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Cloud Computing IT Transformation Strategy Bottlenecks Beyond Communication Services Capgemini’s telecom, media & entertainment journal volume 9: Spring/Summer.11

Capgemini’s telecom, media & entertainment journal volume 9: Spring/Summer.11

CONTENTS

An Interview with John Wittekamp, CIO of KPN industry insights 10 Digital Renewal: Addressing Transformational Challenges and the Monetization Conundrum 20 Cloud Computing: The Telco Opportunity 32 Beyond Communications: Identifying New Markets for Telcos 44 Long Term Evolution: LTE Opportunities and Challenges for Telcos 56 IT Renewal: A Business Transformation 66 Navigating the Content Quagmire: Protecting and Monetizing Intellectual Property management insights 76 Innovating the Telco Business Model: Drivers and Emerging Trends 84 Strategy Bottlenecks: How TME Players can Shape and Win Control of their Industry Architecture lite bytes 92 Mobile and Vignettes

1 2 Editorial

Welcome to the Spring/Summer edition of our Insights journal.

The TME industry currently finds itself in the midst of challenging times. While the general economic slowdown has forced operators to focus on increasing operational efficiency to drive up margins, the advent of new business models and the opening up of new opportunities in other sectors are increasing the pace of innovation. For most operators, addressing the dichotomy of these issues requires transformational changes that run deep and wide into the organization. Operators will increasingly need to take a number of steps aimed at transforming key priority areas including customer relationship, network infrastructure, operations, IT systems, and product management.

For our First Person interview, we had a chance to speak with John Wittekamp, the Chief Information Officer of the major Dutch operator, KPN. John has had an illustrious career in telecom IT in various roles at KPN. We discussed with him the ways and means to achieve operational efficiency and cost savings through IT transformations for telecom operators.

We start the Industry Insights section with an article that evaluates the impact of the evolving trends on the TME value chain and suggest measures to successfully mitigate transformational challenges through digital renewal. In recent years, the increasing costs of setting up and maintaining IT infrastructure has been a cause of concern for enterprise CIOs. In our article on opportunities for telcos in cloud computing, we qualify the services that operators could potentially launch in this space.

Operators are increasingly getting concerned over flat-lining growth in traditional voice services and the monetization challenges in data offerings. Our third article addresses this concern by looking at operator opportunities beyond traditional areas of communications, looking at sectors such as healthcare, energy, and automotive.

Growing consumption of mobile data is placing significant pressure on operator infrastructure. Faced with this challenge, mobile operators need to upgrade their network infrastructure to continue delivering quality and cost- effective services. Our next article looks at Long Term Evolution and the associated challenges and benefits for mobile operators.

The penultimate article of the Industry Insights section addresses the growing need to transform and renew telco IT systems. The increasing mismatch between the IT systems and business needs, along with the need to better align the operations departments with the IT systems, is driving operators to launch IT renewal programs.

Content players are facing challenging times with a transition to digital and the increasing impact of piracy. Simultaneously, they are also trying to understand changing consumption patterns and identify models with potential to succeed in the digital marketplace. Our concluding article focuses on these challenges and proposes ways and means of protecting and monetizing intellectual property.

In an industry that is facing sweeping movements across value chains and a rapid breakdown of entry barriers, it is critical that enterprises keep a constant eye on their business model and strategy. In our Management Insights section, the first article evaluates the evolution of, and trends impacting, telco business models.

The changing business environment requires companies to constantly evaluate their position in the industry value chain. In this context, we conclude with an article by London Business School Professor Michael Jacobides on how companies should strive to build architectural advantages by reshaping industry value chains.

I hope you find this edition of Insights thought-provoking and appealing. If you would like to discuss any of the issues raised, then please get in touch with us.

Rob Staples Global Head of Telecom, Media & Entertainment, Capgemini Consulting

3 industry INSIGHTS

Digital Renewal: Addressing Transformational Challenges and the Monetization Conundrum 10

Cloud Computing: The Telco Opportunity 20

Beyond Communications: Identifying New Markets for Telcos 32

Long Term Evolution: LTE Opportunities and Challenges for Telcos 44

IT Renewal: A Business Transformation 56

Navigating the Content Quagmire: Protecting and Monetizing Intellectual Property 66

9 Digital Renewal: Addressing Transformational Challenges and the Monetization Conundrum By Rob Staples and Manik Seth

Abstract: The Telecom, Media & Entertainment (TME) industry faces a series of challenges both in growing the top line by finding new sources of revenue growth and also increasing operational efficiency to enhance margins. These challenges, while not new, are increasing as a result of the continually evolving consumer demand, rapid technology developments, new business models, and increasing competition. The rise in data usage, fuelled by the proliferation of mobile devices such as and tablets, is exerting tremendous strain on the network of operators. In addition there is the challenge of operators to effectively monetize this rapidly growing data traffic. New business models and non-traditional competitors are also increasing competition in the industry. In order to effectively tackle these transformational challenges, telecom players have adopted a number of diverse measures aimed at renewing customer relationships, network infrastructure, operations, IT systems, and product management. We have assessed these responses here calling it Digital Renewal.

Telecom operators are facing a Europe. Whereas, at 23% of the total complex series of challenges as they traffic, voice contributes a significant seek to grow the top line in an era 73% to the operator’s top line2. This of economic austerity and market trend can be primarily attributed to slowdown. When combined with the factors such as the growing usage competitive complexity and the ever- of free online services which do not increasing demand for , contribute to the operator’s revenues Global operators are adopting a number of and the increasing adoption of low measures so as to prosper. In this priced, all-you-can-eat, bundled chapter we discuss these measures. communications offerings. mobile“ data First, we assess some of the unique challenges that are faced by telecom While we see mobile operators traffic is players. starting to change their pricing strategies to move away from all- Threat from All-You-Can-Eat you-can-eat bundles, if this trend expected to grow Bundles continues, the growth in service The increasing consumption of revenues will not keep pace with at a CAGR of bandwidth hungry applications and the growth in network traffic and the demand for higher speeds is the resulting Capital Expenditure resulting in an unprecedented surge (CAPEX) commitment (see Figure 1) 106% between in the amount of data traffic on required to upgrade the capacity networks. Global mobile data traffic constrained mobile and fixed 2010 and is expected to grow at a Compound networks. As a result, in order to Annual Growth Rate (CAGR) of generate returns on the network 106%1 between 2010 and 2014. investments required to maintain 2014 However, operators have not been a high Quality of Service (QoS), able to successfully monetize this rise operators need to innovate on the in data consumption. For example, top line to monetize this network at 66% of total traffic volume, mobile investment, while also enhancing ” broadband dongles contribute only operational efficiency by reducing 5% to the revenues of costs and streamlining operations.

1 Cisco Visual Networking Index: Global Mobile Data Forecast Update, 2009-2014. 2 Enders Analysis, Mobile Data Economics: The Limit of Unlimited, September 2010.

10 Figure 1: Forecast of Mobile Service Revenue Growth in Western Europe (%), Global Telecom CAPEX Growth (%) and Volume of Network Traffic in Western Europe (Zettabyte per Month)

Window of Opportunity for Sustainable Transformation 5.8%

Widening spread between costs 4 % 661.2 and revenue will limit efficiency of lean measures

2.4% 2.49 % 356.2

69.9 % 168 1.04 % 0.69 %

2010 2011 2012 2013 -0.68 %

Growth in CAPEX Revenue Growth Volume of Data

Source: Informa, Mobile Europe Revenue Forecasts, 2009; Cisco, Cisco Visual Networking Index: Global Mobile Traffic Forecast Update, 2009-2014; 2009; Infonetics Report: Service Provider CAPEX to Bottom in 2010, Investments to Rise in 2011, November 2009

Threat from New Competitors Digital Renewal: Key Priorities for Another challenge, which poses a TME Players potential threat to operators, is the When assessing the range of response infringement of online players in measures being adopted by telecom the traditional telco territory. The operators, it is possible to group them recently announced Facebook-Skype into five broad priority areas alliance3 which will enable Skype (see Figure 2): users to call and send SMS to their Facebook friends directly on their ■■ Enhancing customer relationship mobile phones and landlines has the ■■ Upgrading infrastructure potential to cannibalize voice and ■■ Simplifying IT

SMS revenues of operators. ■■ Streamlining operations

■■ Improving product lifecycle While it is often easy to overstate the management. threat of these kinds of initiatives from non-traditional competitors, We have assessed these responses their global scale, all embracing under the heading of Digital Renewal. nature, and network effect does In the subsequent subsections, we represent a substantial threat if these detail the five key elements of this kinds of services gain traction. approach.

These types of transformational Customer Relationship Renewal challenges, on top of the more Key Issues traditional competitive and There are two broad themes under operational challenges, do require the heading of customer relationship a new set of responses. In the renewal. The first of these is how next section we will discuss these to re-balance the acquisition and responses in detail. retention costs, and the associated

3 Company Website.

11 4 Figure 2: Digital Renewal Approach of TME Players total US retail sales . From a service perspective, the online channel is Customer Relationship not only increasing in demand from Renewal consumers but also is a cost effective Operations Renewal Strategy and transformation of Product Renewal marketing, sales and service to means of post-sales support. When revitalize the customer experience Sustainable efficiency and Advanced life-cycle management compared to call center technical across online and traditional optimization of functional to drive and accelerate innovation, channels as the imperative shifts to support, the approximate cost per performance to raise profitability, improve launch capability and retention rather than acquisition, ensuring operations efficiency of reduce complexity across enabling a true digital transformation contact is nearly 92% cheaper for a current activities and creating the converged product, service 5 headroom to invest in expansion and tariff portfolio virtual agent . initiatives and customers Digital Renewal TME players are, therefore, developing How to respond to the IT Renewal Infrastructure Renewal transformational challenges their online channel strategy to use

Transformation of telecom driven by the increasing data Launch and monetization strategy Web 2.0 and tools

operators’ IT to reduce complexity consumption, changes in of new fixed and mobile networks for driving marketing campaigns, and cost in IT management, consumer behavior, emergence (, fiber) to support the launch processes and platforms across of new technologies, and the of new products and services, enhancing sales, and optimizing fixed and mobile environments resulting monetization and improve quality of service customer service and support. conundrum Moreover, they need to identify and target the right customer segments Customer Focus Technology Focus Operations Focus by making their online proposition

Source: Capgemini Analysis attractive and less complicated.

approach in light of the shift towards For example, having realized the retention and away from high importance of the online channel, volume customer acquisition. The operators such as SFR have put the second is to revitalize the customer Internet at the core of customer experience (see Figure 3) through the relationships. The share of SFR’s By improvement of the online experience online shop in the overall distribution in terms of both sales and service, increased threefold from 5% in 2013,“ online and to improve the multi-channel Q1 2008 to 15% in Q1 20096. experience so that customers are Furthermore, the share of web being offered a seamless experience in overall customer care doubled and online- across all channels. These twin between Q1 2008 and Q1 2009 to challenges drive the key activities of reach nearly 42% at the end of Q1 influenced sales operators in this area. 20097. As part of the customer relationship Online Channel Performance are expected renewal, the online channel strategy, Improvement online performance improvement, To enhance the customer experience, to account and multi-channel strategy seem to be drive their top line, and reduce for the key priorities for TME players. In selling and service costs, operators the subsequent subsection we detail are also taking measures to enhance 62% of total US these key focus areas. the performance of their existing online marketing, sales, and service Key Focus Areas initiatives. A focus needs to be on retail sales Online Channel Strategy measures such as optimizing the The online channel is emerging as online channel for improved cross- the most efficient and cost effective and up-selling, achieving higher customer touch point for TME conversion rates, reducing post-order ” players. In addition to affecting sales revenue losses through stringent directly, the online channel also credit checks, improving supply chain impacts offline retail sales. By 2013 and inventory management, and online and online-influenced sales are analyzing online consumer behavior. expected to account for 62% of the

4 Forrester: US Online Retail Forecast, 2008 to 2013, xxxx 2009. 5 Forrester: It’s Time To Give Virtual Agents Another Look, March 2010. 6 Company Presentation. 7 Company Presentation.

12 Some operators have been able to Figure 3: Select Initiatives for Enhanced Customer Experience successfully enhance the performance of their online channel through Operator Measure Description Indicative Examples initiatives such as web exclusive Single Bill Single bill for all services including fixed 8 offers, sales driven search engines , and mobile, free of cost

9 Simplified Invoice Simplification of invoices so that charges high shop visibility , and robust fraud are easy to understand for the customer 10 policy to achieve significant benefits . Integrated Multi-channel Service Facilitate a consistent experience and Experience The online channel of a European seamless switch over across channels E-Shops based leading integrated telco was Web portal to drive online sales significantly underperforming Social Media Use of social media for proactive compared to industry benchmarks communication and resolving customer with extremely low conversion rates. issues Chat-bots Interactive automated online tool to

In order to address this challenge, address customer queries the operator formulated a strategy Enhanced IVR Personalized and intelligent IVR system, focused primarily on selling to to reduce the volume of repeat calls existing customers. The telco created Online Community / Web Forums Community based portals for information an excellent experience throughout dissemination and troubleshooting the digital customer lifecycle always guaranteeing availability, simplicity, Source: Capgemini TME Strategy Lab Analysis; Company Websites and relevance. This enabled the operator to not only achieve online sales growth as planned but also benefit from the superior profitability best experience. Therefore, to enable of the online channel11. A European a seamless experience across multiple incumbent telco, on the other touch points such as retail stores, hand, significantly improved its online portal, and call centers, players online order to sales performance need to provide a balanced attention by reducing leakages arising due to to all channels. faulty payments. By developing a stringent fraud detection and credit When compared to pioneers such check policy, the operator aimed to as Dell, Argos, Apple, and Expedia, achieve revenue improvement of more operators have not only been late in than €15 million in 12 months from the adoption of an integrated multi- implementation with retained benefits channel approach, but also have had a in future years12. weaker online experience13. Even with the significance of the online channel TME players need to carefully assess increasing, other non-online channels the maturity of their existing online including retail stores and telesales marketing sales and service system, are still expected to account for the identify key areas of improvement, bulk (70%) of global retail sales in and implement an ‘online mindset’ 201614. This makes it imperative for throughout their organization. TME players to define and formulate a multi-channel strategy in order to Multi-Channel Strategy maintain a 360 degree view of the The evolution in consumer behavior customer and balance sales, customer with an increasing appetite for care, and retention across channels. technology, strong desire for cross- channel flexibility, and demand for It is also important that players personalization, is the key driver balance Subscriber Acquisition Cost for TME players to strengthen their (SAC) and Subscriber Retention Cost multi-channel experience. For each (SRC) across channels in order to transaction, customers seek the maximize customer lifetime value. channel that provides them with the Furthermore, they need to ensure

8 The search feature on the portal is optimized so that customers can easily search and buy products. 9 The portal is designed such that customers can easily locate and access the e-shop. 10 Capgemini Analysis. 11 Capgemini Analysis. 12 Capgemini Analysis. 13 Capgemini Analysis; Forrester, Best and Worse Cross-Channel Design, 2007-2009. 14 Capgemini Analysis; Datamonitor: Global Internet and Catalog Retail Report, xxxx 2009.

13 that organizational structures and of new products fail within the first incentives are aligned to drive three years after introduction and maximum value across all channels. many more fail to be of interest to consumers19. This can be attributed Some operators such as T-Mobile, to the fact that a decision to develop Orange, and Vodafone have already and launch a product is often defined embarked on the journey to deliver within organization silos, customer a unified multi-channel experience involvement is limited and happens to their customers15. For instance, only in the later stages, and product T-Mobile offers its customers performance is not evaluated on a personalized multi-channel self- regular basis. Moreover, key tools, service over a mobile portal, SMS, such as market sizing, segmentation, or a voice portal with touch-tone and customer purchase criteria, (DTMF16) or speech recognition17. required to effectively formulate a T-Mobile Germany launched a new product strategy are not always technology driven channel integration used effectively. This drives players to program to improve profitability and re-define their product development customer service. As a result, the strategy in such a way that it covers operator witnessed a 3% increase of all key aspects impacting the product Average Revenue Per User (ARPU) in portfolio performance, including more four months and a 25% increase in efficient in-life product management. Several customer satisfaction18. A European based global operator operators“ are Product Renewal presents a good example of a TME Key Issues player that was able to successfully brand In order to increase competitiveness, accelerate new product development exploring operators are aiming for continual by promoting collaborative working improvement on how they manage and intense brainstorming. In stretch across their portfolio of products and the analysis phase, the operator services. Not only is there a need organized a series of facilitated new growth areas to reduce time-to-market for new events, bringing together all the right products but also an increased people from business and technology drive to simplify and rationalize such as decision makers, subject such as energy, the product portfolio. This will matter experts, and experienced balance the organizational focus facilitators, to enable faster decisions and investment in new versus and increased ownership. This healthcare, and existing products, including driving accelerated the analysis phase of new innovation. product development from five to two automotive months20. To overcome these challenges operators are focusing on three In addition, in order to offset the sectors initiatives: product portfolio declining growth rate of traditional management, product launch services and gain incremental management, and product revenues, TME players are increasingly rationalization. exploring brand stretch across new ” product and service propositions. For Key Focus Areas example, the launch of application Product Portfolio Strategy stores, diversification into content Selecting the right products to launch services, smart metering solutions, and tracking their performance is and mobile payments are some one of the most critical challenges areas which have already witnessed for TME players. Approximately 80% activity from telecom operators. There

15 Company Websites. 16 Dual Tone Multi Frequency. 17 Voxeo: Unified Self-Service: Delivering on the Value of Multi-channel Customer Interactions, March 2010. 18 Capgemini Analysis; Cisco IBSG Survey, Mobile E-Channel Experience: A Multi-Channel perspective; Cisco Multi-Channel Handling at T-Mobile Germany, Tieto Presentation, Thomas Villinger, HET VCN Congress: NAARdeTOP, November 2007. 19 Capgemini Analysis. 20 Capgemini Analysis.

14 are several success stories as well, products, but also to effectively kill such as that of them. Achieving and sustaining a which is betting big on innovative lean product portfolio of competitive, services and sectors. The company profitable, and innovative products expects revenues from its “intelligent through rationalization of products networks” growth area for energy, and tariffs could increase efficiency healthcare, media, and automotive across business and technology areas. sectors to reach around €1 billion by 201521. Rationalization projects carried out by a global mobile operator demonstrate Product Launch Management the significant value that can be Product launches are frequently delivered through such initiatives. plagued by delays due to disparate Driven by the reduced ability to product data, and legacy billing and execute promotions, Vodafone Italy CRM systems. In addition, limited reduced its prepaid tariffs from 55 senior stakeholder involvement and to 37. This resulted in the migration the lack of structured and a cross- of 10 million SIMs23 from the legacy functional project management tariffs to the new ones, and had more approach results in launch than a €15 million net impact on inefficiencies. While entirely EBITDA24 in the 2008 / 2009 fiscal new offerings can take as long as year. 12 months or more to launch, even simple rate changes can take eight to Infrastructure Renewal twelve weeks22. Moreover, product Key Issues development and the management of Technology choices are becoming changes is often slow and inefficient more and more complex as because product information is operators seek to balance the need stored in multiple places and formats. to deploy high capacity bandwidth Therefore, in order to ensure a with the challenge of generating successful on-time and on-budget a Return on Investment (ROI) for launch TME players need to adopt such deployments. Fiber network a proven program management rollout, Long Term Evolution (LTE) approach and tools to accelerate time- deployment, and network capacity to-market. upgrades all present competing demands for investment with a Product Rationalization complex business case. With the Product rationalization is a wealth emergence of all inclusive pricing for accretive activity and is one of data services it becomes increasingly the hallmarks of competitive difficult to monetize these TME players. In most cases, a investments. At the same time new majority of subscribers are served services such as application stores do by a small percentage of the total not necessarily generate significant product portfolio resulting in incremental revenue for operators reduced organizational efficiency yet bandwidth hungry devices put and increased operational costs. pressure on networks. There also exists a long tail of products and tariffs with few or no To keep pace with this rising subscribers. Moreover, the presence bandwidth requirement and the rapid of duplicated tariffs driven by legacy technology innovations in network product catalogs structure, increases and IT infrastructure, it is important complexity. The key challenge is for operators to future-proof their not only to identify unprofitable delivery networks and data centers.

21 Deutsche Telekom Press Release. 22 Capgemini Analysis. 23 Subscriber Identity Module. 24 Earnings Before Interest Taxes Depreciation and Amortization.

15 Mobile network traffic in Western increasing customer stickiness, but Europe is expected to increase at will also enable operators to earn 111% CAGR, between 2010 and higher revenues. The 4G network 2013, from 69.9 Zettabyte per month of TeliaSonera enabled Swedish to 661.225. In order to ensure that TV stations to broadcast the royal service quality is not compromised, wedding of the Crown Princess and to earn incremental revenues Victoria and Daniel Westling live27. from high bandwidth services of This experience was not possible to the future, operators need to focus imitate on the existing networks on rolling out the next generation of other operators in Sweden. The networks. The deployment of such benefits from a revenue perspective networks is also an important factor can be illustrated through recent in driving down the cost of capacity studies which have found that provision and increasing efficiency for operators having both legacy which must feed into the business and fiber based broadband, ARPU case. from the fiber services is typically 20-30% higher than that of legacy Network deployment takes place broadband28. against a backdrop of governmental and regulatory pressures to develop For operators, upgrading their existing national infrastructure and is further networks, fixed or mobile, is not a impacted by the debate on net question of if, but when. The timing neutrality. Making the appropriate of the upgrade largely depends on technology portfolio choices is, factors such as current and expected therefore, an essential step. market demand for bandwidth and the ability of the existing network Moreover, to diversify their offerings to serve this demand. While FTTx29 beyond traditional services and and DOCSIS30 3.0 deployments are leverage the potential top line benefits the technologies of choice for fixed from systems infrastructure renewal, players, mobile operators can upgrade operators can consider the benefits their networks to 4G. of adding cloud service offers to their portfolio. Cloud Computing Operators have massive internal IT Key Focus Areas infrastructure as well as multiple Advanced Networks large data centers through which The deployment of advanced they deliver enterprise services. networks can help operators meet the Cloud computing can not only help rising consumer demand for speed, telecom service providers optimize reduce churn, and enhance ARPU. It their internal systems but also enable can also help them reduce operating them to offer cloud services by costs and improve environmental leveraging their strengths such as data sustainability. For example, Sprint center capabilities, managed service plans to invest between US$4 to 5 experience, and a global IP backbone. billion over the next three to five Verizon has leveraged the experience years in network upgrades which is gained from virtualizing 2,100 of expected to create cost savings from its internal servers for achieving reduced energy costs, lower roaming internal efficiencies, to offer cloud expenses, and improved capital deployment and consulting services efficiencies26. to its enterprise customers31. Several other operators such as BT, AT&T, Superior networks will not only and Orange have also made an entry enhance service experience, thereby into cloud computing.

25 Cisco Visual Networking Index: Global Mobile Traffic Forecast Update, 2009-2014,2009. 26 Company Websites. 27 Company Website. 28 Yankee Group, Next Generation Access Services: Analysis of Portfolios, February 2009. 29 Fiber to the x: Where x can stand for Home, Curb, or . 30 Data Over Cable Service Interface Specification. 31 Verizon Case Study.

16 In order to successfully tap the adopting COTS from vendors such cloud computing opportunity, it is as Amdocs, Oracle, and Comverse important that operators carefully for billing and ERP. However, the evaluate different cloud computing biggest challenge ahead for telcos service segments within their market, will be to ensure transformation identify the value proposition and success, as only one out of three33 create a roadmap for services, IT transformations is successful in forge the right partnerships with delivering within time and budget as technology enablers, and identify they lack the necessary alignment and relevant sales channels. commitment. In order to successfully renew their IT systems, operators IT Renewal need to strive for a change in Key Issues organization, business processes, and Telecom operators have built up IT in an aligned manner. expensive legacy IT systems over many years which have now become Operational Renewal Only one prohibitively costly to maintain. The Key issues cost of deployment is clearly one The pressure on TME players’ “out of three IT part of the equation, but operators margins due to slower revenue are increasingly focused on reducing growth, increasing costs, and the total cost of ownership (TCO). fierce competition has prompted transformations The complexity of these legacy IT several operators to embark on cost estates also creates challenges on the cutting programs. The challenge successful speed of deployment of new services is to move from short-term cost is which is increasingly important when cutting to creating sustainably competing with highly agile online efficient organizations and optimize in delivering entities. functional performance in order to raise profitability. This would ensure There is now a trend to simplify the that not only current activities are within time and IT estate and focus on the deployment efficient, but also enable headroom of more standardized solutions which to invest in new business expansion. budget are implemented “out of the box” Three example areas require with minimal customization. This is attention: infrastructure sharing and linked to a simplification of business outsourcing, sustainable efficiency, processes whereby best practice— and environmental sustainability. 32 ” often eTOM based—industry standard processes are being selected Key Focus Areas at the expense of highly customized Infrastructure sharing and outsourcing processes which, in practice, offer Network infrastructure sharing and little differentiation in a highly outsourcing all or part of network mature industry. related operations is a key strategic option for operators to reduce costs Key Focus Areas and free up vital resources. It is Addressing the given key issues, the expected that by the end of 2010, need for most operators is a radical IT 60% of the world’s operators and business transformation to reduce and 80% of the emerging market TCO, to have a single consistent operators will have some form of view of the customer, and accelerate network-outsourcing contract34. As time to market for new services. operators rollout new networks, share This can be achieved by focusing on active and passive infrastructure, commercial off-the-shelf solutions outsource network management (COTS) based on standard business functions, and share and outsource processes. Operators are increasingly network backhaul, this will not only

32 Enhanced Telecom Operations Map, published by the TM Forum, it is the most widely used and accepted standard for business processes in the industry. 33 Capgemini Analysis; Standish Group as quoted in the July Computer Bulletin from the BCS 2009. 34 The International Communications Project, Issue 12, Managed Services Partnering.XXXXXX

17 help them save costs, but will also waste and balance resources in both result in faster rollout speeds, broader the front- and back-office operations. coverage, and reduce the time-to- However, players need to keep in market for new services. mind that implementing a truly sustainable operational excellence Network sharing and outsourcing is culture demands time and should not becoming a key priority for operators be viewed as a quick fix. to enhance operational efficiencies and reduce costs. Leading global Green Telco operators such as Orange, Vodafone, Operational renewal measures and TeliaSonera have all outsourced should be aimed at not only network operations in order to saving costs but also making a develop lean business models35. meaningful contribution towards the Similarly, in both emerging and environment and benefiting from developed markets, operators such the corresponding goodwill. Even as 3 UK, T-Mobile, and Bharti have customer decisions today are driven forged network sharing deals36. by environmental friendliness and sustainability. Many customers are Sustainable Efficiency increasingly opting for online or Today, TME players operate in an e-bills over paper bills. Therefore, increasingly complex environment deploying focused initiatives around with a multitude of services, improving cooling efficiencies, diverse geographical footprint, and reducing energy consumption, and numerous support systems. This has implementing low carbon programs resulted in enlarged organizations, to realize tangible savings, should be increased process complexity, and the key priority for operators. multi-layered technology platforms, all designed to meet the growing Some operators are already deploying needs of consumers. Due to this, focused initiatives such as low carbon the profitability of operators has programs and the reduction of energy also suffered. The average EBITDA usage for sustainable cost reduction. margin of major European operators37 BT has achieved a 43% global carbon has witnessed a fall of nearly 12% intensity reduction through initiatives between 2005 and 2009. Operators, such as sourcing 41% of UK energy therefore, require a step change in requirement from renewable sources operational efficiency in order to and adopting a global energy savings remain profitable and competitive. campaign38. In another example, Vodafone has implemented measures Sustainable efficiency is a holistic aimed at reducing energy usage and approach to drive value and reduce its associated costs in its operations costs across the organization. In across multiple locations. The order to implement it, a behavioral company has deployed initiatives change is required at the heart of to improve cooling, modernize its the transformation and a change in network equipment, and reduce diesel the way employees and employers usage39. approach, plan, and execute their work. This lean thinking can ensure In conclusion, the Digital Renewal sustainability and continuous responses of TME players enable improvement at every level. TME them to effectively address their most players can achieve significant pressing challenges. By focusing benefits by holistically revisiting their on the five key priorities of this organizational structures, operating approach, players can enhance models, and processes to remove customer experience, develop a

35 Company Websites. 36 Company Websites. 37 Belgacom SA; BT Group plc; Deutsche Telekom AG; France Telecom SA; Koninklijke KPN N.V.; Telecom Italia SpA; Telefonica SA; ASA; TeliaSonera AB; Vodafone Group plc. 38 Corporate Responsibility, The BT story on Carbon Reduction, April 2010. 39 Company Website.

18 robust product lifecycle management strategy, future proof their network, standardize IT systems, and achieve operational efficiency.

Rob Staples is a vice president and Average Global Head of Consulting Services for Capgemini’s Telecom Media & “EBITDA Entertainment (TME) practice. Rob works with CEOs and board-level clients in the telecommunications and media margin of industries and is a founding member of Capgemini’s TME Advisory Board — a major European private think tank in which CXOs can discuss the implications of the converging communications industries. Rob has operators has 20 years’ operational and consulting experience, gained in Europe, Asia, witnessed a fall Latin America, the United States and the Middle East. He is based in London. of nearly 12% Manik Seth is a manager in the TME Strategy Lab. He has over five years between 2005 of experience in strategy, planning, market analysis and consulting. His recent work includes being part of a and 2009 one year technology-driven business transformation program for an integrated operator and helping a leading equipment manufacturer with identifying BSS/ ” OSS-related acquisition targets. Prior to joining the Lab, Manik was involved with identifying new technology initiatives in next-generation networks for a leading software services provider. He is based in Mumbai. n

19 Cloud Computing: The Telco Opportunity By Jerome Buvat and Priyank Nandan

Abstract: In recent years, the increasing costs of setting up and maintaining IT infrastructure have been a cause for concern for enterprise CIOs1. Cloud computing provides businesses with a cost efficient and elastic solution for offloading maintenance, freeing up budget, and improving IT productivity and responsiveness. The rising interest in cloud computing has resulted in several telcos entering this space. Although operators have been late entrants, they have established a strong presence by leveraging their in-place assets and focusing aggressively in this market. The primary focus of telcos has been on IaaS2, even if many also provide significant SaaS3 applications. However, PaaS4 has been largely neglected by most operators. Our analysis indicates that cloud computing presents several attractive commercial opportunities for telcos which should be tapped in a phased manner, without delay, in order to maximize returns. Although the IaaS proposition would be most fruitful for operators, other opportunities across SaaS, service delivery innovation, and PaaS will also offer significant potential. We recommend that telcos differentiate themselves by offering niche services which require industry and region specific customization. For example, a strong focus on specific industry verticals such as finance and healthcare will help them gain an edge over the competition. In terms of service delivery, telcos are best equipped to adopt virtual private cloud deployments and broker approach5. Customized offerings for large enterprises and SMEs6 will further strengthen their position and enable them to become frontrunners in cloud computing.

Cloud computing is the latest Figure 1: Categorization of Cloud Computing Offerings technology trend in which IT infrastructure and software programs SaaS Offerings The Cloud are accessed over the Internet or I Software applications running private networks. Cloud offerings can on a cloud infrastructure

I Applications are accessible be largely categorized as Software as Stack of Cloud Services through a thin client interface such as web a Service (SaaS), Platform as a Service browser Applications End-user applications (PaaS), and Infrastructure as a Service available through Internet PaaS Offerings (IaaS) (see Figure 1). These services

I Applications built using tools Application Web Application Service Catalog, are delivered via three main models: Development Databases servers runtime supported by the provider environment component library 7 8 Environment public cloud , private cloud , and I Clients have control over the 9 application hosting environment Monitoring and management of: hybrid cloud . Virtual I Services & Resources Infrastructure IaaS Offerings I Virtual servers (Virtualization) I Delivering storage, computing, Enterprises of all sizes are being I Physical servers monitoring and backup services (Datacenters) increasingly drawn to cloud from the cloud

I Companies can manage their computing. Benefits such as reduced infrastructure remotely IT costs, pay-per-use, better resource Source: Capgemini Analysis utilization, and elastic scalability are driving its uptake. The percentage of CIOs interested in cloud computing has grown rapidly from 5% in 2009 to 37% in early 201010. The rising

1 Chief Information Officer. 2 Infrastructure as a Service. 3 Software as a Service. 4 Platform as a Service. 5 A broker is the single point of contact for an enterprise for all cloud computing requirements such as service provisioning, service level agreements (SLA) and compliance. A broker sits between the enterprise and multiple cloud service vendors and provides a layer of abstraction. 6 Small and medium sized enterprises. 7 Public cloud services are delivered to multiple customers from third party data centers over the Internet. 8 Private cloud is deployed within an enterprise for its internal use. 9 In a hybrid cloud model, some resources are provisioned and managed in-house while others are delivered from the cloud. 10 Harvard Business Review, What We’re Watching in Cloud Computing, http://hbr.org/2010/06/what-were-watching-in-cloud-computing/ar/1.

20 interest in these services is driving increased enterprise spending, and as a result, cloud computing presents an attractive revenue potential for technology players and telcos alike.

While the benefits of cloud computing make it attractive for customers, concerns such as data Given the revenue potential, security, privacy, and compliance have slowed down the pace of adoption. For instance, strict “telcos should not delay their privacy laws that place limits on the movement of information beyond entry in the cloud computing the borders of the European Union, have hindered the evolution of cloud computing in Europe. space

After carefully weighing the benefits and risks of cloud computing, several operators have advanced into this ” lucrative market. However, the key challenge ahead for these operators Figure 2: Worldwide IT Cloud Services Revenue (US$Bn) and Growth Rate by is to differentiate themselves in this Service Type highly competitive arena. In this $17.4 $44.2 chapter, we take a close look at the billion billion cloud computing space, qualify the 21% 3.7 37% opportunity for telcos, and propose 12.8 29% 10% 1.7 some recommendations around 35% how operators can maximize the 5.8 13% opportunity in this market. 69% 12.0 21% 25.6 58% Market Dynamics Worldwide IT cloud services revenues are expected to grow rapidly at a 2009 2013 CAGR11 of 26% from 2009 to 2013 Infrastructure as a Service Platform as a Service Software as a Service to reach US$44.2 billion. While x% CAGR

SaaS will continue to contribute the Source: Capgemini TME Strategy Lab Analysis; Forrester Research; Cloud Computing 2010, An IDC Update, September highest to the overall revenue, its 2009 share is expected to decline, largely due to an increased enterprise focus on IaaS (see Figure 2). The rapid growth of IaaS will be fuelled by a keen interest from businesses on curbing the huge costs associated with IT infrastructure.

11 Compound Annual Growth Rate.

21 Several companies are competing Figure 3: Stakeholders in the Cloud Computing Ecosystem aggressively to grab the largest share of the lucrative cloud computing Cloud Service Cloud Enablers Vendors (CSVs) Service Providers market. These players fall largely under one of these three categories: I Provide the technology, I Provide the actual cloud I Provide cloud focused enablers, vendors, or service providers infrastructure, platforms, and services, spanning SaaS, business consulting, and middleware to enable the PaaS and IaaS, to customers technology services such as (see Figure 3). The role of some provision of cloud services system integration, cloud migration, and maintenance mature players, however, can also span a number of categories. For instance, both Cisco and IBM are cloud enablers as well as CSVs12.

Leading technology vendors such as Amazon, Salesforce.com and Microsoft have established a firm footing in this market and offer a

Source: Capgemini TME Strategy Lab Analysis range of services spanning SaaS, PaaS, and IaaS (see Figure 4). In terms of revenues, the current CSV landscape is dominated by players such as Salesforce.com, Amazon, and Oracle. Salesforce.com, the leading provider of SaaS CRM13 solutions, reported Figure 4: Enterprise Cloud Offerings of Select Vendors revenues of over US$1billion14 in 2009, which is the highest amongst Infrastructure as a Service (IaaS) Application CSVs. The success of these leaders Examples Software (SaaS) Development Servers Storage Platform (PaaS) can be attributed to their technical Oracle on Demand prowess, early mover advantage, and Cisco Webex the strong focus on cloud computing. Salesforce CRM IBM Lotus Live Salesforce Force.com Though large technology players Google App Engine have emerged as leaders in cloud Microsoft Azure Amazon Web Services computing, several smaller companies BT such as Rackspace and Netsuite are Orange Business Services trying to carve their niche. Telcos AT&T GoGrid such as BT and AT&T have also Rackspace entered this market. In the next EMC MozyEnterprise section, we will evaluate the cloud Nirvanix CloudNAS computing initiatives and strategies of Source: Capgemini TME Strategy Lab Analysis; Company Websites telcos.

Telco Activity in Cloud Computing Compared to market leaders such as Amazon and Salesforce.com, telco entry into cloud computing has been reasonably late. While Salesforce. com started offering services in 1999, BT and T-Systems, one of the earliest telcos to offer cloud solutions, entered

12 Cloud Service Vendors. 13 Customer Relationship Management. 14 Company Websites; Annual Report.

22 only in the 2003 to 2004 timeframe (see Figure 5). Despite the late start, several telcos such as BT, AT&T, and Verizon are competing aggressively with market leaders to establish a strong foothold. The majority of Several telcos have entered operators have taken the role of a CSV while a few such as Verizon also “the cloud computing market with act as service providers. This section presents an overview of key telco strategies in cloud computing. IaaS as their flagship offering and Target Segment a strong focus on the enterprise The cloud computing offerings of most telcos are targeted towards the enterprise segment. Enterprises and segment governments spend nearly US$2.4 trillion worldwide15 on IT products and services, many of which can be delivered from the cloud. This high ” revenue potential makes the segment attractive for operators. Moreover, the consumer cloud space is nascent and the revenue opportunities limited. Figure 5: Select Examples of Telco Foray into Cloud Computing

2003-2004 2007-2008 2009-2010 Planned Within the enterprise segment BT Open telcos are aggressively targeting Orchard NTT Biz Telefónica Orange IT Security Aplicateca SMEs due to the growing interest T-Suite Plan SaaS T-Systems in this segment for cloud-delivered Dynamic TeliaSonera Business Class software. SME share in overall cloud Services Cloud Services services revenue is expected to increase from 25% to 40% between T-Systems (Database and SK Telecom Cloud AT&T Middleware Environments) Computing Platform 2009 and 201516 . To benefit from PaaS Telstra this opportunity, several telcos offer services customized to fulfill SME Orange Verizon needs. For instance, “IT Plan” from AT&T Deutsche Flexible Computing as a Computing Service Orange is a packaged SaaS solution Synaptic Telekom Telecom Italia IaaS Hosting Zimory* AT&T Synaptic NTT offering a suite of office productivity, BT Virtual Storage and messaging, and business applications Data Center Compute targeted at SMEs. Source: Capgemini TME Strategy Lab Analysis; Company Websites Note: Deutsche Telekom spun off from Zimory as an independent subsidiary in November 2007 Service Offerings Telco offerings in cloud computing are centered around IaaS and SaaS with limited focus on PaaS (see Figure 6). IaaS is the flagship offering of most operators, and in general SaaS has taken a backseat compared to IaaS primarily because telco capabilities and experiences are more aligned towards delivering IaaS.

15 Forrester Research, The Evolution Of Cloud Computing Markets, July 6, 2010. 16 Capgemini TME Strategy Lab Analysis; Analysis Mason, Seize the US$35.6 Billion Global Market for Enterprise Cloud Services, June 2010.

23 Figure 6: Categorization of Cloud Offerings from Telcos the mainstay of SaaS offerings from leading operators. Telcos SaaS IaaS Paas

BT Telcos have traditionally stayed Orange Business Services away from PaaS, largely due to its Deutsche Telekom/T-Systems unattractiveness both in terms of TeliaSonera revenue and demand, when compared Belgacom Telefónica to IaaS and SaaS. Apart from

AT&T T-Systems, which offers database and (Planned) Verizon Business middleware environment to nearly 19 Telstra 300 customers, few operators have (Planned) SK Telecom shown significant interest in this NTT category. Tata Communications In addition to SaaS, PaaS, and IaaS

Source: Capgemini TME Strategy Lab Analysis some telcos such as Verizon, Orange and BT also offer professional services, helping customers identify and migrate the right applications to In 2008, AT&T made its debut the cloud. in IaaS with its Synaptic Hosting proposition. Since then, several Entry Strategy leading operators such as BT (Virtual Partnership with technology players Data Center), Orange (Flexible has been the foremost entry strategy Computing), Verizon (Computing of telcos in cloud computing. as a Service), and Deutsche Telekom Operators have partnered with a (Zimory) have followed suit. In fact, range of vendors from hardware the current IaaS offerings of most providers such as HP and Sun to operators are as competitive as those virtualization specialists such as from established players like Amazon VMware and Citrix Systems. These and Rackspace. Over the next few partnerships have helped telcos years, all major telcos plan to focus significantly reduce their time-to- most on IaaS in order to address the market and minimize the risks growing enterprise demand for cloud associated with developing complex infrastructure services. technical capabilities in-house.

Although IaaS has captured most In addition to partnerships, a few of the operators’ attention, SaaS too operators have acquired technology has garnered significant interest. companies to leverage their expertise Many telcos offer a host of SaaS to launch cloud services. For instance, applications, usually in partnership AT&T acquired leading application with ISVs17, for accomplishing a range services provider USInternetworking of business tasks. For example, BT (USi) in 2006 for US$300 million offers multiple CRM solutions in to develop capabilities in delivering partnership with Salesforce.com and on-demand services and managed Netsuite, NTT has recently launched enterprise software solutions. a cloud-based security solution, and Similarly, telcos such as BT, Verizon T-System delivers SAP from the cloud. and T-Systems also acquired Communication and collaboration companies to develop expertise in software such as hosted PBX18, launching certain cloud services. messaging, email, conferencing, and team collaboration solutions are

17 Independent Software Vendor. 18 Private Branch Exchange. 19 Forrester Research, Market Overview Of Cloud IT Services From Major Telcos, September 2009.

24 Attractive Opportunities for Figure 7: Universe of Potential Cloud Services Telcos in Cloud Computing Cloud computing presents several SaaS opportunities for telcos to pursue ERP SCM CRM Security Billing Document Management

(see Figure 7). Analysts estimate that Communication and Collaboration Business Intelligence Digital Content Creation by 2015, telcos will have a 23%20 Consulting Content Management Desktop Productivity Disaster Recovery share in the overall cloud services Hosting on Demand Maintenance and Support

market. Backup Services Service Management IaaS Wholesale Capacity Cloud Universe Storage on Demand System Integration Virtual Servers Testing and Operator success in the cloud, White-label Services Development Enablement and

however, will depend largely on Professional Services Cloud Broker App Server Database Compute on Demand selecting the right choice of services to launch. Telcos should consider Integration Middleware Network Assets Object Data Stores Application Development Environment a combination of factors such as Message Queues 21 the attractiveness of a service, PaaS its complexity, and the expertise Source: Capgemini TME Strategy Lab Analysis; Forrester, Future View: The New Tech Ecosystems of Cloud, Cloud required to launch before determining Services, And Cloud Computing, August 2008 the services to offer. Most importantly, operators should focus on those services for which they are well positioned to offer by leveraging their existing capabilities such as data center expertise, managed service experience, and global footprint. Based on this rationale, the most Figure 8: Most Attractive Commercial Opportunities for Telcos in Cloud relevant commercial opportunities for Computing telcos can be categorized into three Low I These services have a high different service buckets: low hanging demand from enterprises Future fruits, the next phase, and the future I Telcos already possess significant expertise and assets required to Cloud Billing (see Figure 8). In order to make the deliver these services The Next Phase most of these opportunities, telcos Cloud Security Services Broker Approach should launch these offerings in a PaaS (Expose phased manner, starting with the low Low Hanging Fruits Unified Communication Network hanging fruits first. Functionality) Hosting on Demand Wholesale Telco Capability Capacity In the subsequent subsections we will I These services require telcos detail the three service buckets. SaaS Enablement to gain significant experience I Telcos can build on their first phase in the cloud before launch services to expand their portfolio of Storage and I They can help telcos Low Hanging Fruits Computing on offerings differentiate Demand I Telcos can also leverage their global IP their cloud offering backbone to offer capacity as a service These are the services which provide High an immediate attractive opportunity High Service Attractiveness Low for telcos and should be launched first. Not only do these services Source: Capgemini TME Strategy Lab Analysis have a high demand and revenue potential but also existing telco strengths are well aligned to deliver them rapidly. Hosting on-demand, SaaS enablement, and storage and computing on-demand fall under this category.

20 Analysis Mason, Seize the US$35.6 Billion Global Market for Enterprise Cloud Services, June 2010. 21 Service attractiveness is a combination of customer demand and revenue potential.

25 Hosting on Demand SaaS, these telcos can also improve Telcos are already proficient at customer loyalty by offering SaaS as a providing managed hosting services value added service. for enterprises. In collaboration with technology partners, operators Computing and Storage on Demand can rapidly virtualize their existing Computing, storage, and backup data center infrastructure, without along with hosting constitute the excessive cost overheads, to offer bulk of US$5 billion23 IaaS market. on-demand hosting. Some operators Telcos already offering on-demand such as AT&T and Orange already hosting can cross-sell computing provide this service. Service delivery and storage through an integrated through the cloud will not only result package. In addition to hosting, in the optimization of telcos’ existing providing virtual CPU24 instances infrastructure, but also attract a (to meet the different computing large number of customers interested needs of customers) and on-demand in maximizing IT investment by storage and backup will result in a migrating to the cloud. According comprehensive IaaS solution. In order to analysts, when compared to to deliver these additional services, traditional hosting, cloud hosting can existing data center resources can be help enterprises save 50% in costs easily leveraged, thereby, minimizing with an associated ten-fold increase in incremental costs. capacity22. Phase 2 SaaS Enablement This phase includes the next line of SaaS has the largest share of the cloud services, which telcos should offer services market and its adoption in order to expand their portfolio within enterprises, especially of cloud services and establish a SMEs, is rising. Telcos which have stronger footing. Operators can sell not yet ventured into SaaS can these services on top of their existing quickly establish a firm footing by cloud proposition. Cloud security partnering with a wide range of services, unified communication, ISVs and leveraging their existing and wholesale services fall under this infrastructure to deliver diverse SaaS category. applications. In addition to gaining a substantial share of the large and Cloud Security Services increasing enterprise spending on In terms of market share, telcos are one of the leading providers of managed security services. They can quickly leverage their existing expertise in network, application, and data security to deliver these services Offering customized cloud from the cloud. Cloud security is an attractive market, which is set to rise by 200%25 during the period from “solutions can help telcos price 2008 to 2013. Telcos can capitalize on this opportunity by differentiated their services at a premium offerings such as Distributed Denial of Service (DDoS) protection. Operators have an inherent advantage in this area because they can look ” across their backbones and prevent

22 nScaled, Slashing Costs and Driving Capacity for SaaS Providers, February 2009. 23 Cloud Computing 2010, An IDC Update, September 2009; Capgemini TME Strategy Lab Analysis. 24 Central Processing Unit. 25 Gartner, Cloud-Based Computing Will Enable New Security Services and Endanger Old Ones, June 2008.

26 potential attacks earlier than most other service providers.

Unified Communications (UC) Enterprise customers are interested more than ever in a common platform for all their communications Hosting on-demand, needs including IM26, presence, voice, conferencing, and email. The unified communications SaaS“ enablement, storage and market is expected to rise at 55.6% CAGR to US$4.3 billion between computing provide an immediate 2008 and 201427, fuelled by cloud computing. Telcos already deliver individual communication services attractive opportunity for like messaging, VoIP28, and PBX to enterprise customers. They can build telcos on this experience to offer a unified user interface and experience across multiple devices. revenue leakages. Telcos can leverage ” Wholesale Capacity their experience in billing metered Reliable network connectivity, which services to enter the cloud billing includes fast and secure connections arena. Operators along with their from the cloud data center to the billing partners can provide their customer premise, is imperative for expertise as a comprehensive cloud the success of any cloud business. billing solution for vendors. Telcos can offer capacity, over their global IP29 backbone and private PaaS MPLS30 networks, as a service to As IaaS and SaaS space becomes both cloud service vendors and mature and increasingly competitive, enterprises. In addition to capacity, operators might shift their focus large global operators can also white- towards PaaS in order to diversify. label a complete telco-focused cloud PaaS is an attractive solution for infrastructure solution for regional ISVs and SMEs to improve their operators. productivity and reduce costs by using cloud-delivered toolkits The Future for application development and Telcos should also think beyond deployment. Operators can build traditional offerings and leverage the on their existing experience with commercial opportunities presented Service Delivery Platforms (SDP) to by more novel services and delivery offer PaaS. Telco assets such as voice, mechanisms such as cloud billing, location, and presence can be offered PaaS, and the broker approach. to help application developers build applications that can be monetized. Cloud Billing Technical and cost challenges make Telcos as Brokers it difficult for most cloud service There is a growing demand for “cloud providers to run their billing brokers” as intermediaries between infrastructure in-house. Unlike end users and cloud providers. subscription based billing, From SLAs with multiple vendors to pay-per-use billing is complex and compliance and security, the broker failing to get it right can result in handles all cloud related issues

26 Instant Messaging. 27 ABI Research, Vertical Market Opportunities in Unified Communications, Q4 2009. 28 Voice over Internet Protocol. 29 Internet Protocol. 30 Multiprotocol Label Switching.

27 Figure 9: Telco Strategies in the SaaS Space

I Expanding basic hosting capabilities to support SaaS delivery Telcos as hosting

service providers I Telcos with limited interest in developing a robust SaaS roadmap for SaaS should adopt this strategy

I Along with hosting, a telco can provide carrier-class data infrastructure, Telcos as SaaS network connectivity, and 24x7 monitoring ecosystem providers I Telcos keen on differentiating their SaaS proposition and providing value added services should go for this strategy

I In addition to offering hosting services, a telco acts as an aggregator of SaaS

Increasing Telco Involvement Telcos as SaaS I Telcos with a high interest in SaaS and keen on positioning themselves enablers as a one-stop-shop for enterprise software should adopt this strategy

Source: Capgemini TME Strategy Lab Analysis; VON, Telco Strategies to Win a Share in the SaaS Pie, June 2007; Company Websites

for a customer. This approach also enables customers to switch cloud vendors without worrying about the operational details. Telco experience in delivering multiple services with stringent SLA requirements, strong In order to address enterprise presence, and long lasting relationship with enterprise IT departments gives them an edge in customer“ concerns such as the cloud broker space. security, costs, and vendor Given the revenue potential and high demand of different cloud services, it is imperative that telcos do not lock-in, telcos can take up the delay their entry in this space. By diligently identifying and launching role of a cloud broker the right services at the right time, operators can maximize their share of wallet while the end customers would reduce IT CAPEX31 and OPEX32.

” Recommendations As seen in previous sections, several telcos have entered into cloud computing and are focusing primarily on IaaS and SaaS. However, there is a significant possibility of these services, especially IaaS, being commoditized in the near future. As the intensity of competition increases and service differentiation dilutes, margins will fall. Therefore, customization and differentiation across their offerings, service delivery, and customer segment targeting,

31 Capital Expenditure. 32 Operating Expenditure.

28 should be the hallmarks of a telco the level up to which they want to cloud strategy. have a SaaS presence and accordingly adopt the right strategy. In the following subsections we will illustrate how telcos can carve their PaaS is an area which will see limited niche in these different areas. action from telcos in the near future. Before establishing a PaaS presence, Service Offerings telcos would need to carefully In addition to providing traditional evaluate their technology readiness IaaS, operators should focus on and experience with platforms such offering localized and customized as SDP33. services which have a potential of commanding high margins. This will Service Delivery help them stay relevant in the face Telcos should endeavor to deliver of high competition from established services in a way that customers players such as Amazon and can enjoy the cost benefits of public Rackspace. clouds and the security and reliability offered by private clouds. This can Telcos provide enterprise services be achieved through Virtual Private across various geographies and Cloud (VPC) deployments. This have a good understanding of local model delivers services from a public market demand for these services cloud over MPLS-based Virtual including cloud. They are, therefore, Private Networks. VPC, therefore, best equipped to address the regional offers the full security and privacy of cloud services market needs. For a private cloud, but pushes hardware example, in certain geographies cloud ownership to the service provider. -based Virtual Desktop Infrastructure Telcos can leverage their distinct may have high demand, whereas strength in providing reliable private other enterprises might be more IP service to enable a cost effective interested in disaster recovery. By and secure VPC solution. quickly identifying and addressing such opportunities, operators can In order to address customer concerns gain an edge over the competition. such as security, costs, and vendor lock-in, telcos can take up the role Offering customized cloud solutions of a cloud broker (see Figure 10). can help telcos price their services at a premium. For instance, Figure 10: Telcos as Cloud Broker replicating the exact software testing environment on the cloud is a Telcos can mitigate most customer concerns related to cloud, by taking the role of a broker challenge for enterprises because Major Customer Concerns How Can Telcos Address These As Brokers? many providers do not offer custom OS images and limit the type of Enterprise Cloud Customer Concerns, %, 2009

I Creating a level of abstraction between the customer and configurations. By providing a Vendor Lock-in 14% multiple CSVs ensures seamless switching of vendors customized virtual environment for companies to replicate their exact test Performance 20% I End-to-end SLA management, by controlling the entire conditions, operators can not only delivery chain of services, will ensure high performance

I Delivering services through vendors which ful„ll all differentiate their offerings but also Compliance 25% charge higher margins. compliance and regulatory criteria will allay this concern

I By monitoring security of multiple CSVs and providing an Security 30% In the SaaS space, there are three additional security layer, security concerns can be reduced different strategies which telcos can I Effective allocation and optimum utilization of internal and Cost Control 37% adopt (see Figure 9) with the level external resources will ensure effective cost control of involvement by operators varying significantly. Telcos should evaluate Source: Capgemini TME Strategy Lab Analysis; Forrester, February 2009

33 Service Delivery Platform.

29 Figure 11: Summary of Cloud Strategies for Telcos The share of SMEs in the overall cloud services market is expected to rise rapidly in the next few years. Service Offerings Service Delivery Customers SMEs prefer all their ICT34 needs to be catered for by a single vendor and 1. IaaS should be the primary target 1. VPC should be the preferred 1. Separate SME targeting want solutions that are easy to deploy I Telcos should focus on niche delivery model for provisioning I SMEs have very different high margin IaaS offerings cloud services requirements and and support. Total Cost of Ownership should be targeted with 2. Selection of right SaaS strategy 2. Telcos should adopt the broker bundled services (TCO), which also includes should be determined by approach having low TCO

the degree to which a telco I High QoS and stringent security maintenance, upgrade and support wants to be involved in SaaS guidelines are required, making 2. Focus on enhanced security, is another factor which SMEs value telcos ideal brokers multi-country presence, and 3. Operators should target specic end to end cloud solutions for I Operators should become more than the actual selling price of a industry segments requiring large enterprises stringent SLAs brokers after gaining signicant experience as a CSV solution. In order to effectively target this segment, telcos should focus on Source: Capgemini TME Strategy Lab Analysis bundling different cloud services such as communication, security, and hosting in a simple package. Moreover, operators should offer standards-based cloud solutions and This is another innovative approach reduce overheads wherever possible, to service delivery where telcos in order to minimize TCO. are well positioned compared to their competitors because of In summary, telco focus should be strong enterprise relationships and on offering niche IaaS for specific experience of delivering multiple industry segments, provisioned services involving stringent through VPCs (see Figure 11). SLAs. However, operators should build significant experience in In conclusion, the revenue potential cloud computing before adopting and high demand of cloud computing this approach, so that they can presents a real opportunity for telcos successfully tackle the complexities to offset the declining revenue from associated with end-to-end solution traditional services. Several operators delivery. have already entered this area and others should soon follow suit. Customer Segment The in-place assets of telcos such Large enterprise customers have as data center capabilities, global multi-country operations and serious IP backbone, and experience in concerns about the security of their delivering managed IT services can applications and data. Also, due to not only help them expedite their the sheer size and complexity of their launch but also establish a leading operations, deploying cloud services, position. However, there is significant integrating them with on-premise possibility of cloud services, systems, and continuous maintenance especially, IaaS being commoditized and support becomes a highly in the near future. Moreover, the complex process. In order to target competition is becoming increasingly large enterprises, telcos should try intense with several players entering and offer enhanced security and end- this lucrative market. Operators, to-end cloud solutions across multiple therefore, need to constantly innovate countries. and focus on the right services,

34 Information and Computing Technology.

30 delivery models, and industries where they are best positioned, by the virtue of their strengths, to carve their niche and gain an edge over the competition.

Jerome Buvat is the Global Head of the TME Strategy Lab. He has more than thirteen years’ experience in strategy consulting in the telecom and media sectors. He is based in London.

Priyank Nandan is a senior consultant in the TME Strategy Lab. His research interests and project experiences span diverse areas such as , fixed and wireless networks, and cloud computing. He has a deep understanding of the TME industry in both developed and growth markets. Prior to joining the Lab, Priyank worked for a major IT product company. He is based in Mumbai. n

Telcos can di“fferentiate themselves by offering niche IaaS for specific industry segments, provisioned through Virtual Private Clouds ”

31 Beyond Communications: Identifying New Markets for Telcos By Jerome Buvat, Subrahmanyam KVJ and Nikhil Ray

Fixed and mobile operators across the developed world are faced with the prospect of increasing pressure on their voice and data revenues. Telcos are also facing a strong challenge from over-the-top Internet players who have been taking an increasing share of the consumer spend on digital media and communications. These developments are forcing telcos to identify new revenue streams for the future. Consequently, they are looking at entering new sectors that hold revenue potential, while being able to leverage their existing assets. While telcos have entered into a variety of new services involving content, advertising and cloud computing, among others, some of the more exciting opportunities lie in healthcare, energy, and automotive. These hold significant potential for telcos to enter and create a whole new ecosystem where they can place themselves at the center, and in the process generate significant value in the future. However, in order to tap into this potential, telcos will need to adopt different go-to-market strategies for different service opportunities. Telcos will need to assimilate changes in how they have traditionally operated their organizational structures if they are to effectively address upcoming opportunities and challenges.

mobile. Telcos are also keen to Figure 1: Key Telco Strengths Developed Over the Years re-use assets that they have built- up over the years and deploy them Tangible Assets Intangible Assets to more effective use (see Figure 1). The biggest and most valuable Telcos have built a strong brand due asset for telcos is the extensive These factors are playing a key Network Brand Equity to their extensive marketing efforts voice and data networks that they over the years have installed over the years role in telecom operators looking

Telcos have developed significant Telcos have access to large capital, for new revenue streams beyond Financial Strong IT capabilities in IT systems given the a prerequisite for setting up any new communications. wide range of software solutions Stability & line of business, in addition to years Capabilities that they need to integrate and Reliability of experience in delivering reliable operate services Telco opportunities in new areas can Wide Telcos have the capability to offer Strong Distribution/ services across the length and Most telcos have procurement be ascertained through a combination breadth of geographies that they Procurement Retail divisions that have significant operate in, giving them significant Divisions purchasing power given their scale of proxy data-points. An increased Presence retail presence IT spend in any industry is usually Existing Telcos have a strong existing billing Telcos already provide customer relationship with consumers for the Customer service through multiple channels Billing a good pointer to greater usage of various services that they provide Relationship and have built a steady relationship Relation that can be leveraged with their user base technology and communications which can be correlated to enhanced opportunities. As such, an analysis Source: Capgemini TME Strategy Lab Analysis of IT and communications spending forecast is likely to help identify those Telecom operators are in the midst sectors that could potentially hold of challenging times. While they are future opportunities and which are just recovering from the impact of likely to grow (see Figure 2). the financial slowdown, they are also facing the prospect of contending The projected IT and Telecom spends with increased competition from in different sectors leads us to look at over-the-top players. Consumers three key sectors namely, healthcare, increasingly expect connectivity energy, and automotive that telcos to add value to their day-to-day can target in order to exploit their activities, and are looking to emulate latent potential. These sectors, while their PC-based experiences on the offering strong growth potential, also

32 Figure 2: IT Spend and Telecommunications Spend Comparison by Sector, Global, CAGR, 2008–2013

3.0%

Healthcare 2.5% Utilities

Education 2.0%

Financial Services

1.5% Transportation The 1.0%

elecommunications, 2008-2013 Wholesale CAGR Revenue Growth of Spend on T 0.5% healthcare Process Manufacturing “ Agriculture Discrete Manufacturing offers 0.0% industry 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% CAGR Revenue Growth of IT Spend, 2008-2013 a variety of Source: Gartner, IT Spending by Industry Market, Worldwide, 2007-2013, 3Q09 Update, 2009 opportunities have low entry barriers, allowing limited to urban areas. Countries owing to telcos to re-use some of the assets such as India have under 0.6 they have built up over the years. physicians per 1,000 people, when compared to an European Union its critical In this chapter, we take a look average of 3.32. Such wide disparities at the opportunities, challenges, also point to latent opportunities for role across capability gaps and some potential innovative solutions that can better services that telcos can offer in these address the needs of the people in sectors. We conclude with a set of such geographies. developing recommendations aimed at giving initial direction to telcos as they Service offerings in the healthcare and developed venture into these new sectors. market can be classified as consumer services and enterprise solutions. Telco Opportunities in Healthcare Consumer services primarily involve markets Market Overview and Opportunity delivering healthcare offerings to Areas retail consumers, spanning the Opportunities in healthcare are traditional healthcare value chain closely tied to the critical role that (see Figure 3). These services include ” the industry occupies in both the remote diagnostics, continuous developed as well as developing monitoring, self-monitoring and markets. In developed markets, home-emergency solutions, e-health healthcare-spend as a percentage record solutions and awareness of GDP varies between 8-11%1. services. The opportunity for telecom Such significant spending indicates operators primarily lies in creating a sizable opportunity across the services where connectivity adds healthcare value chain. Similarly, significant value to the overall in emerging markets, the biggest experience. This can be achieved by opportunity arises from the fact that close collaboration with healthcare healthcare coverage is sparse and industry players. For instance,

1 World Bank, World Development Indicators, 2010. 2 Ibid.

33 Figure 3: Indicative Activity Chain of Consumer Services in the Healthcare Industry

Diagnosis Treatment Rehabilitation Management Prevention

Identification of a Addressing the Nursing a patient Enabling patient Encouraging patient’s cause of the back to good and doctor consumer education condition and patient’s health and greater control through information likely remedies condition through lifestyle over information and awareness

Description medication gathered campaigns

Remote Continuous Self-monitoring Electronic health Awareness and diagnosis monitoring and home record solutions, information solutions solutions aimed emergency either for the dissemination at ensuring the monitoring healthcare services rapid treatment solutions service providers of patient or for patients Potential Services

Source: Capgemini TME Strategy Lab Analysis

Orange Austria launched a health broadband network for the UK’s package for monitoring blood sugar healthcare authority, NHS. and pressure levels in partnership with Alcatel-Lucent and an Austrian Key Challenges and Capability Gaps charity in May 2010. The service Telcos will face stiff competition from is available to Orange Austria’s online players such as Google and subscribers to sign up in their retail Microsoft in certain elements of the stores for a cost of €10, on top of any consumer activity chain. Specifically, Orange tariff. Subscribers could use in areas such as management of one of the approved blood glucose personal health records, online meters to interact with an application players are looking to create models installed on their mobile phones that that bypass healthcare industry communicated with the server3. players looking to enter new service areas, as well as other new entrants Enterprise solutions typically involve including telcos. Google offers a working with healthcare institutions service called Google Health where and regulatory authorities in building patients can upload, update and the technology and communications manage their health records in a infrastructure. Orange offers a single location. Similarly, Microsoft secure communications platform for offers a personal health record system healthcare facilities to send automated known as Microsoft HealthVault, reminders on appointments, while which is offered direct to consumers another service allows hospitals to and to healthcare institutions and route incoming calls amongst a pre- regional authorities in various set group of numbers. Similarly, BT’s geographies. However, telcos have initiatives in e-health are focused significant advantages that they on solutions in collaboration with can leverage to compete with such regulators and medical institutions. over-the-top players. The telcos’ BT has also built and currently relationship with their subscriber manages the N3, a secure national base, including fixed and mobile

3 Company website.

34 networks, helps them offer remote Figure 4: Comparison of the Relative Advantages of Telcos and Over-the-Top diagnostic services (see Figure 4). Players (OTT) in the Generic Healthcare Industry Activity Chain

One way of working around this Diagnosis Treatment Rehabilitation Management Prevention challenge is for operators to take a I Remote I Mobile and I Telcos are better I Telcos would I Prevention of collaborative approach. The Canadian diagnosis using tele-health positioned than need to develop disease is closely specialized systems allow for OTT players to healthcare record tied to patient operator signed an exclusive hand-held continuous deploy healthcare management education that license with Microsoft’s HealthVault devices that monitoring of solutions that solutions that are telcos offer in a require patients and allow for robust and easy limited way solution to offer it to regulatory and connectivity constant self-monitoring to use through help lines 4 I e-health systems communication and home municipal authorities in Canada . rely heavily on a requires high emergency telco’s network Quality of Service monitoring Telecom Operator assets that telcos can solutions The other significant challenge that offer telcos will face in their entry into I OTT players can I OTT players will I OTT players will I OTT players with I OTT players have offer services have to rely on need to develop their personal a potential edge, the healthcare sector is around the only on Internet Service an ecosystem health record given their standardized Providers to offer that would solutions offer increasing strict regulations that are imposed devices such as high Quality of support the ability to number of on collection, retention, storage, mobile phones Service for healthcare collate a patient’s touch-points with mobile device systems and medical records including email, and transfer of medical data. This OTT Players Internet communication monitoring and organize instant them effectively messaging, social heightened regulatory oversight networking where acts as a significant entry barrier they can spread the message to new players. Telcos will need to Area of strength ensure that they are well versed with regulations and should take necessary Source: Capgemini TME Strategy Lab Analysis steps to stay compliant.

While these challenges are broad hurdles that telcos face in their entry Telco Opportunities in Energy into the healthcare sector, there are Market Overview and Opportunity other specific capability gaps that they Areas will need to plug as well. Telcos need The energy industry finds itself in to be able to work with, and help times of rapidly increasing demand co-develop, a wide range of healthcare and end-user costs. Demand for monitoring devices. Traditionally global energy is estimated to be more telcos have limited themselves to than doubling in the time period working with handsets, and in some 1980-20305. Similarly, electricity cases, netbooks and tablets. However, costs in the UK are estimated to going forward, telcos need to develop have grown at a CAGR of over 11% capabilities that will help device during the period 2005-20096. vendors to target various healthcare These developments are forcing needs rapidly to bring their devices utility service providers to look for to market with connectivity from the solutions that can help both utilities operator. and consumers manage energy in a more efficient manner. This need is largely addressed by the emergence of smart grid technologies, and primarily through the smart meter (sees Figure 5).

4 Company websites and press releases. 5 IEA, World Energy Outlook, 2009. 6 DECC Statistics Database 2009.

35 Figure 5: Needs Served by Smart Grid Technology The advent of smart meters has created wholly new application and communication layers on top of the existing industry value chain and this Rising Energy Limited availability of Increasing levels of Demand fossil fuels greenhouse gases brings with it multiple opportunities (see Figure 6).

Opportunities in Communications Rising cost of energy The communications layer spans from conventional sources multiple network topologies allowing telcos to offer traditional data-driven solutions that leverage their network Increase energy Higher usage of assets. Telcos can potentially partner efficiency of grid alternative sources of energy with utilities to re-use the existing telco communications infrastructure, rather than allowing utilities create Needs real-time Needs advanced alternate channels of transmitting monitoring and control systems for remote control load optimization smart metering data. The size of the opportunity can be gauged from the fact that data consumption in the energy industry is expected to Smart Grid Technology (Grid with sensing, embedded ramp up significantly, on the back processing and digital communications) of the increasing requirements for data processing and transfer. It is

Source: Capgemini TME Strategy Lab Analysis; World Economic Forum, Accelerating Smart Grid Investments, 2009; estimated that smart meter data is Xcel Energy, Smart Grid: A White Paper, 2008 likely to grow up to over 35 Petabytes7 by 20158.

Opportunities in Home Energy Management Home area networks9, enabled by smart meters, allow telcos to offer Advent of smart meters home energy management together with multiple value-added services. Connectivity to smart appliances allows“ creation of new services could be routed through existing network assets, including femtocells10. on top of existing industry Telcos can also potentially build services such as home automation and remote appliance control on top value chain of this connectivity to tap into the fast-growing smart appliances market. Indeed, it is estimated that the global smart appliance market is likely to ” grow at a CAGR of almost 49% in the period 2011-2015, reaching a market size of US$15 billion11.

7 A Petabyte is 1024 Terabytes. 8 UtiliPoint, The Utility Industry Enters the Petabyte Era, June 2010. 9 A home area network is a residential used for communication between digital devices deployed in the home using WiFi, Zigbee, Bluetooth, Z-wave, among others. 10 A femtocell is a small cellular base station used to expand coverage of mobile network within a building. 11 ZPryme, Smart Grid Insights: Smart Appliances, March 2010.

36 Opportunities in Utility Enterprise Figure 6: The Evolving Energy Industry Value Chain Systems Management

Utility Enterprise Systems Traditional Energy Value Chain Management involves telcos offering Communications Layer Components data management and related Power Power Power Energy (Smart) Home Area Network (HAN) Generation Transmission Distribution Retailing Meter services using their existing assets. A residential local area network used Key services that telcos could offer for communication between digital 12 devices deployed in the home using include meter management , meter Communications Layer WiFi, Zigbee, Bluetooth or Z-wave 13 Communication networks that connect metering and control data management and revenue systems across the traditional value chain Field Area Network (FAN) 14 management . Telcos are rightly Application Layer Network deployed to connect a group positioned to offer these services A set of applications that help balance the supply and of buildings served by a substation or demand in a decentralized energy generation environment transformer using Radio Frequency given their experience of handling using the ICT infrastructure mesh, fiber, power line communication large consumer usage data sets, well (WAN) established IT processing systems, Application Layer Components Network connecting many FANs across Home Energy Utility Enterprise Utility Energy a wide areas such as a city using and revenue management capabilities. Management System Management Management cellular, private wireless, backhaul, satellite, WiMAX networks This market is estimated to grow Systems to monitor Management of Energy optimization and control energy Information systems that balance Local Area Network (LAN) from US$5.9 billion in 2009 to over usage within the Technology supply and demand 15 home infrastructure and to maximize Utility enterprise network that connects US$6.7 billion globally by 2015 . data assets of the efficiency of the all the IT systems within the utility utility utility operating locations Opportunities in Utility Energy Management The primary opportunity for telcos Source: Capgemini TME Strategy Lab Analysis in Utility Energy Management lies in energy industry specific applications such as advanced metering One of the biggest challenges in who are looking to create consumer- infrastructure (AMI)16, demand typical smart metering projects is cost facing models through online energy response17 and grid optimization18. estimation and project management. management solutions. AMI includes services such as remote Smart metering projects are usually meter reading, remote activation/ complex, given the wide variety of The telco entry into the energy sector de-activation of services, among partners that they involve, including is contingent on them filling various others. In the US alone, it is estimated the smart meter vendor, the utility, capability gaps that exist. While some that revenues from the AMI market the regulator, the local municipality, telco assets are definitely re-usable are likely to grow at a CAGR of 22% and the telecom operator. Another key in launching new services in energy, in the period 2009-2015 up to US$8.4 factor is that consumer distribution is telcos will still need to ensure that billion19. likely to be varied and wide-spread, they rapidly build specific capabilities creating another variable that might for specific services. In order to Key Challenges and Capability offset the best of project plans. exploit opportunities in utility energy Gaps Managing these uncertainties, while management, telcos should recruit a Telcos will face significant staying profitable, is a key challenge specialized workforce with knowledge competition from smart meter as witnessed by Telenor’s entry into of power systems. They should strive vendors wanting to move up the value smart metering solutions through to gain understanding of software chain; large IT solutions providers its subsidiary, Telenor Cinclus. The applications that are used in the looking for new outsourced services, company failed to estimate the cost energy sector and ensure they are on and over-the-top players that will of large scale project implementation, top of utility industry technologies want to create solutions aimed at eventually leading to its closure20. such as SCADA21. consumers to efficiently manage their Telcos will also have to contend power consumption. with competition from over-the-top players such as Google and Microsoft

12 Meter Management is the management of the installation and servicing of smart meters and related services. 13 Meter Data Management is the processing of meter data for energy management applications. 14 Revenue Management is the management of billing and collection for the utility. 15 Newton-Evans Research, Utility CAPEX Report, January 2010. 16 AMI-Networking of sensors and devices that form the basis for advanced applications. 17 Demand Response is the management of peak time demand by incentivizing consumers for higher efficiency. 18 Grid Optimization is the optimization of the grid performance in real-time, improving reliability, efficiency and security. 19 Frost & Sullivan, The United States Advanced Meter Infrastructure Market, 2009. 20 Dagens IT, Electrical shock to Telenor, May 2009. 21 Supervisory Control and Data Acquisition is a process control application that collects data from multiple remote locations sending them to a central server.

37 These factors are expected to boost the overall automotive market which is forecast to grow globally from 6.2 million units in 2008 to over 16.5 million units by An increased focus on safety 201326. Telco service opportunities arise through three categories of “and desire for in-car services is services, namely safety / security services, infotainment services, and driving the growth of automotive efficiency services. The range of services that are aimed telematics at improving passenger safety/security include accident and emergency assistance, vehicle tracking, and remote vehicle operations. Infotainment services span ” navigation, location-based services, and entertainment services within the Telco Opportunities in vehicle. The advent of GPS-enabled Automotive smartphones potentially allows telcos to provide navigation and concierge Market Overview and Opportunity solutions to users. Efficiency services Areas help customers reduce the total cost The global automotive sector has of ownership and increase efficiency been growing steadily over the to help mitigate rising fuel costs. past few years, although the recent B2C efficiency services potentially financial downturn has resulted include vehicle diagnostics and green in a dip in demand. Nevertheless, telematics. Remote vehicle diagnostics the global market for light vehicles involves the service provider running is expected to grow at a CAGR of a series of diagnostics of the vehicle over 4.8% during the period 2010- systems and recommending actions. 2020, growing to over 88.5 million The telco opportunity in each of these 22 vehicles . The rapid evolution of service areas can be viewed through technology, a growing regulatory the channels in which a telematics focus on safety, and an increased system can be bought (see Figure 7). consumer demand for in-car connected services are among the key Potential services in the B2B segment 23 drivers for automotive telematics . include fleet management services Regulatory authorities are pushing for that require a combination of increasing the deployment of eCall telematics services. A typical fleet and bCall systems with the aim of management service could potentially 24 reducing vehicle fatalities and this include navigation, vehicle tracking, is likely to result in these markets communications, security, vehicle growing to almost 20 million unit diagnostics, and geo-fencing27 among 25 shipments by 2017 in Europe . others.

22 R. L. Polk & Co., The Changing Automotive Industry — Forecasting Global Vehicle Demand, May 2009. 23 Automotive telematics is a set of systems that combine global positioning (GPS), onboard computing, and telecommunications technologies that enable a range of services within the vehicle. 24 eCall is an emergency call system which is deployed automatically or manually notifying the vehicle location, severity of accident and help needed to the nearby emergency center in the case of an accident. bCall is a breakdown assistance system where the driver manually alerts the nearby emergency center in case of a vehicle breakdown. 25 R. L. Polk & Co., The Changing Automotive Industry — Forecasting Global Vehicle Demand, May 2009. 26 Frost & Sullivan, Second Innings for Telematics — but the On-going Auto Market Crisis will Decide the Future, January 2009. 27 Limiting vehicles within certain geographic boundries using GPS.

38 Key Challenges and Capability Gaps Figure 7: Classification of Telematics Systems and Corresponding Telco Telcos will face significant challenges Positioning around addressing privacy Compatibility with Channel concerns, overcoming the lack of Description Telco Positioning Safety / Security Infotainment Efƒciency standardization, and coping with a Services Services Services I Telematics systems that I Telco will have to tie up risk of marginalization. come with the car and are with Original Equipment Built-In installed by vehicle Manufacturers in order to (GM OnStar, manufacturer offer basic telematics BMW I Safety services (e-call) and services through the Addressing privacy concerns Connected vehicle maintenance and built-in channel Drive) Telematics services require the diagnostic systems are I Forming alliances with vehicle position data to be accessible normally built-in automotive manufacturers could also increase market to service providers. However, penetration the ownership of this data can be I These are systems that I Telcos would have to can be purchased after partner with device misused and regulations are not After Market vehicle purchase and vendors and embedded clear on ownership. Consequently, (TomTom, installed in the vehicle systems companies to Garmin) I Navigation and address this market consumer concern over potential entertainment systems are generally fall in the after abuse of such data persists and telcos market category will need to manage issues around I This is a growing class of I Telcos are most strongly telematics systems in positioned for this market perception. However, telcos have Bought-In which mobile phones or as they already have (Ford Sync, other mobile internet signiƒcant in†uence in the historically had a strong record on Mercedes devices (MID) are used by MID market managing consumer privacy, despite Mbrace) tethering with the built-in I Telcos can provide systems services through mobile handling sensitive personal data and apps this is likely to help them stand in Not compatible Completely compatible good stead.

Overcoming lack of standardization Source: Capgemini TME Strategy Lab Analysis The strong opportunity in automotive telematics has led to the entry of a wide range of players across the value chain. However, with each player using its own set of technologies of these firms are encouraging and protocols for delivering services, solutions and services in which there has been a profusion of multiple mobile connectivity is treated modes of communication and as a commodity. For instance, operating systems that can be used Ford Sync service offers an in-car for telematics systems. Moreover, communication and entertainment given the nascent state of this service through a one-time charge due industry, there is a lack of industry at purchase of car with no recurring standards that can be uniformly connectivity charges. applied. While the automotive sector offers Threat of being commoditized potential for a wide range of services, Automotive telematics offers the telcos will still need to build their first real chance for players in the capabilities in order to effectively automotive value chain to create compete with other players in the new revenue streams beyond automotive ecosystem that are looking their traditional product lines. to expand into the services realm. Consequently, multiple players are Specifically, telcos will need to build focusing their efforts at gaining a up skills in areas spanning embedded vantage position in the new service software, device design, and sensors. environment. In doing so, many

39 Figure 8: Strategic Options for Telecom Players in Healthcare specific sector, from the perspective of ARPU28 and the potential amount of control that telcos can exert. Beyond 1 2 3 Basic Connectivity Service Complete Solution the initial stage of identifying the Provider Enabler Provider ideal sector to enter, telcos should

I Telco restricts itself to the I Telco provides platforms on I Telco creates, manages, and then take steps tailored to address the role of a connectivity provider which developers and sells end-to-end integrated specific needs and requirements of Description that can offer wholesale and third-party healthcare service solutions to either healthcare secure access network for providers can build institutions, regulatory the sector. transmitting health applications and services authorities or to end information consumers

I Telcos operating in markets I Telcos can effectively I This option enables telcos to Telcos in Healthcare where a competitive co-operate with over-the-top effectively leverage the full electronic and mobile solution providers rather than potential of the healthcare An entry into healthcare leverages Rationale healthcare ecosystem compete opportunity multiple existing telco assets. In for Role already exists can benet I Telcos can also look at I Telcos can launch branded signicantly by positioning co-branded service offerings offerings that can help emerging markets, telcos should themselves as an access enabling them to cut down establish their line of focus on capitalizing on their wide provider of choice for on the time-to-market while business multiple players in the space gaining credibility through retail presence for driving the uptake partnerships of mobile healthcare solutions, to capitalize on the limited healthcare Source: Capgemini TME Strategy Lab Analysis availability in such geographies. Moreover, given the fact that multiple services in mobile healthcare are going to be delivered through third-party devices, it remains Recommendations imperative that telcos draw upon The opportunity for telecom operators their extensive M2M29 experience. to create new revenue streams Telcos should start off as a basic beyond their traditional focus areas connectivity provider and then move do exist. However, in order to tap on to creating platforms that support into these emerging opportunities, other healthcare service providers. they will need to take a structured Once they have gained significant approach towards deciding on the understanding of the space, they choice of sector, selecting their go-to- should actively look at creating, market strategy for each sector, and managing, and selling integrated making fundamental changes to healthcare solutions (see Figure 8). their organizational DNA. Given Large operators such as Orange and the diverse nature of the sectors, Vodafone are currently focused at and the services within each, these offering services across the consumer recommendations should be viewed activity chain. However, players as basic guidelines that will help such as BT have moved aggressively telcos better assess the opportunity at in the enterprise space and have hand. already launched multiple large- scale initiatives in collaboration with Priority of sector should be closely regulators and medical institutions. tied to an operator’s existing assets and market attractiveness Telcos in Energy Entry into specific sectors needs to be The telco capability gaps in the closely tied to the operator’s existing energy sector are best addressed by assets including markets that they selective partnerships. The potential operate in. These should then be partners include smart meter/control mapped into the attractiveness of a system vendors, system integrators, and software service providers. Telcos should adopt a phased approach towards becoming an

28 Average Revenue Per User. 29 Machine-to-Machine.

40 energy management solution provider to maximize revenue potential. They should start off by being an infrastructure integrator, move on to being an application service Telcos should prioritize their provider before finally evolving to an energy management solutions provider that offers the entire range “entry into new sectors based on of smart grid services. These include communications, management of their existing assets and market home energy, meter, meter data, and offers advanced metering infrastructure, demand response attractiveness and optimizes the grid (see Figure 9). Most telcos including Vodafone, T-Mobile, and AT&T are currently in players including device vendors, the infrastructure integrator phase vehicle manufacturers, application” where their primary engagement with developers, embedded software utilities is built around using network providers, location aggregators infrastructure. and third-party telematics service providers in order to create Telcos in Automotive professional solutions that they can Telcos should aggressively move co-market. They should begin with forward in the automotive sector in automotive applications, using their order to create solutions with which experience with mobile apps, and they can directly reach out to the progressively move on to being a consumer. At the same time, they complete telematics service provider should also partner with a range of that offers a complete platform to

Figure 9: Telco Evolution as Service Provider in the Energy Space

Development of applications would Energy management of the Smart Grid Services require specialized knowledge that a utility and the consumer are Telco can acquire seamlessly managed by the Telco revenue would be based on Telco service revenues from enterprise Telco revenue would be based systems management on scale of managed solutions HIGH

Meter

Revenue Meter Data

Infrastructure Home Energy Infrastructure Communication Management Management Management Management Grid Optimization Advanced Metering Demand Response

Energy Management Solutions Provider

Application Service Provider New Capability Requirement

Infrastructure Integrator LOW

LOW Revenue Potential HIGH

Telco acts as an integrator for IT hardware and provides integrated communications Telco revenue is linked only to use if its existing infrastructure assets, including networks

Source: Capgemini TME Strategy Lab Analysis

41 Figure 10: Telco Evolution as Service Provider in the Automotive Space

Telematics Market Strategic Options for Telecom Operators Power System 3 Complete Telematics Service 1

Vehicle Manufacturer Provider

Built-in I Safety (e-call, b-call) I Telcos can offer various app styled 2 services that can be used in the vehicle via I Security the mobile phone Tethered Telematics Service I Built-in navigation Provider I Services that require vehicle information I Vehicle diagnostics will have to come from a built-in unit I Security After-Market I Green telematics 1 I Vehicle control I Remote vehicle control Automotive App Provider I Navigation I In-vehicle entertainment 2 I Navigation apps I PAYD insurance Bought-in I Telcos can offer an after market solution I Location based apps I Green routing

Telecom Operator Telecom that can be installed in any model of I In-vehicle media vehicle

I The mobile phone that can be tethered via Content/ Bluetooth or Wi-Fi offers more advanced Application services that apps Developer

Third Party Service Provider 3

Location I Offering a complete platform including Aggregator hardware and software to automotive manufacturers

I Complete suite of telematics services can

Partnership Need Embedded Software be offered to customers via a model similar Developer to the Kindle

Device Manufacturer

Source: Capgemini TME Strategy Lab Analysis

car manufacturers (see Figure 10). partnerships. This would require the Some operators are already taking telco to take a more collaborative early steps in this direction. Telecom approach and a willingness to work Italia has created a joint venture with industry players. On the other with auto-component manufacturer hand, in services where telcos will Magneti Marelli aimed at developing attempt to directly compete with innovative solutions that connect incumbents, they should adopt a vehicles to cell phone networks and more aggressive and rapid approach providing new on-board infomobility in terms of going to the market and services. establishing a clear value proposition for their service. In such cases, telcos Adopt differentiated go-to-market need to bear in mind that here they strategy for each sector are attempting to supplant traditional The telco approach towards launching players which will most likely result services in new sectors will need to in the incumbents responding with be differentiated on the basis of the full force. nature of service. In sectors where telcos intend to create additional value rather than replace the incumbent, they should strive to work their way up the value chain through

42 Adapt and assimilate changes required to organizational DNA Traditionally, telcos have conceived, launched and operated new services in the telecoms space on their own. As telcos venture into new However, increasingly, as telcos look to new sectors for emerging “sectors, it is imperative they adopt opportunities, it becomes imperative for telcos to adopt a collaborative approach towards launching services. a collaborative approach, while This could mean the creation of separate business units, in some assimilating changes required to cases. Some operators have already realized the need for organizational structures that are different and organizational DNA separate from their traditional telecoms units in order to expand into new sectors. Deutsche Telekom has launched three business segments in Jerome Buvat is is the Global Head of ” order to target opportunities in smart the TME Strategy Lab. He has more grid, smart vehicles and networked than 13 years of experience in strategy healthcare30. Telcos will need to consulting in the telecom and media ensure that such new segments are sectors. He is based in London. able to work independently with various existing business units of Subrahmanyam KVJ is a senior the company such as wholesale, consultant in the TME Strategy Lab. His B2B and retail. Moreover, such recent work focused on identifying the standalone units allow for faster telecom operator opportunity in social response to market forces, since the networking. He has worked extensively pace of competition is likely to be on the impact of convergence and the significantly different in each sector, changing consumer behavior on telecom and is also likely to vary with what and media players. He is based in the telecoms sector has to offer. Mumbai.

For telcos in developed markets Nikhil Ray is a senior consultant in staring at the prospect of maturing the TME Strategy Lab. His recent work telecom markets, the need to identify includes growth strategies for telecom new revenue streams is adequately operators through diversification and matched by the opportunities in new innovative services. He has over five sectors. While the move into new years of experience in business planning sectors is likely to be challenging, and consulting across diverse industries. going forward, it is safe to say that Prior to joining the Lab, Nikhil worked at only those telcos that stay nimble a boutique strategy consulting firm. He is n and alert to such opportunity areas based in Mumbai. are likely to stand out from the competition.

30 Company website.

43 Long Term Evolution LTE Opportunities and Challenges for Telcos By Linda Asplund and Priyank Nandan

Abstract: The mobile networks of most operators are witnessing an unprecedented rise in data traffic, due to an increasing consumer demand to access bandwidth intensive content on-the-go and the proliferation of a large number of mobile devices such as smartphones and tablets. This trend is exerting extremely high pressure on the capacity constrained network of operators. Faced with this challenge, wireless providers need to upgrade their network infrastructure in order to keep up with data traffic volumes and deliver bits more cost-effectively. When compared to some other upgrade options such as HSPA1, HSPA+, and WiMAX2, Long Term Evolution (LTE)provides operators with a technically superior and cost effective solution to deliver true mobile broadband experience. Although LTE standards and the ecosystem have not yet evolved fully and an upgrade requires significant capital investment, operators can still reap tremendous benefit by formulating the right migration strategy. A focus on key priorities such as pricing, rollout strategy, network sharing, and spectrum policy will be instrumental in the successful rollout of LTE. Having realized its potential, several operators across the globe have already deployed LTE commercially and many more are in the fray.

Figure 1: Global Mobile Data Traffic, Exabytes* per Month, 2009-2014 The Need for LTE The increasing proliferation of a range of Internet enabled mobile devices, such as tablets, smart-phones, and 3.6 e-readers has added to the rising consumer need to access rich content on the go. This phenomenon has CAGR 108% resulted in the explosion of mobile 2.2 data traffic (see Figure 1) exerting an unprecedented demand on the

1.2 network of wireless operators. Driving this boom will be the increasing 0.6 consumption of mobile video, 0.2 0.09 which will consume nearly 66% 3 2009 2010 2011 2012 2013 2014 of all mobile data traffic by 2014 . Bandwidth intensive applications, especially those based on video, * One Exabyte is equal to 1 billion Gigabytes Source: Cisco Visual Networking Index: Global Mobile Data Forecast Update, 2009-2014 expose the capacity bottlenecks and the gap which customers are increasingly facing between peak rates in perfect conditions and real everyday experiences. It is, therefore, imperative for operators to ensure that The explosion of mobile the average user’s mobile experience is not compromised especially in high “data traffic is exerting traffic areas. unprecedented demand on 1 is the amalgamation of two protocols, High Speed Downlink Packet Access (HSDPA) and High Speed Uplink Packet networks Access (HSUPA). 2 Worldwide Interoperability for Microwave Access. 3 Cisco Visual Networking Index, Global Mobile Data ” Traffic Forecast Update, 2009-2014. 44 Figure 2: Comparison of LTE Peak Theoretical Throughput, Latency, Spectral Efficiency and Relative Cost per Bit Parameters with other Mobile Network Technologies

Downlink Spectral Efficiency (bits per second/Hz/sector) Downlink and Uplink Peak Throughput (Mbps)

2.5 UMTS / HSPA LTE WiMAX Antenna Downlink Speed UMTS Technology (Mbps) Uplink Release 2.0 Speed 5 10 20 (Mbps) Type Qty MHz MHz MHz 1.5 1x1, R6 HSPA SIMO 1x2 14.4 – – 5.76

1.0 R7 HSPA+ 1x1, 11.5 64-QAM SIMO 1x2 21.6 – –

0.5 R7 HSPA+ MIMO 2x2 28.8 – – 11.5

c 0.0 R8 LTE MIMO 2x2 43 86 173 58 HSDPA HSPA+ HSPA+ LTE 2X2 LTE 4X2 LTE 4X4 Rel 1.0 Rel 1.5 2X2 SIC, MIMO MIMO MIMO 2X2 4X2 R8 LTE MIMO 4x4 82 163 326c 86 MIMOa 64 QAMb MIMO MIMO

Relative Cost per bit of Transmitted Data Latency (ms)

100 200

80 160 - 70% 60 120

-20% 40 80 -50% 20 40

0 0 3G HSPA HSPA + LTE 3G HSPA HSPA + LTE

a) Multiple Input Multiple Output: MIMO uses multiple antennas at both the transmitter and receiver to improve communication performance b) Quadrature Amplitude Modulation c) 3GPP TR 25.912 V7.2.0 Source: Capgemini TME Strategy Lab Analysis; Whitepaper, Upgrade Strategies for Mass Market Mobile Broadband, 2009; 3G Americas, HSPA to LTE Advanced, September 2009; Morgan Stanley Research

In order to enhance subscriber and spectrum availability. In Japan, LTE is a pure packet switched experience, prepare access networks while NTT DoCoMo is skipping evolution of UMTS9 3G technology for the onslaught of data intense HSPA+ and migrating straight to LTE, which offers significant advantages applications, and reduce operational Softbank Mobile believes there are such as higher spectral efficiency, expenditure, operators will need to still significant opportunities with lower cost of transmission per upgrade their networks sooner rather 42Mbps HSPA+6. megabyte, higher throughput, and than later. For doing so, they have lower latency when compared to multiple technology options such as However, given the various migration existing technologies WCDMA4, HSPA, HSPA+, CDMA2000 options, LTE seems to offer the most (see Figure 2). It is also backward EV-DO5, WiMAX and LTE to chose efficient, cost effective (in terms compatible with the CDMA10 family from. The migration strategy of each of TCO7 and OPEX8 savings), and of technologies and thereby enables operator is likely to be different future proof solution for operators, even CDMA operators to move to and will be based on several factors who can reap considerable long term this technology. Furthermore, by such as the existing state of their benefits by leveraging an early mover deploying LTE SON11 telcos can networks, current and projected advantage. significantly improve operational data demand, costs considerations,

4 Wideband Code Division Multiple Access. 5 Evolution Data Optimized. 6 Telecomasia.net, HSPA v LTE: The Debate Continues, May 2010. 7 Total Cost of Ownership. 8 Operating Expenditure. 9 Universal Mobile Telecommunications Service. 10 Code Division Multiple Access. 11 The Next Generation Mobile Networks (NGMN) Alliance and the Third Generation Partnership Project (3GPP) have standardized a set of capabilities known as Self-Organizing Networks (SON). With SON, operators can automate previously manual steps throughout the lifecycle of a network — from planning and deployment to optimization and operations.

45 Figure 3: Commercial LTE Deployments and Technology Adopted With over 100 commitments by service providers around the world to deploy LTE networks, Operator Country Deployment Date Frequency Band Duplex Scheme the worldwide LTE infrastructure

Sweden December 2009 market is set to grow tenfold to reach US$11.5 billion13. Going Finland May 2010 2.6GHz by the trends, LTE seems to be

Sweden November 2010 the technology of choice for most operators across the world. USA September 2010 1.7/2.1GHz FDD

USA December 2010 700MHz In this chapter, we evaluate the technology options within LTE, the Japan November 2010 2.1GHz most significant barriers regarding its uptake, and recommend the best Poland September 2010 1.8GHz approach for different operators.

China May 2010* 2.6GHz TDD Technology Options for

* has deployed 11 LTE trial networks across China. The first of these trial networks was launched in May Operators 2010. Source: Capgemini TME Strategy Lab Analysis; Company Websites The technical advantages of LTE which render significant benefits over other wireless technologies can efficiency and reduce OPEX. Thus, be attributed to its superior access LTE offers the best potential to and antenna technologies. The use address one of the most significant of technologies such as OFDM14, priorities of wireless operators, SC-FDMA15, MIMO, and multiple which is, upgrading their capacity channel bandwidths results in constrained networks. attributes such as high throughput, low power consumption, high Having realized the potential, spectral efficiency, and improved telcos across the globe have already coverage and cell performance. LTE taken the first steps towards the can be deployed in both paired deployment of LTE networks (see spectrum for Frequency Division Figure 3). In December 2009, by Duplex (FDD) and unpaired spectrum launching services in Sweden and for Time Division Duplex (TDD), Norway, TeliaSonera became the first and we witness a greater adoption operator in the world to offer LTE. of FDD in initial deployments (see In September 2010, Metro PCS, a Figure 3). In this section, we will prepaid service provider in the US, primarily focus on the TDD and FDD became the second operator to launch technology deployment options for LTE services. It offers its service on operators. the first commercially available 4G enabled handset in the world, the Both FDD and TDD have their own Craft12. While TeliaSonera, advantages and disadvantages (See which is a GSM operator, offers Figure 4), and decisions on which its LTE services over USB dongles, duplex scheme to adopt can be taken Metro PCS, a CDMA2000 player, depending on the operator’s business provides unlimited and contract less requirements. In the subsequent LTE services over a handset. It is subsections, we detail these choices. noteworthy how LTE can be delivered by both large and small operators, FDD LTE irrespective of their existing wireless FDD LTE transmits the downlink and technology, over multiple devices. uplink traffic in separate frequency

12 Company Press Release. 13 Infonetics Research, LTE Infrastructure Forecasts Up, Along With Operator Commitments to LTE Networks, November 2010. 14 Orthogonal Frequency Division : Used for downlink. The available spectrum is divided into many thin carriers each on a different frequency. 15 Single Carrier Frequency Division Multiplexing Access: For uplink. LTE uses a pre-coded version of OFDM called Single Carrier Frequency Division Multiple Access (SC-FDMA) which reduces power consumption, improves coverage and the cell- edge performance.

46 bands. FDD thus requires paired Figure 4: Relative Advantages and Disadvantages of FDD LTE vs. TDD LTE spectrum with sufficient frequency FDD TDD separation to allow simultaneous Parameter LTE LTE Remarks transmission and reception. The I The adaptable Downlink: Uplink ratio means that TD LTE ensures Spectrum Flexibility paired spectrum of FDD LTE is most maximization of available bandwidth Spectrum Costs suited to support voice as well as I TDD spectrum is traditionally auctioned for lower US$/MHz/population I Economies of scale in favor of FDD will lead to lower hardware and user equipment symmetric data applications such as Hardware and User costs Equipment Costs I However, the push from China Mobile and emerging interest from leading peer-to-peer file transfer and video operators in Europe and US is expected to bridge this gap conferencing. Coverage I TDD LTE has poor coverage (up to 40% less) compared to FDD and requires base station synchronization to avoid cross slot interference

I Most of the current 3G deployments are based on paired spectrum and as a result In addition, when compared to TDD Ease of Migration are easier to migrate to FDD LTE I However, TD LTE is expected to provide effective upgrade path for technologies LTE, FDD LTE offers advantages such as TD-SCDMA, TD-HSPA and WiMAX both in terms of higher coverage and Ecosystem Support I Though network and device vendors as well as major mobile operators are better compatibility with existing 3G committed to support both FDD and TD LTE technology, higher push is towards FDD Suitability for Data I TDD LTE is more suitable for IP-based data applications which are mostly networks, which are mostly based on Applications asymmetric in nature paired spectrum. As a result, FDD Very High High Medium Low Very Low LTE is expected to be the logical Source: Capgemini TME Strategy Lab Analysis; Ventura Team, Has Hi3G Played a Shrewd Hand in the Recent Danish migration path for most operators Auctions?, 2010 who have deployed 3G networks. In fact in most geographies the has entered into partnerships with majority of the spectrum which has eight international telecom operators been auctioned is FDD. Most early to jointly promote the development of and planned deployments of LTE TD-LTE industry. from operators such as TeliaSonera, Tele2, and Verizon have also been on Many countries have TDD spectrum FDD. Other major operators are also available and operators in Europe expected to roll out their LTE macro have already auctioned unpaired networks on FDD bands in order to spectrum for LTE. Being a niche easily meet their business objectives technology, TD-LTE is expected Video will for mobile broadband and multimedia to fetch a lower price per MHz services. per population compared to the “represent nearly FDD equivalent. In Sweden while TDD LTE (TD-LTE) 2x10 MHz FDD spectrum was 66% of all mobile TDD LTE (also known as TD-LTE), auctioned for 296.6 million SEK, transmits the uplink and downlink 50 MHz of unpaired spectrum traffic within the same unpaired went for 159.25 million SEK16. The data traffic by frequency band and is predominantly lower spectrum costs and higher a mobile broadband technology. spectral flexibility of TD-LTE makes TDD LTE offers flexible and adaptable it an attractive option for greenfield 2014 (real-time) uplink and downlink operators in both emerging and traffic ratio, which makes this developed markets to make a technology suitable for asymmetric quick transition to TD-LTE mobile data applications such as HD video broadband. This is evident from the ” download and content upload. strategy of operators such as , Augere, and TD-LTE can provide an effective Clearwire who are focusing primarily upgrade path for existing technologies on TDD bands, banking on the such as TD-SCDMA, TD-HSPA and abundance of available and low cost WiMAX. China Mobile is one of the unpaired spectrum. major proponents of TD-LTE, with 11 TD-LTE trial networks in place, TD-LTE is not only witnessing and plans to roll out eight more by traction from pure play mobile the end of 2011. The Chinese operator broadband providers but also from

16 Swedish Regulator.

47 existing 3G operators in developed Technical Challenges markets as they try to focus on Complexity and Backward a capacity-centric rather than a Compatibility coverage-centric network strategy. For operators considering a network This was evident in the latest update, selecting the right technology spectrum auction in Denmark which is a major concern. They can either witnessed operators such as Telenor, upgrade to evolved versions of 3G, Telia, and 3, bidding for paired as such as HSPA, and HSPA+ or go well as unpaired spectrum. For for LTE. While upgrades within such operators, TD-LTE can act as a the 3G family may not require too complimentary solution to LTE FDD many network architectural changes, to serve the increasing demand for transformation to LTE requires new broadband. Operators can roll out radio access technology and core LTE their LTE macro networks on FDD network expansion. This is not bands while deploying a small-cell17 only cost intensive, but also highly offers “the most (picocells and femtocells) second complex. In addition, since existing layer on TDD spectrum, thereby not and 3G networks will not be only providing enhanced capacity phased out anytime soon, there is efficient, cost to indoor users but also offloading additional burden on operators to demand from the existing macro cell maintain two networks, support effective, and network. interoperability, seamless roaming, and handovers across multiple The considerable interest in TD-LTE communication service providers. future proof is expected to help build the ecosystem support and bridge the Backhaul solution for gap with FDD LTE. Major network The advent of LTE will further ignite and device vendors have already the surge in mobile data traffic due to committed to developing TD-LTE increasing consumption of bandwidth operators to technology, and live network trials hungry applications and services. are already underway. Although the This will exert additional strain on upgrade their adoption of LTE FDD will be the the existing backhaul capacity of more widespread, it is reasonable to operators. In Western Europe wireless assume that TD-LTE will also witness backhaul capacity will more than networks significant uptake. triple between 2010 and 2014, to nearly 60,000 Gbps18. Traffic from Challenges in LTE LTE applications is expected to Implementation account for more than half of last-mile LTE certainly stands out in terms of backhaul demand in North America ” 19 its technical superiority and spectral by 2014 . Operators need to upgrade efficiency. However, being an evolving their existing backhaul capacity as standard it poses some significant failure to do so can negatively impact challenges ahead of operators. The the end-user experience and the main barriers to LTE adoption can quality of service. be largely categorized as, technical, regulatory, ecosystem driven, and /E1 leased lines, fiber, and Return on Investment (ROI) related. microwave are the most popular We detail these challenges in the options for telcos to upgrade their subsequent subsections. backhaul infrastructure (see Figure 5). Backhaul networks, however, are expected to be a hybrid of microwave, fiber, and leased line depending

17 Small cell base stations such as picocells and femtocells are low-power, small wireless access base stations that sit inside the customer premise, whether at home or at work. They are expected to play a vital role in LTE deployment by helping mobile operators provide indoor coverage to their subscribers, while at the same time, relieving backhaul and infrastructure costs. 18 In-Stat research, Wireless Backhaul: The Network Behind LTE, WiMAX, and 3G, October 2010. 19 Ibid.

48 on factors such as available capital, Figure 5: Backhaul Options and their Suitability to Meet Future Demand capacity requirements, and type of terrain. Backhaul CAPEX Operational Deployment Flexibility/ Overall Rating to Options Per Site Expense Speed Scalability Meet Future Demand

Voice over LTE T1/E1 Leased One of the key benefits of LTE is Lines N/A as they are ~100-500 / Infrastructure Range 1-3km, Uneconomical to meet its ability to carry all types of voice, leased month/site already exists bandwidth 2Mbps expected increase in (E1) demand video and data traffic. However, most of the developments in deployment Microwave ~20-50K Negligible Issues like LOS, Range 10-30km, Effective where DSL and of LTE have been focused towards site geography, etc. bandwidth 100-200 Fiber cannot reach providing faster data access, and voice Mbps standards are still immature. This Fiber ~125K High for leased Requires digging Unlimited range Operators plan to replace is partly due to the unavailability of and low for own and capacity leased lines with fiber in terminal devices and the existence of deployment densely populated regions multiple standards for voice. There are Most Favorable Least Favorable three main approaches for operators Source: Capgemini TME Strategy Lab Analysis; JP Morgan, Power of Mobile Broadband, May 2008; Ofcom, Future to offer voice over LTE, namely, Options for Effective Backhaul, January, 2007 IMS-based “One Voice” approach20, Voice over LTE via Generic Access (VoLGA)21, and Circuit Switched within geographies, there might Fallback (CSFB)22. be a disparity in LTE deployment frequencies. For example, in the US, It is expected that CSFB will be a while Verizon and AT&T are using short term solution for operators given the 700 MHz band for their LTE significant drawbacks such as high roll-out, Clearwire is testing in the call set up times, coverage concerns, 2.6 GHz band. and low battery life. Though VoLGA is being backed by T-Mobile, it has Despite a global technical standard, received limited operator and vendor LTE deployments lack regulatory support and is expected to see consensus on a standard frequency limited adoption. The “One Voice” band globally. This poses a real approach is expected to be the LTE challenge and increases complexity voice standard of the future and has for operators, device manufacturers, support from all ecosystem players and chipset vendors in terms of including the GSMA. factors such as roaming difficulties and multi-band support for devices Regulatory Challenge and chipsets. LTE networks across the world are being deployed on disparate Ecosystem Related Challenges frequency bands as different Availability of Terminal Devices regulators free up and auction As operators start deploying and different spectrum bands. For commercializing their LTE networks, instance, while TeliaSonera has one of the key questions they face is deployed its LTE network in the the ready availability of LTE enabled 2.6 GHz band, NTT will initially devices. Most operators are rolling launch services on the 2.1 GHz band out their data-only LTE networks on and extend coverage using 1.5 GHz; limited devices such as USB modems Finland and Hong Kong have due to the lack of a mature device allocated the GSM 1800 spectrum ecosystem. For instance, although for LTE, and 700 MHz is the primary Verizon has announced the launch candidate in the US. In fact, even of its LTE data services by the end of

20 One Voice utilizes the IMS (Internet Multimedia Subsystem) network overlay to send voice calls and SMS over LTE network. 21 The voice call is carried over the LTE network using VoIP and over the GSM/UMTS network using circuit-switched technology. 22 Operators use the LTE packet-switched network for data communications and the 2G/3G circuit-switched network for voice communications.

49 Figure 6: Key Technical Challenges for the LTE Chipset Ecosystem

1 LTE technology at present has a number of different configurations such as a range of Support for different frequency bands, varied antenna systems like 2X2 MIMO, 4X4 MIMO, etc. Multiple Technical – This puts a severe strain on the chipmakers with respect to specific technologies to be Parameters supported and the allocation of R&D budget – Supporting too many different configurations pushes up the price of the chipsets, thereby affecting adoption

2 Integration with 2G and 3G will be a major requirement for all LTE chipsets, especially during the early days of LTE deployments Backward – This will allow modems and handsets to be interoperable with existing networks, and Compatibility thus function in the case of selective rollouts – For example, Qualcomm’s MDM9600 series of chipsets support dual-carrier HSPA+ and multi-mode 3G/LTE

3 The power consumption levels of current LTE chipsets are very high, due to their use of Reducing Power technologies like MIMO and use of multiple components Consumption and – This severely limits the usage of these chipsets, as the battery life of the LTE devices is Chip Size limited A number of LTE chipsets available in the market are currently bulky, thereby adversely affecting the size and shape of the devices

Source: Capgemini TME Strategy Lab Analysis; cellular-news, Qualcomm Now Sampling Dual-carrier HSPA+ and Multi-Mode 3G/LTE Chipsets, 2009; MobiledevDesign, 4G Terminal Chipsets Present Challenges And Opportunities, December 2009

2010, it maintains, that the first LTE power consumption and chip size phone would be available only by the are some of the key challenges for middle of 2011. The unavailability of chipset vendors (see Figure 6). There LTE compatible phones, smartphones, is a direct correlation between the and tablets is an opportunity lost for availability of chipsets and the launch operators in terms of revenue they of new LTE capable devices. As the could have earned from premium chipset ecosystem for LTE gradually pricing. matures, we will see a large number of devices being introduced. Multi-mode and multi-band support is another factor which has slowed Return on Investment down the availability of LTE devices. Migration to LTE entails high For instance, TeliaSonera launched CAPEX24 investments when compared its first dual mode LTE and 3G to HSPA or HSPA+, due to the high modem a whole 6 months after the spectrum costs and upgrades in launch of its LTE network. Multi- network infrastructure required. mode (GSM‑HSPA-LTE) support Typically, a tier one mobile operator is critical for the device to appeal in the UK would need to invest to early technology adopters and US$750 million in the first year to help operators acquire a large deploy an LTE network, while an subscriber base. Similarly, multi-band upgrade to HSPA+ may cost just capabilities are critical for roaming US$250 million25. Even TeliaSonera, handovers, as LTE will be deployed in which reused nearly 70%26 of its multiple RF23 bands. existing network infrastructure, had to invest a total of US$1.95 billion Chipset Compatibility on its networks27 in 2009 to deploy The LTE chipsetecosystem needs to LTE and plans to invest an additional address key barriers around selection US$70 million in 201028. The biggest of specific technologies and chipset challenge therefore for an operator is performance improvement. Support to justify the ROI and business case for multiple technical parameters, for these high investments in LTE backward compatibility, and reducing network deployment.

23 Radio Frequency. 24 Capital Expenditure. 25 Aircom International, LTE Not the Only Option for Mobile Operators Today, says AIRCOM, May 2010. 26 Dailywireless, TeliaSonera: Go Directly to LTE, September 2010. 27 Large part of it was driven by LTE. 28 Reuters, TeliaSonera Sees no Investment Boost from LTE, April 2010.

50 Today, while wireless carriers provide Figure 7: Comparison of LTE Price Plans of Commercial Offerings the access channel for provisioning content and various multimedia Operator Price Per Month Data Allowance Bandwith services on a large number of mobile devices, they hardly earn any share of TeliaSonera 599 SEK (US$87) Capped at 30 GB per month 10 to 80 Mbps the revenue pie. Most of the revenues 369 SEK (US$54) Capped at 20 GB per month 10 to 20Mbps on such services are scooped away 299 SEK (US$44) Capped at 10 GB per month 5 to 10 Mbps by content developers and over-the- * top players. Therefore, one of the key Tele2 299 SEK (US$44) Unlimited Not tiered by network speed operator challenges is to introduce Telenor Sweden 549 SEK (US$80) Unlimited Not tiered by network speed innovative services and pricing Verizon US$50 Capped at 5 GB per month Not tiered by network speed models which leverage their advanced (US$10 per gigabyte overage fee) LTE network capabilities. US$80 Capped at 10 GB per month Not tiered by network speed (US$10 per gigabyte overage fee)

MetroPCS US$55 Unlimited Not tiered by network speed In the next section, we look into some key strategies which operators can NTT DoCoMo 1000 JPY (US$12) Capped at 3 GB per month Not tiered by network speed adopt in order to successfully mitigate 7980 JPY (US$95) Capped at 5 GB per month Not tiered by network speed these challenges and maximize their * For the first 12 months of an 18-month contract, after which the price goes up to 499 SEK return on investment. Source: Company Websites; Light Reading NTT Docomo Sets LTE Date, November 2010; Light Reading Swedish LTE Challengers Wield Unlimited Offers, November 2010; Next Steps for Telcos As discussed, although LTE Pricing provides wireless operators with In order to manage network traffic a more efficient, future proof, and volumes effectively and justify the cost effective long-term solution high costs of network capacity for upgrading their networks, the upgrades it is critical for operators to road towards LTE is not without its get their LTE data price model right. challenges. However, by adopting the most relevant strategy around First, telcos should price their LTE the rollout, cost savings, customer offering at a significant premium over Operators proposition, and spectrum policy, their existing mobile data plans and telcos can succeed in their quest. In focus on maintaining a very high “need to position this section we evaluate these key service quality. For instance, the LTE operator considerations and propose data plan of TeliaSonera in Sweden is measures to realize the true potential priced at an 88%30 premium over its LTE primarily of LTE. existing regular 3G subscription. as a much faster Customer Proposition Second, all-you-can-eat pricing Service Positioning strategies need to give way to pay-for- From a customer perspective, the what-you-use models where mobile and superior higher speeds and lower latency data is charged based on bandwidth 29 enabled by LTE is the key USP of and volume. Since different customers broadband the technology. As voice and SMS have widely varying consumption31 standards gradually evolve, operators pattern, and a one-size-fits-all data should eventually offer these services strategy is no longer economically access too. However, they need to position sustainable for operators, subscribers LTE primarily as a much faster need to be charged differently. Entry technology and superior broadband access level customers should be able to surf technology. the net at lower prices albeit with slower speeds and lower data caps, ”

29 Unique Selling Proposition. 30 Company Website; Computer World on the Streets of Stockholm with LTE, August 2010. 31 Both bandwidth and data volume.

51 Figure 8: Accumulated CAPEX and OPEX Savings (%) from Network Sharing

29% 28% 27% 27.5% 26%

15% 13.5% 12% 11% 10%

Year 1 Year 2 Year 3 Year 4 Year 5

CAPEX OPEX

Source: Analysis Mason Wireless Infrastructure Sharing Saves Operators 30% in CAPEX and 15% in OPEX, May 2010

whereas heavy users and business RAN network. While the former customers should have access to results in higher cost savings and higher priced faster plans with higher faster rollout, the latter promises data caps. A look at the LTE price a more flexible, clean, and stable plans of existing offerings indicates upgrade for long term benefits. similar trend (see Figure 7). It is imperative for operators to justify Lastly, in the long-term, operators their investments in LTE with ROI. should try and adopt a value-based In most cases, a full-scale nationwide pricing model where customers pay a rollout strategy may not make A one-size- premium for superior experience. For economic sense, since the returns instance a professional photographer on data rich LTE services in rural fits-all data trying to send a photo of a winning and semi-urban areas may not be as “ attractive as in urban areas. Therefore, goal at a football match could pay extra to ensure he would have access a phased deployment strategy, pricing strategy to the network ahead of the many targeting affluent data hungry football fans sending texts. Operators customers in the densely populated such as TeliaSonera and Vodafone urban areas first, makes a stronger is no longer have already announced the launch of business case. For instance MetroPCS such plans in the future. As part of its has rolled out its 4G LTE services in economically new “supermobile” strategy, Vodafone five major metropolitan cities where plans to introduce “staircase” pricing it anticipated maximum demand, and so that customers can pay extra for a will gradually expand to other urban sustainable for guaranteed level of superior service or areas. pay less for limited data browsing. operators In order to increase coverage in rural Rollout Strategy areas operators can forge partnerships In terms of rollout strategy, operators with local wireless providers, and can either choose to extensively reuse companies having towers and ” their existing network infrastructure backhaul capabilities. Verizon is by adding LTE capability over their currently planning to adopt this 3G network, or plan and build a strategy for the rural rollout of its LTE network from scratch by swapping network. out current infrastructure to a single

52 Cost Savings Figure 9: Primary Candidate Bands for LTE Network Sharing In order to minimize the large Band Uplink (UL) Downlink (DL) Channel/Carrier Potential Description Operating Operating Bandwidths (MHz) Deployment Comments investments required in LTE network Band (MHz) Band (MHz) Supported Region(s) rollout and maximize returns from Strong push from European Union Digital Dividend 791-821 MHz 832-862 MHz 5, 10, 15, 20 Europe Spectrum auctioned in Germany its deployment, cost savings should be one of the foremost priorities GSM 900 880-915 925-960 1.4, 3, 5, 10 Europe Spectrum can be re-farmed Spectrum can be re-farmed for operators. It is estimated that GSM 1800 1710-1785 1805-1880 1.4, 3, 5, 10, 15, 20 Europe, Asia Finland and Hong Kong have LTE infrastructure CAPEX alone allocated for LTE UMTS Core, 1920 - 1980 2110 - 2170 5, 10, 15, 20 Europe, Asia Available for LTE in Japan will reach US$14 billion globally in ‘2100’ 32 2015 . Therefore operators should IMT Extension, Focus of most operators in 2500-2570 2620-2690 5, 10, 15, 20 Europe Western Europe not only go for passive sharing of sites ‘2.6 GHz’ 700 MHz Multiple bands Multiple bands 1.4, 3, 5, 10 US Primary candidate for LTE launch and tower masts but also engage in in US AWS (US) 1710-1755 2110-2115 1.4, 3, 5, 10, 15, 20 US, Canada US auctions completed in active network sharing, to effectively September 2006 reduce their financial burden. Two Cellular 850 824-849 869-894 1.4, 3, 5, 10 US, Canada Can be re-farmed after 700MHz operators jointly rolling out an LTE (US) and AWS is consumed in the US PCS, ‘1900’ 1850-1910 1930-1990 1.4, 3, 5, 10, 15, 20 US, Canada Can be re-farmed after 700MHz network of 2,500 sites in a developed and AWS is consumed in the US economy can potentially save nearly 30% in CAPEX over a 5 year period, Source: Capgemini TME Strategy Lab Analysis; Regulator Websites if they share radio access networks (RANs)33(see Figure 8). Data Offloading LTE networks are technically more Mobile Data Offloading (MDO) is suited to active sharing due to their another strategy which operators can flat all-IP network architecture and adopt to achieve cost efficiencies. operators sharing their active network MDO is the use of complementary elements can save at least 40% network technologies such as WiFi, more in CAPEX and OPEX, over a femtocell, mobile CDNs35, and five-year period, compared to their media optimization for offloading counterparts striking only passive data originally targeted for cellular 34 site-sharing deals . networks, thereby reducing costs and minimizing load on core operator Operators should also get into network. It is expected that offloaded agreements to share their backhaul mobile data will increase threefold costs which may account for nearly from 16% in 2010 to 48% in 201536. 50% of the CAPEX needed to deploy LTE RAN equipment in urban and Each of these offload technologies metropolitan areas. can solve a particular problem and will coexist. For instance, while WiFi Some telcos have already taken the is effective in covering limited areas first steps towards network sharing having many users, such as train to lower the costs of their rollout. stations and sports venues, femtocell For instance, in Canada, Telus and is a good solution for targeting Bell have formed an agreement to small numbers of heavy data users. overlay their EVDO networks with a Mobile CDNs alleviate the problem joint HSPA network by 2010 that will of frequently-accessed content, for more efficiently prepare for an LTE example a viral video, by caching the migration expected between 2011 content locally rather than loading it and 2012. Similarly, in Sweden, Tele2 onto the network for each download and Telenor built the LTE network request. together through their network- sharing joint venture, Net4Mobility. Many suppliers such as BelAir Networks (WiFi), Akamai (CDN),

32 Total Telecom, LTE Business Models: LTE: Sharing the Burden, July 2010. 33 Analysis Mason, Wireless Infrastructure Sharing Saves Operators 30% in CAPEX and 15% in OPEX, May 2010. 34 ABI Research, Active Radio Access Network (RAN) Sharing Amounts to a US$60 Billing Cost Saving Potential for Operators, April 2009. 35 Content Delivery Networks. 36 ABI Research Mobile Network Offloading, August 2010.

53 Ubiquisys (femtocell), and Openwave same coverage at 2.6 GHz37. This will (media optimization) offer a range of translate to lower costs and enable MDO solutions which operators can operators to gain an edge on the leverage. pricing front.

Spectrum Policy However on the flip side, there is a LTE can be deployed in many high level of regulatory uncertainty, different frequency bands, with each especially in Europe, on the band supporting multiple channel availability of low frequency digital bandwidths (see Figure 9). dividend band. This along with the fact that these bands are expected Operators will need to carefully to be priced significantly higher evaluate the frequency bands and weakens their proposition. While the channel bandwidth in which to price per MHz per population for deploy LTE, based on factors such the 2.6 MHz spectrum in Norway as spectrum availability and price, was US$0.00043, in Germany, it was rollout costs, and coverage. In the US$0.19 for the 800 MHz spectrum38. subsequent subsections we detail the parameters upon which operators Given the high costs and competition should determine their spectrum involved in the acquisition of LTE policy. spectrum, operators can also consider the option of re-farming their existing Which Spectrum Band licensed frequencies, if regulation Although the decision on the permits, to offer LTE. For example, choice of band in which to deploy Mobyland in Poland has launched LTE depends upon the availability the world’s first LTE network in the of spectrum, operators will still 1800 MHz spectrum39. The main generally have more than one option concern with re-farming will be to choose from. clearing enough spectrum to facilitate an acceptably efficient implementation The higher frequency bands such as of LTE while maintaining enough 2.6 GHz are readily available and capacity in the remaining spectrum have been auctioned in many parts to support non-LTE traffic on legacy of the world. Therefore, 2.6 GHz technology. is expected to be the spectrum of choice for most operators considering What Channel Bandwidth LTE deployment. However, lower LTE can be implemented in multiple frequency bands have certain distinct channel bandwidths ranging from advantages which are likely to be of 1.4 MHz to 20 MHz. For instance considerable interest to operators. while TeliaSonera uses a 2x20 MHz Low frequency bands such as channel, Verizon has used 2x10 MHz 800 MHz and 700 MHz allow signals channel for deployment. It is to travel farther and provide better technically possible to implement in-building coverage than higher LTE as a Single Frequency Network frequencies. For instance, cell radius (SFN) or using a frequency reuse at 700 MHz could be between three pattern. For example an operator with and four times larger than at 2.6 GHz. 15 MHz of spectrum can use it either Therefore, from a coverage point of as a single channel or split it into view, a network built at 700 MHz is likely to require less than a tenth of the number of sites required for the

37 Wray Castel, Training the Telecom World, LTE – Where’s the Spectrum?, November 2009. 38 KB Spectrum Blog. 39 Company Website.

54 three 5 MHz channels. In the SFN Priyank Nandan is a senior consultant case, the bandwidth would likely be in the TME Strategy Lab. His research in the order of 18 Mbit/s, but available interests and project experiences span only over a very limited coverage diverse areas such as digital media, area with the potential bit rate falling fixed and wireless networks, and cloud sharply at the cell edges. In the computing. He has a deep understanding frequency reuse case, the bandwidth of the TME industry in both developed will be lower at around 7 Mbit/s, but and growth markets. Prior to joining available over a much wider area40. the Lab, Priyank worked for a major IT product company. He is based in Therefore, operator decision on Mumbai. n channel bandwidth needs to be based on a speed versus coverage tradeoff. In dense urban areas, they can implement LTE as SFN where as in rural areas they can adopt the frequency reuse pattern.

In conclusion, LTE presents an Operators should try and attractive technology choice for operators to mitigate their most “adopt a value-based pricing model significant concerns around explosion in demand for wireless broadband. However, the path towards LTE is not where customers pay a premium without its set of challenges and the decision to migrate is not an easy one to make. LTE is in a nascent stage for superior experience with standards still evolving and the ecosystem still maturing. Moreover operators have other wireless technology options, some of which ” may be more cost effective in the short term. Therefore, operators need to carefully evaluate the need and business case for LTE deployment, before giving a green flag. To reap the true potential benefits offered by LTE and successfully mitigate the challenges, operators should adopt the right strategies around pricing, cost savings, and rollout.

Linda Asplund is a principal with the Swedish Capgemini Consulting practice. She focuses on strategy and transformation within the telecom and media sector. Linda works with both fixed and mobile operators primarily in the Nordic market. She is based in Stockholm.

40 Wray Castel, Training the Telecom World, LTE – Where’s the Spectrum?, November 2009.

55 IT Renewal: A Business Transformation By Frédéric Vander Sande, Jean Diop and Manik Seth

Abstract: Operators across the world are increasingly realizing the imperative of transforming their IT systems. Driven by the need to focus on new products and services, while countering increased competition from Internet players, operators are looking to ensure their IT systems are in sync with the need of the hour. Key factors driving this change include a renewed push from telcos to cut down on their time-to-market while cutting down on their costs. Telcos will have to bear in mind that a successful IT transformation is the result of the coming together of a variety of elements from the business and IT side of operations. In doing so, the first step is to identify and understand the building blocks of a business transformation. Thereon, a strong understanding of the key success factors of a transformation program completes the early steps towards creating a large-scale successful IT transformation.

Rationale for IT Transformation manner. We see this in how telcos Operators are increasingly looking have traditionally developed product to launch new services for driving features. Internet players have revenues while optimizing current perfected an approach where they systems in order to reduce their first release products in beta, and cost structure. The need to launch then incrementally and rapidly add new services has a direct impact on product features to it. This approach operations and IT infrastructure as helps them incorporate user feedback operators need to upgrade their IT rapidly back into the system. For Convergence systems for supporting an expanded instance, Google’s most popular service portfolio. In order to address services including Gmail and Google “ of services these growing requirements, operators Talk had the beta label for over five are launching comprehensive renewal years, during which time Google transformation programs that involve made multiple rapid iterations of and networks a shift from the current bespoke product features, while still having processes1 to standardized processes a strong base product available to 2 is hastening supported by packaged solutions and consumers . On the other hand, telco out-of-the-box IT implementations. product testing and launch typically the need for takes months and product iterations In this section we discuss the reasons subsequent to launch are usually few. why operators are launching IT This is changing in recent times. For upgrading IT renewal programs. instance, Telefónica, which acquired social networking site Tuenti in Operators are demanding a faster August 2010, rapidly launched a low- systems time-to-market cost invitation-only Mobile Virtual Telcos are under constant pressure Network Operator (MVNO) using 3 from fast-moving Internet players the brand by December 2010 . The that are not only threatening their need for rapid turnaround in terms ” core revenue streams, but are also of launching services is putting doing it in a fundamentally different increasing pressure on IT systems.

1 Bespoke Processes: Home grown processes developed by operators not based on any industry standard. 2 PC World, Google Removes ‘Beta’ Label from Gmail, Calendar, Other Services, July 2009. 3 Telecom Paper, Telefónica’s Tuenti launches MVNO in Spain, December 2010.

56 Reducing costs is a high priority Figure 1: IT Spend as Percentage of Revenue, Select Industry Verticals, 2010, area for telcos Global Another major challenge for telecom operators is coping with the rising 5.7 cost of maintaining IT systems. In comparison to other sectors, players 4.6 in the telecom sector already spend 4.3 a significant amount on (see Figure 1). Global telco spend on IT systems is estimated to 3.1 increase from around $71 billion in 2008 to over $86 billion by 20144. Such rising costs of IT are forcing 1.9 operators to take a closer look at ways and means to control it. 0.9 Growing costs of operations are forcing operators to look at new models involving infrastructure Energy Manufacturing Transportation Telecommunications Media Banking & Finance sharing and network outsourcing. Source: Gartner, IT Metrics: IT Spending and Staffing Report, 2010 Multiple telcos have also initiated cost rationalization programs in order Another problem leading to the to ensure that they use the recent fragmented nature of IT systems is financial slowdown as a good driver the lack of maturity in commercial for removing superfluous costs. off-the-shelf solutions (COTS). COTS solutions traditionally allowed only Proliferation of multiple systems a limited amount of customization and platforms is hindering growth which did not permit operators Over the years, telco IT systems to fully benefit by installing have grown into multiple disparate these systems. Moreover, process platforms for a variety of reasons. standardization was a significant Most major telecom operators have challenge for telecom operators grown to their current market given the lack of established and position after a series of mergers and accepted industry standards for IT acquisitions. Each such transaction architectures. Such proliferation has brings with it its own set of existing resulted in IT systems becoming IT platforms that are rarely integrated unwieldy in time. back into the parent company’s IT systems. This results in an operator IT systems have not kept pace with running several versions of the same the evolving business environment system within the organization. In a scenario where most developed Similarly, many product lines within markets are nearing saturation, the an operator typically ran in a silo industry is seeing a steady move fashion, implementing their own towards consolidation and a renewed IT systems that rarely integrated push towards improving the customer seamlessly with other product lines. experience. Furthermore, with the This also led to a situation where increasing role of customer experience multiple IT systems began to co-exist in retaining customers, operators and were developed independently. are now exploring new channels for customer care. The growing adoption of the Internet is driving operators

4 Gartner, Forecast: Enterprise IT Spending by Vertical Industry Market Worldwide, 4Q10 Update, 2010.

57 to launch Web-based self-service the US, AT&T allows consumers to channels to augment the existing control data plan subscription to their channels such as contact centers and iPads directly through an application retail stores. on their device. Operators are looking to create such frictionless processes While the business environment which therefore require highly is seeing a substantial shift, the flexible IT systems. operations and underlying IT systems and processes have seldom Convergence of networks and been upgraded at the same pace. services is driving the need for a Considering the broad environmental new breed of IT systems changes in recent years, most Of late, there has been an increasing operators are fast reaching the limits trend towards convergence of in terms of time-to-market and total service offerings where telcos deliver cost of ownership of integrating new multiple services over the same access services, channels, processes and/or connection. Customers appear to be system stacks. This often results in a increasingly comfortable in having misalignment between the business a single operator for voice, Internet needs and IT systems and opens a and TV services. For instance, Virgin competitiveness gap for the operators Media reported that more than (see Figure 2). 60% of its cable customers received broadband Internet, television and There is a growing need to improve fixed line telephony services in 20095. the customer experience A growing challenge for telcos is to Moreover, operators are now moving ensure a consistently high level of towards a single network for all customization across all customer services. The emergence of Next experience channels. With growing Generation Network (NGN) is customer touch points, operators are allowing operators to converge their looking to create a uniformly rich mobile and fixed line networks. Such customer experience. For instance, in convergence of different networks enables operators to reduce the cost of Figure 2: Misaligned Evolution of Business Environment and IT maintenance, while providing enough flexibility to offer a wide array of

I Need for expansion into services. related markets like Music, Gaming, Cloud I Convergence of mobile, xed and TV I Launch of new While operators are addressing technologies like LTE, I Intense competition from Fiber Cable and Internet players the need for network and service

I Growth of data I Strong focus on customer convergence, most operators are and IP services experience not structurally transforming their I Voice focused services business support systems to respond Environmental Change Environmental Need for I Limited competition transformation effectively to these changes. Instead, al change they are showing a preference for Strategic Drift evolutionary and focused tactics. Incremental Change Limited scope for Most telcos have typically launched further expansion for I Integration of different additional services and new channels, partners, products or IT components technologies services by adding new IT stacks “on I Expansion of I Large number of new applications to I Custom built applications for new top” of legacy billing and customer applications include data services and processes services Business Needs I Automation of care systems without real efforts at existing processes IT Systems portfolio cleaning.

Source: Capgemini Analysis Time

5 Virgin Media Annual Report 2009.

58 Figure 3: Convergence of Networks and Offers

Separate Networks and Offers Converged Networks and Offers

Telephony Internet TV

Telephony Internet TV Offer 1 Offer 2 Offer 3

Bundled Offers

Products & Services Products & Services

Business Organization Business Organization Processes Processes

IT IT

Single Network Network 1 Network 2 Network 3 Fixed Line Fixed Line Mobile Voice Data Fixed Line Fixed Line Mobile Voice Data

Source: Capgemini Analysis

Such initiatives are increasing the pressure, operators are now looking complexity in managing the existing to transform their IT systems from processes and systems of an operator. current custom-made solutions to This is resulting in compelling lower cost systems. COTS solutions operators towards IT transformation offer significant cost advantages in order to bring their IT systems over custom-made solutions, due up-to-date with the rapidly to research, development and changing operational requirements maintenance costs being spread over (see Figure 3). a large number of implementations.

The mature state of COTS solutions Large vendors such as Amdocs, offers a strong case for their usage Oracle and Comverse are ensuring a A number of operators including strong supply of COTS solutions in American major AT&T, which relied the market. Although the maturity of on custom-made IT systems, have different business support systems/ traditionally faced high costs for operations support systems (BSS/OSS) IT development and maintenance6. components vary, some of them such With margins coming under as billing and Enterprise Resource

6 Billing and OSS World, Case Study: AT&T’s Migration to Service-Oriented Architecture, 2005.

59 Figure 4: Maturity Matrix for COTS Solutions In the next section, we take a look at the building blocks of a successful IT transformation program. High ERP Building Blocks of a Successful Customer Care Business Transformation Billing Size of the bubble indicates In order to respond to the rapid “Vendor Focus” environmental changes in the

Centralized industry, operators need to revisit Product Catalog Service their IT strategy. The changing Analytical Fulfillment CRM business environment requires Level of Functionality* operators to make key changes in Data Service their processes and IT architecture. Warehouse Assurance Low In this section we discuss the main Low High Operator Adoption building blocks of an IT renewal program (see Figure 5).

* Level of functionality: Indicative of functionality provided by Amdocs, Oracle, Comverse, Convergys, SAP and Ericsson products IT architecture and solution Source: Capgemini Analysis; Company Websites; TM Forum Website implementation IT architecture and solution Planning (ERP) have reached a high implementation is an important degree of maturity in terms of the component in the assessment of the level of functionality provided by readiness for a transformation. It different vendors and adoption by provides the key interaction point various operators (see Figure 4). and alignment with the roadmap For instance, billing solutions from of the IT integrator. Key readiness various vendors today cover all aspects that need to be in place in aspects of rating, mediation and order to perform an efficient and partner settlement. effective IT release process need to be defined beforehand. This includes However, the market still lacks the synchronized roadmaps between availability of complete suites of business and IT, where each step in various BSS/OSS components from the IT transformation phase generates a single vendor, driving operators to true business value. Furthermore prefer best-of-breed solutions that the process should ensure that all combine components from different the stakeholders are aligned on a vendors. Consequently, some vendors common platform. including Amdocs and Oracle are now focusing on developing end-to- Business architecture and processes end solutions providing all BSS and The rationale behind the creation OSS components required by the of the business architecture and operators. processes stream is the need to prioritize the area where the bulk Considering these evolutions, most of the delivery work will need to be operators are embarking on IT performed during the transformation. transformation programs. However, The different elements that need to in these implementations the main be designed are: scoping and defining challenge is to create a comprehensive the business requirements approach, business plan and business case, business process re-engineering based besides addressing the IT complexity upon the best-of-suite processes, that is required to manage in the business data management and course of the transformation. metrics and Key Performance Indicators (KPIs).

60 Figure 5: Building Blocks of Digital Transformation

IT Architecture Business Transformation Change and and Architecture Governance Communication Solution and Processes and Policies Implementation

Commercial Business and IT Migration and Organization Roadmap and Simplification Transition Design, Evolution Management Competences and Training

Source: Capgemini TME Strategy Lab Analysis

Transformation governance and The other key component of the policies transformation governance is The need for business and IT arbitration. It needs to guarantee alignment as well as the integration timely and effective business of the solution editor and/or solution decisions, specifically in the context integrator within the operator of a best-of-suite driven IT solution requires a specific focus on the implementation. Arbitration must be transformation governance and done after multi-dimension analysis policies. These include organization in order to reconcile the short- and model and business/IT arbitration. long-term views, internal and external benefits and financial performance. The right set-up of the transformation By having the arbitration process governance and policies is critical running in parallel to all business for a successful transformation. requirement gathering activities, a It requires not only looking at fitness for use delivery is guaranteed the governance but also involves while managing out-of-the-box setting up the necessary governance compliance at the same time. structures, decision making processes, policies and monitoring Change and communication of the transformation progress and Change and communication is crucial realized benefits. It describes the in generating the necessary buy-in, structure, processes, organization, motivation and mobilization amongst planning and transformation KPIs. the different stakeholders in order The whole transformation is then to achieve common appreciation of phased and steered through the goals and commitment in working design and follow-up of a global towards it. It also underpins the transformation roadmap aligning all transition of an organization from the the streams in order to reach the right current state to target state aiming level of transformation readiness. at empowering employees to accept The important aspect here is that and embrace changes in their current the roadmap must combine and business environment. Within this synchronize both business and IT stream it will be crucial to set up a roadmaps. At each phase there should change and communication plan that be a clear deployment that generates will identify all the necessary actions business value. and measures to ensure change readiness, involvement, commitment

61 and acceptance by all the different enterprises build the new IT and stakeholders, both business as well migrate in “one shot” the existing as IT. business to the new environment and then enhance the system. In the Organization design, competencies third scenario, which is essentially and training a turnkey solution with incremental Changes to business processes migration, enterprises build the new will result in the need to learn IT beside the legacy systems in order new process sequences and tasks, to provide a new, robust, end-to- and potentially new skills, roles, end solution, designed for innovation responsibilities and new ways of and business strategy and later on working within the organization. migrate existing business according to Competency development should priorities. fulfill these needs all along the transformation and should be Once a decision is made on the considered up-front. The training migration strategy, both business and plan should describe the training IT aspects have to be detailed and approach and the training program synchronized. All transformation required to provide operator staff dimensions have to be re-considered, with the skills to guide the IT planned and tested in such an transformation. This program must exercise. be closely aligned to the To-Be organization’s design and culture, to Business and IT simplification the related processes and procedures, Business and IT simplification is as well as to the new roles, tasks, a crucial element in a successful responsibilities. transformation program. Business and IT simplification guidelines and Migration and transition decisions should be based upon management the effects of the overall business Three migration scenarios essentially case. It encompasses simplification arise in any large transformation. of the organization, products, In the first scenario, enterprises channels, communication methods, build the new IT infrastructure by terminologies, and processes from prioritizing urgent evolutions, and hypotheses testing over design and progressively evolve to support planning to execution and validation. business and technology/network evolution. In the second scenario, A key element while planning the IT which represents a turnkey solution renewal program is to simplify the with a “big bang” migration, IT architecture through application rationalization and integration of different applications for data consistency. Software application Advancements in IT systems rationalization can help operators achieve significant reduction in the overall IT costs as it results in “have not kept pace with changes in lower development and maintenance costs. A simplified IT system business environment will also enable operators to gain competitive advantage by reducing the time-to-market for new services. For example, in efforts to simplify ” and transform its IT systems, KPN

62 implemented Oracle’s Application Integration Architecture to enable the integration of its billing and Customer Relationship Management (CRM) systems thereby accelerating the time-to-market for new products and The need to create a services by 30%7. “uniformly rich customer The ability of an operator to reach its total cost of ownership (TCO) and time-to-market business objectives experience is a key driver for IT while keeping the transition as transparent as possible for its system transformation customers is closely linked to the capacity to change quickly and adapt itself. In order to do so, operators to ensure completeness, secure should focus on critical business delivery readiness and manage risks. ” simplification and transformation areas including product catalogue, Any IT transformation is firstly a product lifecycle, project portfolio, business transformation organizational design and opportunity Almost systematically, IT scouting. transformations are initiated and initially driven within the offices Commercial roadmap and of the Chief Information Officer innovation (CIO) or Chief Financial Officer In the course of the IT transformation (CFO). However, IT transformation program, new products and services objectives are generally divergent and technical innovations will in terms of delivery priorities and have to be incorporated in the planning from short/mid-term sales operational and IT infrastructure. and marketing objectives. At the A set of rules have to be defined to end, the To-Be solution must serve decide on whether to incorporate business objectives and be used by these innovations in the incumbent customers and partners themselves in or replacement infrastructure. addition to internal business and IT Additionally, the inception of new operations. To ensure full company innovations needs to be stimulated commitment, realistic qualitative and and consequently new structures and quantitative business objectives and methodologies should be developed. KPIs must drive the transformation.

In the next section, we conclude The success of a transformation lies the paper with insights on in its design, partner selection and what constitutes a successful IT its kick-off phase transformation program and highlight The program design phase plays the potential pitfalls of which a crucial role along with solution operators should be aware. and partner selection in realization of the objectives. Specific attention Key Success Factors for a encompassing all business and Winning IT Transformation IT change dimensions should be Program set in the initial 100 days of the A winning IT renewal program transformation. This design period requires the successful coming must not only build confidence in the together of various elements in order solution in the various stakeholders

7 Oracle Customer Case Study, KPN Drives a Customer-Centric Approach and Simplifies IT Systems with Prebuilt Integrations, 2009.

63 People change management needs IT transformations, to be addressed right from the start With transformation programs typically impacting the bulk of a at“ their core, are business company’s workforce, it becomes imperative that companies have a transformations strong focus on change management. It requires companies to design and plan a clear change strategy and roadmap integrating progressively and in the transformation path,” but all the stakeholders right at the start also deliver early results and reveal and then constantly managing change unknowns and gaps requiring specific through well structured orchestration focus to secure the full transformation during the program delivery. program delivery. Not identifying Correctly skilled transformation them early enough will dramatically teams and change agents must be increase the failure rate. identified, incentivized, trained and coached as effective transformation Senior management commitment is happens only from the inside. paramount for success Considering the scope, impact Effective engagement with partners and risks of an IT transformation, is a pre-requisite for successful it is essential to create up-front delivery alignment on vision and objectives Transformation programs are long across departments. CxOs should and painful. It is the capacity and build, share and commit on a the commitment of the involved clear picture of the To-Be situation third-party partners to successfully and the business and personal overcome program difficulties as one benefits the transformation will team that will build the successful bring to customers, partners and conditions for transformation their own departments. They must delivery. Reaching such equilibrium then translate it into qualitative requires at least two key conditions. and quantitative objectives for It requires the development of a all individuals involved in the true win-win partnership where all transformation and ensure direct parties are contractually incentivized support and the right empowerment. to do everything possible to deliver CxOs and transformation leaders the program. The collaboration and must more than all “walk the talk” program governance must reflect this as they are de facto the first level of situation. On the other hand, the change agents within the organization up-front definition, communication and will be regarded as such within and close management of strict roles their own department. and responsibilities in program activities and deliverables must be Constant focus on To-Be state is enforced. A collaborative approach necessary will help the transformation A continuous focus on To-Be target stakeholders to achieve better, leads to the complete realization of faster, more sustainable results all transformation benefits. However through seamless interactions and a focus on To-Be requires additional collaboration-focused methods and efforts in designing a realistic tools. transformation path.

64 Strong business arbitration operators reduce the TCO of their IT Manik Seth is a manager in the TME safeguards need to be established systems as most IT products today Strategy Lab. He has over five years A key challenge during large are based on industry frameworks. of experience in strategy, planning, transformation programs is to quickly BSS solutions such as Siebel and market analysis and consulting. His resolve disagreements that might Clarify are based on eTOM. Operators recent work includes being part of a arise between stakeholders. In such following the eTOM standard can one year technology-driven business cases it becomes important that both quickly implement such solutions transformation program for an integrated parties come to a quick agreement without any customization, reducing operator and helping a leading equipment against the defined KPIs in order to the TCO and implementation time. manufacturer with identifying BSS/ ensure that the business objectives OSS-related acquisition targets. Prior to and overall timelines of the program In conclusion, a successful IT renewal joining the Lab, Manik was involved with are not impacted. A clear and timely program requires an understanding identifying new technology initiatives in arbitration process up to CxO level and appreciation that it is, at its core, next-generation networks for a leading must therefore be set up involving a business transformation program, software services provider. He is based in business, IT and integration/solution requiring companies to systematically Mumbai. n partners. To ensure that decisions take a series of steps aimed at are driven by the business case, achieving their stated goal. systematic evaluation and decision of the business and IT scenario impacts Frédéric Vander Sande is a is required. principal consultant within the Capgemini Consulting Telecom Media Industry standards should be put at & Entertainment’s practice. With the center of IT renewal ten years’ balanced business and Senior For the success of IT renewal technology background, he has been programs, it is necessary for operators involved in strategic planning, business to change the fundamental way of transformation and business creation mana“gement planning the different processes and initiatives with telecom, media & IT systems. Traditionally, operators entertainment companies worldwide. have tended to put business and Frederic’s expertise lies overall in belief and their requirements at the center digital content distribution strategy of IT development. Each operator and operations including IPTV, mobile commitment to a typically developed systems in line TV, Digital Cinema, and intellectual with their own understanding and property management. He also advises requirement. However, today both and delivers in areas such as MVNO, transformation business and IT should orient towards business/IT transformation, operations accepted industry standards in excellence or new product and service program is defining requirements, processes and launches. He is based in Brussels. solutions. Processes and IT systems based on industry standards such as Jean Diop is a Vice President in the critical the Enhanced Telecom Operations Capgemini Consulting Telecom Media Map (eTOM)8 result in significant & Entertainment practice group. He improvement in operational efficiency leads the Mobile Financial Services as standards are based on industry (MFS) strategic & business consulting ” best practices incorporating a large group. He’s been involved in the strategic number of business situations and definition, financial appraisal, and capitalize on vast practical experience. business creation, development and Also, standards can help operators launch of several MFS initiatives in the in streamlining processes across Telecoms, Banking, Retail and Transport different business units as these are sectors in different geographies. He is easier to understand and implement based in Utrecht. across different teams. Implementing standardized processes can help

8 Industry trade association framework by TM Forum.

65 Navigating the Content Quagmire: Protecting and Monetizing Intellectual Property By Bas den Braber and Nikhil Ray

Abstract: The rapid growth and consumer uptake of the Internet has created both opportunities and challenges for the content industry. The advent of new form-factor devices such as tablets and content types such as short-form video are creating significant shifts in consumption patterns. The increased Internet usage has also led to an increase in piracy. For consumers, the cost, convenience, and anonymity are the prime drivers for piracy. Content owners have traditionally countered piracy by seizing counterfeit CDs/DVDs and prosecuting online distribution platforms and pirating consumers. However, piracy is not the only challenge facing content owners. While consumers have rapidly increased consumption, the pace of monetization has been much slower. A combination of advertising and consumer payments is likely to establish itself as the de facto monetization model for most content owners.

In the long-term, content providers need to evolve beyond only selling content. One way of achieving this is to provide superior digital content consumption ecosystems that give anytime, anywhere access across multiple devices. In this aspect, cloud-based services will play a critical role in adding significant value to the content proposition. Moreover, such ecosystems are difficult to pirate and they enhance the content’s value proposition. Content owners should also actively work with Governments and Internet Service Providers (ISPs) to create legislation modelled on the “three strikes rule” in order to create a credible deterrent and cut down on piracy. In the end, the creation of platforms where consumers get a superior experience, in a convenient manner, will be imperative for the success of content players.

The advent of, and subsequent Figure 1: Digital Content Contribution to Overall Category Revenues, Global, transition to, digital has had a 2008-2009 disruptive impact on the content industry. The spread of the Internet; 40% the rapid increases in fixed and 35% 2008 2009 35% mobile broadband speeds; and a rapid 32% proliferation of devices have driven 30% strong growth in the consumption 27% of digital content. Overall, digital 25% is beginning to register significant 20% revenues (see Figure 1). 20% Platforms such as peer-to-peer 15% networks, streaming sites, and file

10% hosting services have made sharing pirated media convenient for the 5% 4% 5% 4% 4% general population. Recent surveys 1% 2% indicate that over 15% of Internet 0% users admit to regularly sharing files Gaming Recorded Music Films Newspapers Magazines over peer-to-peer networks1.

Source: IFPI, Digital Music Report, 2009, 2010; PWC, Global Entertainment and Media Outlook, 2009, 2010 In this chapter, we study the key challenges facing content players and analyze the opportunities that they

1 Forrester Research, The Napster Legacy: File Sharing 10 Years On, June 2009

66 have in terms of driving revenues Figure 2: Survey Response to Question “Free content on the Internet should and minimizing Intellectual Property remain free”, Global, 2009*

(IP) theft. We also present insights 100% 92% from Capgemini’s primary research 89% 89% 87% of key content industry players 90% 86% 80% across Europe2. We conclude with a 80% set of recommendations for content 70% providers. 60%

Challenges Facing the Content 50% Industry 40% Content players globally are facing significant challenges through a 30% combination of changing consumer 20% 16% behavior, evolution of technology, and 12% 11% 11% 8% 10% piracy. These challenges create the 10% 4% 2% 1% 2% 1% 1% need to continuously innovate, pursue 0% new business models, and effectively Total Asia Pacific Europe Middle East, Latin America North America Africa, Pakistan apply law enforcement. Strongly Agree/Agree Neither Agree nor Disagree Disagree/Strongly Disagree

Consumers Expect Content to be * Note: The numbers may not add up to 100% due to rounding errors. Priced Free Source: Nielsen, Changing Models: A Global Perspective on Paying for Content Online, February 2010 A key reason for the rapid uptake of web services has been the largely out of ten genres3. Multi-tasking is free content provided initially. widespread with 59% of US citizens The New York Times and The Times using the TV and the Internet Changes originally encouraged free access simultaneously4. to their websites while charging for in“ consumer print editions. After gaining traction, Customers also demand more they are now attempting to create flexibility in consumption, and some paywalls around their websites. User industry players are beginning to behavior and perception, however, is still at the address that. For instance, Amazon’s price point of zero (see Figure 2). Kindle automatically synchronizes the expectations Moreover, the ease and convenience last page read between devices letting in transferring digital content consumers to move seamlessly from has led consumers to have a poor a PC to a dedicated e-book device to coupled with low appreciation of the inherent costs a . Similarly, Capgemini’s of the content owners. Industry research indicates that Video on technological players now have the challenge of Demand (VoD) to be a priority for changing this perception and creating content companies5. pricing models that will viably entice barriers to customers. Barriers to Piracy are Low and the Impact Multi-faceted piracy are some New Consumption Patterns are Efficient digital file formats and Evolving the ubiquity of the Internet have The proliferation in devices such enabled easy access to a large variety of the biggest as smartphones, tablets and Digital of content. For the end-consumer, Video Recorders (DVRs) and piracy is seen as an effective option challenges the increasing fixed and mobile because of cost, convenience, and the bandwidth are driving consumption perceived anonymity. pattern changes. Consumer attention for content spans have shrunk. In a survey For companies though, the full impact published in June 2010 short-form of piracy goes beyond the direct players videos were the most popular in eight revenue loss. Piracy puts pressure

2 Capgemini conducted detailed primary research with select content industry senior executives on a wide-ranging array of matters related to the spread of digital content; the need to protect intellectual property; the impact of piracy on business models; and various other related questions. The survey was conducted in mid-2010 across major European markets. 3 Frank N. Magid & Associates, Magid Media Futures 2010: Online Video, June 2010. 4 Nielsen, Three Screen Report, Q1, 2010. ” 5 Capgemini Primary Research, 2010.

67 Figure 3: Synopsis of Options for Controlling Piracy Control Piracy through Regulatory and Industry Action A key option for content owners Implementation Feasibility Potential Impact is to confront parties indulging in

Confiscate Physical Counterfeits High Medium and facilitating large-scale piracy (see Figure 3). Such action can Close Online Platforms High Low include the individual initiative of a

Prosecute Customers Medium Low content owner, or of a larger industry consortium. Involve ISPs Low High

Create Barriers Low High Confiscating Physical Counterfeits The seizing of counterfeit CDs and Charge Levies Low High DVDs is a commonly exercised

Increase Consumer Awareness High Low option. In 2010, over 42 countries participated in a collaborative

Source: Capgemini TME Strategy Lab Analysis operation and seized over 142,000 DVDs and 28,000 CDs6. With a stronger substitution effect for to lower prices or shorten release counterfeit discs compared to online windows. The provider’s reputation piracy, the economic impact is also might suffer from substandard and greater. illegal versions due to quality issues. However, file sharing also serves Pursuing Online Distribution as a way to discover new content, Platforms especially before the arrival of legal Platforms that aid large-scale piracy platforms. are a highly visible target. An early success was the closure of Napster’s These challenges create a tough original P2P7 file sharing service environment for content players. following lawsuits and a court order In the next section we look at the in 2000. Post-Napster, the actual options available to content providers content is typically not stored on the to overcome these challenges. P2P site but is distributed across a large number of customers, making Revenue Protection and the task of taking down such services Generation Options for Content more challenging. Players The content industry needs to look at Torrent sites that allow users to stemming losses from IP infringement download content off P2P networks as well as identifying new avenues are now the primary target. In 2005- and models for an increased 2006, US authorities permanently monetization of content. closed down Elite Torrents and imprisoned some offenders8. In 2006, the leading torrent site—The Pirate Bay’s servers—were raided by the Swedish Police9. In May 2010 the site went offline, but only temporarily, when a German court blocked access10. After a prolonged litigation, the founders were sentenced to jail in November 201011.

6 World Customs Organization, Mountains of Pirated and Counterfeit CDs and DVDs Seized in Global Operation, October 2010. 7 Peer-to-Peer: A service that directly connects users of a service with one another, without the need of a server to host content. 8 US Department of Justice, Federal Law Enforcement Announces Operation D-Elite, Crackdown on P2P Piracy Network, May 2005. 9 The Register, Swedish Police Scupper Piratebay, May 2006. 10 PC World, German Injunction Knocks The Pirate Bay Offline Temporarily, May 2010. 11 Denver Post, Jail Reduced for Founders of File-sharing Company, November 2010.

68 Despite these few successes, such France’s HADOPI has had a platforms continue to thrive. With successful start with the sending of no copyright content hosted on their warning e-mails to IP infringers16. servers and the option of hosting The law faced initial resistance with servers globally, impactful legal ISP Free refusing to send warning enforcement remains a challenge. e-mails. However, after the French Government filed a decree stipulating Deterring Pirating Consumers ISPs to send warning emails within Barring few instances, content 24 hours of a HADOPI request, Free industry players have not directly was forced to comply17. prosecuted pirating consumers. Also, such cases are typically against Creating Barriers to Piracy uploading copyrighted media but An effective deterrent is to make not downloading it. In 2005, a Hong it inconvenient and/or costly for Kong man was sentenced to three consumers to use illegal content. months in jail for what is considered Microsoft has banned modded18 Adopting to be the first such action for sharing Xbox 360s from playing online via files through torrents12. The ensuing Xbox Live and has also voided their “a multi-pronged negative publicity and the unviable warranty. costs of pursuing large number of individual consumers has blocked the Similarly, Sony’s PlayStation 3 has approach implementation of this option. rolled out an update disabling the third party operating system involving Involve ISPs to Block Network Access installation19. As per a lawsuit against of Pirates Sony, the update was not for the The reluctance of ISPs to benefit of consumers but to protect legislation and cooperate with content owners is content. a long standing issue. For ISPs, collaboration is blocking paying customers is not The difficulty here is in devising good economics. In the US, the effective barriers for content that is Recording Industry Association of downloadable and consumed offline. key to reducing America (RIAA) launched a “three strikes” program to block Internet Charging Levies on Internet Access the impact of connectivity but did not get the or Hardware backing of the major ISPs13. Another option being exercised by content players it to impose levies piracy However, control over a consumer’s on Internet access and/or media piracy history and the ability to share storage hardware since they are content and contact details makes perceived as key enablers of piracy. In ISPs a critical element of the value some countries, content owners are ” chain. The HADOPI Law in France engaging with regulatory authorities and the Digital Economy Act 2010 of to create legislation aimed at doing the UK are based on the “three strikes so. For instance, there is currently rule” and are examples towards a proposal before the Canadian ensuring ISP participation14. The UK Government to extend the levy that Act, however, is facing stiff opposition exists on physical storage media from ISPs with BT and TalkTalk such as blank audio cassettes and having forced a legal review of the CDs to MP3 players20. However, such Act15. moves are likely to face significant

12 New York Times, In Hong Kong, a Jail Sentence for Online File-Sharing, November 2005. 13 Wired, AT&T, Deny RIAA ‘Three-Strikes’ Participation, March 2009. 14 The HADOPI law, named after the institution administering it which is the Haute Autorité pour la Diffusion des Œuvres et la Protection des Droits sur Internet, refers to the French law introduced in 2009 promoting the distribution and protection of creative works on the Internet. 15 TalkTalk Website, BT and Talktalk Win Legal Review of Digital Economy Act, November 2010. 16 The Wall Street Journal, All Eyes on France as Officials Enforce New Antipiracy Law, October 2010. 17 The Connexion, Free Backs Down in HADOPI Dispute, October 2010. 18 A modded Xbox is a device that has been hacked to allow it to play pirated game DVDs. 19 Techtree, Sony Sued For Removing ‘Other OS’ From PS3, April 2010. 20 Toronto Sun, Canada’s Government Says No to ‘iPod tax’ and Kicks Around its Political Opponents, December 2010.

69 implementation challenges since they Consumer-Paid Models are based on the premise of punishing The most commonly used consumer- other stakeholders in the ecosystem paid models for monetization include instead of just the perpetrators. subscriptions, one-time transactions and bundling. Conducting Consumer Awareness Campaigns Subscription Based Offerings Compared to consumer prosecution, Media players are putting higher a softer approach is to conduct quality content behind a pay wall. awareness campaigns highlighting the This is particularly true of companies negative impacts of piracy. Several of with strong brands and loyal these campaigns have been started following. The Wall Street Journal by content providers and regulatory adopted paywalls in 1997 and now bodies. Disney took a creative has over a million paying customers23. approach by having its characters Likewise, digital versions of The educate on piracy21. However, Times / The Sunday Times have crossed Capgemini’s primary research clearly 100,000 paid subscriptions since shows that an approach based on their launch in June 201024. These changing attitude is not regarded as successes are, however, qualified. effective as the legal enforcement22. Half of The Times / The Sunday Times’ paid subscribers are occasional users Generate Revenues by Identifying and website traffic has fallen by Monetization Opportunities 90%. Overall, few general purpose The landscape of monetization publications have generated large opportunities available is changing digital subscription revenues. with the evolution of several traditional models and the emergence An effective approach is to target a of new models such as bundled-with- niche audience that values the content device (see Figure 4). and usage experience. Thomson Reuters has around 500,000 users, almost half of them being premium, Figure 4: Overview of Digital Content Monetization Models while Bloomberg has about 288,000 Digital Content paid customers in the financial Monetization Models institutions segment25. Similarly, Microsoft’s Xbox Live service targeting online gamers, crossed the Consumer-Paid Ad-funded Hybrid and Others US$1 billion annual revenues in June 26 Pay Wall/Subscription Cost per Impression (CPM) Loss Leader 2010 . Content is available on Advertiser pays based on Content is given for free subscription basis. User pays number of page views and to drive sales in a more a flat fee to the publisher for publisher charges on the basis profitable channel Subscription-based streaming services consuming content of number of impressions are also a potential option. Hulu

Transactions/Micropayments Performance Freemium Plus offers paid video streaming for Publisher charges based on CPC/CPA model based on user Most content is available free access through devices like iPad, PS3 content consumed by users in action. Publisher charges every and ad supported with paid discrete transactions time a user is engaged in an ad access to premium services and TVs. Similarly, Rhapsody offers subscription-based premium music Bundling Collection Society Digital content is bundled with access. Collection societies collect another product/service and royalty by licensing content on the publisher usually charges behalf of the copyright holder for the access Transaction Based Offerings Pay-per-download offerings have been Source: Capgemini TME Strategy Lab Analysis. very successfully offered through Apple’s iTunes and Amazon’s Kindle.

21 British Video Association, Industry Trust Informer, June 2008. 22 Capgemini Primary Research, 2010. 23 The Week, The media’s risky pay wall experiment: A timeline, July 2010. 24 The New York Times, More Than 100,000 Pay for British News Site, November 2010. 25 Reuters, Thomson Reuters to launch next generation desktop, September 2010. 26 Bloomberg, Microsoft’s Online Xbox Sales Probably Topped $1 Billion, July 2010.

70 Through a superior device and store 2004 to 200930. This growth is integration they make using genuine encouraging traditional print media content the default way and more companies to consider a shift to convenient than illegal content. Such digital. Print magazine U.S. News offerings typically have micropayment & World Report is dropping its based à la carte pricing. subscription business to focus on the USNews.com website which gets nine Content Micropayments can overcome the million monthly visitors and tablet consumer’s reticence to pay by applications31. “companies offering content in small units thereby lowering the economic barriers for A critical challenge in building paid consumption. Capgemini’s ad-funded models is to build up a need to focus research has found that the content large active customer base, since industry believes that micropayments the revenue per user is typically on generating will be a key driver in monetizing low. Capgemini’s primary research currently free content such as catch- suggests that measuring audiences up TV27. across all platforms will help optimize revenues advertisement revenues32. Selling content to corporations can through also be fruitful. The BBC in the UK Hybrid and Other Models makes money from selling TV show Apart from generating revenues only formats. The Master Chef series from advertisements or consumer innovative now has versions for five countries. payments, content owners are also Similarly, our research indicates actively looking at other innovative combinations of that music labels believe that selling ways of monetizing content. synchronization licenses for the use of music for audiovisual productions Marketing Loss Model consumer-paid is insulated from piracy28. In the Marketing Loss Model, content is given away for free to and ad-funded Bundling drive purchases in a more profitable Bundling involves offering digital channel. Music artists Prince and content together with another Radiohead have distributed free monetization product/service. Nokia’s Ovi service albums to increase their fan base, and offers free access to maps, music recoup investments through sold-out models across and other content through select live shows. Moreover, these shows Nokia devices. Similarly, 3 UK is are authentic experiences that cannot experimenting with offering free be duplicated or pirated. Photo multiple limited period access to The Times/The sites, Snapfish and Kodak Gallery, Sunday Times with mobile broadband offset online storage costs by selling platforms connections29. Bundling helps to merchandise such as mugs, prints harness the existing customer base for and T-shirts. Gaming consoles are new product trials and faster time-to- frequently sold at a loss to help drive market. software sales and online services. It is estimated that Sony loses 6 cents ” Ad-Funded Models on every US dollar of PS3 hardware While advertisement revenues for sales33. traditional media are stagnating or declining, digital media is seeing Freemium growth. US Internet advertising Freemium is a hybrid model where revenues have shown a 19% consumers have a choice of ad-funded annualized growth over the years as well as paid premium content.

27 Capgemini Primary Research, 2010. 28 Capgemini Primary Research, 2010. 29 The Next Web, Three offers customers free access to The Times newspaper websites, November 2010. 30 IAB, IAB Internet Advertising Revenue Report, 2009. 31 Star Tribune, U.S. News & World Report to stop sending subscribers monthly print edition, shift toward digital, November 2010. 32 Capgemini Primary Research, 2010. 33 The Wall Street Journal, Cost Cutting Pays Off at Sony, February 2010.

71 Paid content may be subscription the scope of collection societies into There are, however, challenges in or transaction based while digital services such as radio, music pursuing this course. For one, it puts advertisements help fund the long tail and video streaming. For example the implementation onus on ISPs. of non-paying consumers. Buma Stemra in the Netherlands has They are expected to act against their introduced a collection mechanism paying customers for the benefit of These dual revenue streams for online downloads and streams the content industry with which improve the economic feasibility comprising of flat rates and variable ISPs have no revenue sharing. Costs for the publisher. Spotify provides models where 8-12% of revenue is incurred by ISPs for such operations, ad-supported music for free and the shared36. thus, should be covered. Moreover, higher quality, advertisement-free care should be taken to not alienate music, with mobile phone access, Recommendations the consumers. Providing benefit for premium customers. Similarly, Future roadmaps for content owners of doubt to borderline cases could Hulu has a paid subscription with need to move beyond just packaging be helpful. Also, content owners expanded content portfolio over free traditional content in digital formats. should strive to maintain a degree of access though both versions have This includes looking at curbing anonymity by ensuring that action is advertisements. piracy, creating new revenue taken by an independent body and models and providing superior not a specific content owner. The mobile gaming space has several content consumption ecosystems games available for free with a (see Figure 5). Employ Multiple Monetization restricted set of levels and features. Models Unlocking these requires payments. A Deter Piracy through Legislation Generating profitable advertisement recent mobile game, Angry Birds, has In the long run a credible deterrent revenue is a challenging task. For achieved 10 million purchases on the for the average pirating consumer instance, Blinkbox, an on-demand Apple App Store despite having free is a necessity. Directly prosecuting video streaming service, estimates 34 versions available . consumers and platforms has seen that breaking even requires over limited success. An effective option, 60 million monthly streams, a Collection Societies also validated by the content industry reach that only Google and the 35 The role of collection societies in our research37, is to block Internet BBC can command in the UK 38 varies by country, market, service, access of pirating consumers. This market . At the same time, a low and channel. There is significant requires legislation along the lines of consumer propensity to pay means fragmentation across these the “three strikes” model. Industry that sufficient consumer payments dimensions along with limited associations will need to lobby are not likely to be widespread transparency. In some countries for laws such as HADOPI in their either. Most providers would need a efforts are being made to expand respective countries. combination of advertisements and paying customers. Companies that cater to niche user groups and/or offer Figure 5: Key Recommendations for Ensuring Superior Monetization of Digital IP specialized content should, however, construct their model around consumer payments. Digital Content Monetization In all the cases, content owners Control Piracy Increase Revenues need to hit the sweet spot of pricing

Traditional Push for legislation to Use both consumer payments by matching it with the perceived Downloadable block internet access and advertisement which is value of content and convenience in Content of pirating consumers measured across all platforms that particular format. Advertising revenue would improve by delivering Enhanced Ecosystems that provide convenience and excellence in customer advertisements tailored to a device’s Consumption experience are difficult to duplicate and adds value to the content Ecosystems capabilities while measuring audiences across all platforms.

Source: Capgemini TME Strategy Lab Analysis

34 Yahoo! News, (Not so) Angry Birds passes 10 million iPhone downloads, November 2010. 35 Collection societies are responsible for collecting royalty by licensing content on behalf of the copyright holder. 36 Buma Stemra, Digitale tarieven: On Demand, December 2010. 37 Capgemini Primary Research, 2010. 38 Broadband TV News, On demand Blinkbox on a roll, November 2010

72 Portable Connected Devices and the Content Opportunity

One of the biggest developments in the past year has been the advent and rapid rise in popularity of portable connected devices such as the Apple iPad. While tablet PCs have been around since 2000 very few have been able to create the compelling user experience that Apple has done through its iPad. The results are telling. In 2010, Apple sold over 15 million iPads in the 9 months that it was available in the market and has already released the iPad 2 with enhanced featuresa. It is now estimated that global tablet shipments are set for a 12-fold rise from 19.7 million units in 2010 to over 242.3 million units by 2015b. Devices such as the iPad encourage increased consumption of various types of content in both nomadic and mobile environments, giving rise to more monetization opportunities. Through their highly interactive and immersive design, these devices allow content owners to reach out to consumers in ways that were traditionally not possible.

Figure: Survey Response to Category of Content Regularly Accessed, Global, August 2010

53% 51%

44% 41% 39%

33% 32%

25% 22% 21%

13% 11% 12% 8%

Books TV Shows Movies Magazines Radio News Music

iPad iPhone

Source: Nielsen, The Increasingly Connected Consumer: Connected Devices, October 2010

The larger 9.7” sized screen of the iPad with a large on-screen keyboard, allows for convenient viewing of a range of content category, with traditional print and video being the most favored (see Figure above). Content owners have begun to recognize the premium nature of the device — prices starting at US$499 going up to US$829 for the top-end model — and have taken early steps to tap into the potential of the iPad demographic.

For publishers, devices such as the iPad offer a clear route to creating price plans that merit the medium, rather than relying on having a single serve-all website-driven solution. Publishers such as Conde Nast have realized this and have introduced apps that are priced similar to their print equivalents. Conde Nast’s Wired iPad app sold over 95,000 units at US$4.99 in June 2010 (a price that has continued to the time of publishing). A lot of the content of Wired magazine is already available for free on their site or at deeply discounted yearly subscriptions of US$10c. These apps offer rich content including videos, annotations, expanded photo galleries, and interactive advertisements that can potentially help drive engagement levels. Publishers are experimenting with models where each issue is a separate app or they are using a common container app with in-app purchases for new issues. Other magazines such as Time and The Atlantic are also experimenting with similar pricing approaches. Content players are also launching free apps that they are seeking to monetize using mobile advertising. Research commissioned by a consortium of five leading publishers indicated that the publishing industry could gain as much as US$1.3 billion in incremental revenues through interactive periodicalsd.

Newspaper publishers too are viewing the medium with expectation and anticipation. News Corp invested over US$30 million to launch “The Daily”, an iPad-only newspaper that is priced at $0.99 per week or $39.99 annuallye. Video aggregators and broadcasters are among the latest entrants to this opportunity. The BBC is reported to be working on launching a subscription-based offering of its popular iPlayer service on the iPad for audiences outside the UKf. Similarly, video streaming services such as Hulu and Netflix have launched dedicated apps for the iPad.

These are early days for the device category. As such, the current traction could likely be attributed to the initial enthusiasm for the format. Moreover, the market is growing rapidly and Apple now faces strong competition from a variety of vendors that are using the Google Android platform and from other players such as RIM. However, the initial wave of applications and the traction generated indicate the strong potential of the medium. Content players should keep an active eye on this rapidly evolving category and its likely impact on the overall content ecosystem.

a) Company website. b) iSuppli, Global Tablet Shipments to Rise by Factor of 12 by 2015, February 2011. c) All Things Digital, Wired’s iPad App Boasts a New Feature: A Price Cut, June 2010. d) Media post, Subscription Revenue Boost With Interactive Periodicals, August 2010. e) Fast Company, Apple and News Corp’s “The Daily” Hits the iPad for $0.99 Weekly, $40 Yearly, February 2011. f) Paid Content, BBC Plans Subscription-Only U.S. iPlayer on iPad, December 2010.

73 Create Superior Content The content industry needs to create Consumption Experiences new digital ecosystems that provide Content providers need to embrace convenience and a superior customer digitization beyond just packaging experience. If the value provided to content in digital files and streams. the consumers improves, so will the Companies that have provided fortunes of the content providers. ecosystems enabling superior content consumption experiences have done Bas den Braber is a managing better. consultant in Capgemini Consulting’s TME practice. He has been working with Bloomberg terminals have for long major telecom and media companies time integrated device, secure on strategic and operational challenges Content connectivity and real time content. for more than eight years. Bas focuses Similarly, Apple offers iPod along on B2B music, digital media, as well as with iTunes computer application online sales and services. He is based in “providers and the Internet store. The key here the Netherlands. is to have an integrated ecosystem need to focus that offers a superior, convenient Nikhil Ray is a senior consultant in consumption experience and not just the TME Strategy Lab. His recent work content by itself. A traditional parallel includes growth strategies for telecom on creating would be a movie theater experience operators through diversification and versus offering video cassettes. innovative services. He has over five and offering The prevalence of piracy and low years of experience in business planning consumer paying propensity makes it and consulting across diverse industries. even more important in the digital era Prior to joining the Lab, Nikhil worked at superior digital to go beyond just providing content. a boutique strategy consulting firm. He is based in Mumbai. n consumption A vital area is to offer content across multiple devices and platforms. Free flowing content that can be experiences, as seamlessly accessed across devices encourages consumption in varied opposed to only scenarios. With improving Internet connectivity, selling content content owners should also consider cloud-based distribution models. in multiple These also allow access to far greater amounts of content than can be stored in devices. Consumers can formats conveniently stream the chosen content onto the preferred device at their desired time. With increased consumer uptake of cloud-based ” content and the acceptance of its benefits, the utility of downloading a complete version of the pirated content or buying counterfeit discs goes down.

In conclusion, the content industry needs to move from just combating the threats of digitization to taking advantage of this media. It helps to consider all the aspects of digital content access and consumption.

74 management INSIGHTS

Innovating the Telco Business Model: Drivers and Emerging Trends 76

Strategy Bottlenecks: How TME Players can Shape and Win Control of their Industry Architecture 84

75 Innovating the Telco Business Model: Drivers and Emerging Trends By Oliver Schön, Philipp Zimmermann and Subrahmanyam KVJ

Abstract: The operating environment for telcos is turning increasingly complex. Telecom operators who had grown on the back of traditional voice and data services are realizing that as consumption patterns are rapidly changing, value not only moves to other stages in the telco value chain but also into completely different markets. Subsequently, their old business models are coming under increasing pressure and appear to be crumbling. Some telcos have understood this rapidly evolving scenario and have taken steps to ensure that they are in tune with the changing times. How else can one explain the fact that a fiber operator convinces its customer to dig up the last mile connectivity, or that a telco enters into reselling energy and gas agreements, or that consumers in certain markets have opted for advertisements to be a core part of their mobile experience? These developments represent only a fraction of the innovation in business models that telcos can partake in. They, in turn, are being driven by a range of broader trends that are currently impacting business models the world over. Telcos should consider taking steps to incrementally change their business models, while striving to adopt radical approaches in select areas, and challenge traditionally accepted norms of where a telco fits into the larger ecosystem.

Need to Innovate Business declined, on average, by 7.5% every Models quarter in the period June 2009 - 1 The The business environment for June 2010 . An even bigger challenge companies is rapidly evolving. Telcos lies around the monetization of new are facing the constant threat of services such as mobile broadband. It telco “business over-the-top business models from is estimated that while data generated Internet players and from device by mobile broadband dongles account players within the TME industry that for over 66% of traffic volume, it only environment is 2 threaten to reduce their importance in contributes 5% of revenues . Yet, the ecosystem. operators have to continue investing rapidly evolving, in network infrastructure to meet The coming of age of the digital such surging demand. Analysts creating the need consumer, a breakdown in current estimate that while operators’ annual revenue streams, and emerging spending on network equipment in opportunities in new sectors are all the period to 2014 is likely to surge for innovating playing a key role in ensuring that by 28%, overall end-user revenues 3 the business model of yesterday is are expected to shrink by 1% . Such becoming increasingly obsolete. metrics indicate the failure of the the businesss business model to match pricing to Monetization Challenges with usage. model Traditional and New Services One challenge telcos face is the Evolving Consumption Patterns and decline in their traditional fixed-line Advent of Social Media businesses and maturing mobile The rise in popularity of the ‘mobile’ ” voice services. Mobile voice revenues Internet as well as the increasing use of major European operators have of rich and social media is driving

1 Enders Analysis, Mobile Revenue Growth and Outlook Q2 2010, September 2010; Operators include Vodafone, Telefónica, France Telecom (UK, France), and Telecom Italia Mobile. 2 Enders Analysis, Mobile Data Economics: The Limit of Unlimited, September 2010. 3 Bloomberg, Apple Asked to Pay Up for Network Improvement as Operators Face Data Flood, December 2010.

76 significant changes to traditional Figure 1: Framework of a typical Business Model consumption patterns. The popularity of web services is eating into TARGET INTERACTION CREATION traditional telco revenue streams. Customer Markets Core Assets At the same time, telco pricing Relationship models to monetize such traffic do not appear to be working. Moreover, with large social networking sites Customer Segments Distribution Channels Core Processes such as Facebook erecting what is, in essence, a massive walled garden with Defined Product / Payment Structure Role of Partnerships extensive communication features, the Service Range telco’s ability to monetize significantly diminishes.

VALUE REVENUE COST BASE Emerging Opportunities in New PROPOSITION MODEL Sectors The widespread deployments of wireless networks, coupled with an increased appreciation of the value Source: Capgemini analysis of connectivity, have meant that opportunities for telcos have opened However, in order to redefine its up in new sectors. Multiple operators general orientation, it is critical to are actively looking at opportunities first understand the constituents of a in sectors such as healthcare, business model. automotive, energy, and utilities. BT has ventured into the smart metering Structure of a Business Model area by setting up an alliance with The overarching goal of a business two other companies under the brand model is to address a business name SmartReach4. However, a move opportunity in such a way that value A into these new sectors also means is created for customers as well as that telcos will have to change their for the company. A business model “business model traditional ways of doing business to encompasses the addressed value be in line with the requirements of potential, the customer interaction, the new sector. Since opportunities as well as the value creation model. encompasses span sectors, the key focus for telcos A business model consists of three is to ensure that they have a model strongly interlinked dimensions: the addressed that they can deploy flexibly in other Target, Interaction, and Creation sectors. (see Figure 1). value potential, These factors are forcing telcos to Target involves defining the revenue innovate their business models. In potential. This is derived as a sum the customer this article, we analyze the evolution of three key elements. First, the and current trends impacting geographical or vertical markets business models and how telcos within which the company is aiming interaction could potentially address the need to to deliver the service. Second, innovate their traditional models. the customer segments that are as well as the to be addressed and their specific Business Models and their requirements. And, third, a clearly Evolution defined product/service range offered value creation Companies that want to be successful based on previously identified in the current environment have customer requirements. These model to fundamentally scrutinize their elements together form the basis for business model on a regular basis and creating a unique value proposition challenge its components if necessary. for the company’s product/service.

4 ZDNET, British Gas, BT Push Ahead with Smart Meter Plans, October 2010. ”

77 Figure 2: Actions taken by Telcos on their Business Model or technologies. Another element is the specific processes that the TARGET INTERACTION CREATION company has to master for delivering Defining the revenue potential Defining the customer relation Defining profitable means of its services. Finally, it is necessary to achieving target and interaction address which service components Value Revenue Cost Base Proposition Model have to be delivered in-house –

MARKETS RELATIONSHIP CORE ASSETS considering the background of the desired quality, costs and Outsourcing Employing Acquiring Zain Entering utility Customer global network social media flexibility – and which should be Africa sector involvement operations CUSTOMER CHANNEL CORE PROCESSES ordered from a network of partners. SEGMENT The organization of value creation essentially characterizes the cost basis MVNOs* for Use of MVNO BSS** niches Tuenti simplification of the company and also determines

OFFERING PAYMENT LOGIC PARTNER NETWORK the competitive capacity and sustainability of the business model.

Tweaking price Ad-funded price Partnering with plan plans media Evolution in Telco Business Models

Note: *MVNO – Mobile Virtual Network Operator **BSS – Business Support Systems Telcos have made efforts to innovate Source: Capgemini analysis; Company websites and press releases across the three major dimensions, through a combination of market, Interaction defines the manner in channel, and network initiatives which the company interacts with the (see Figure 2). customer to meet their requirements with products and services. It also Changes in Target consists of three elements. The first Telcos have begun to make changes to element is the customer relationship, their core value proposition. Multiple with a focus on the nature of the telcos have realized the need for relationship, the necessary intensity, expanding their footprint in order the duration, the content and the to tide over maturing home markets. typical and ideal sequence of events India’s Bharti Airtel realized that during customer interaction. The competition in the Indian mobile second element is the channels of market was growing rapidly, and in distribution through which products order to diversify, went ahead and and services should be marketed or acquired the African operations of which facilitate the interaction with Zain5. Similarly, operators have also customers before and after the sale. entered completely new sectors. And the third element is the payment Magyar Telecom has recently entered structure with a clear definition of the the utilities market through a mode, point of time, and frequency reselling agreement with E.ON AG of payments. In total, these elements for gas and energy. The operator is define the structure of the business’ also offering smart metering services income . in select cities in Hungary6. Multiple operators have shown readiness to Creation builds on the first two modify their offerings to address dimensions of Target and Interaction. evolving business and consumer It defines how a company can realities. Most operators started off profitably fulfil its value proposition. mobile broadband pricing plans on The essential elements are the a flat rate model. However, once it assets and special capabilities that started becoming clear to them that the company brings into value there was a challenge of monetization, creation. These could be production they are now moving onto tiered facilities, the brand of the company, pricing based on downloads. Some

5 Company website. 6 Wireless Federation, Hungary’s Magyar Telekom & E.ON AG Sign Power Retail Sales Deal, May 2010.

78 operators have ventured even further Changes in Creation and now offer tiers by bandwidth Telcos are also effecting changes to offered. In the US, AT&T has moved areas that directly impact their cost away from a flat rate tariff to a tiered- base. In emerging markets a key download plan for mobile data on approach is to outsource significant smartphones7. Similarly, Vodafone parts of network operations to Germany has introduced plans that equipment vendors. Multiple are tiered by speed for its LTE-based operators in India have outsourced mobile broadband services8. network operations to vendors such as Ericsson and Alcatel-Lucent among Changes in Interaction others. In developed markets too, this Telcos are making fundamental approach has begun to gain traction. changes to traditional revenue In the US, Sprint has signed a US$5 models. Norwegian fiber operator billion network outsourcing contract Lyse realized that the cost of digging with Ericsson12. Another approach a trench for the last mile between the is to work towards simplifying home and the node is prohibitive. complicated Operation Support Accordingly, it came up with an Systems / Business Support Systems. innovative model by which it offered KPN used solutions from Oracle in an a discount to customers who dug the effort to simplify and transform its IT trench themselves. The company also systems13. pre-sells all of its services through town meetings and gatherings. Operators are also looking at other Services are only started after at avenues of cost savings. Multiple least 60% of people in an area have operators are looking at reducing signed up9. By encouraging ownership the impact of their operations on the of the last-mile connectivity, Lyse environment while hoping to save created an emotional bonding with costs. A1 Telekom Austria’s Smart its customers. The results are telling. Energy Control pilot project has Over 80% of the company’s 130,000 helped it save over €175,000 due to customers have opted for the do-it- the intelligent reduction in the power yourself approach. The churn rates for consumption of its mobile network14. such customers are below 0.2%10. While telcos are innovating within Similarly, other players are also the ambit of individual elements venturing into the creation of new of the business model framework, revenue sources. Telefónica acquired there are larger trends with varying a majority stake in Spanish social spans of influence that are impacting networking site Tuenti, and is now companies across multiple elements launching Mobile Virtual Network of this model. In the next section, we Operator (MVNO) services using discuss some of these broader trends. the Tuenti brand11. Companies are also experimenting with innovative Trends Impacting Business ways of payments. Blyk, which Models started off as a B2C MVNO, allowed Capgemini’s experience with multiple consumers to earn free messaging clients across the globe has helped and airtime by receiving targeted us to identify five broad emerging opt-in advertisements. The company trends in business model innovation. now works with operators in multiple We believe peer-to-peer, push-to- countries to create such innovative pull, crowdsourcing, long tail, and advertising supported solutions. fragment-and-mash are among the

7 The Washington Post, AT&T Wireless Scraps Flat-rate Internet Plan, June 2010. 8 TeleGeography, Vodafone Unveils LTE Rollout Plans, Confirms Tariffs, September 2010. 9 The Sydney Morning Herald, Waiting on a Missed Connection, August 2010. 10 Connected Planet Online, NAB: FTTH provider’s Customers Bury their Own Fiber, April 2009. 11 Bloomberg, Telefonica’s Tuenti to Start Low-Cost Mobile-Phone Service, Expansion Says, November 2010. 12 Fierce Wireless, Sprint Inks $5 Billion Network Outsourcing Deal with Ericsson, July 2009. 13 Company websites. 14 Environmental Leader, Telecom Firm Cuts Energy Costs $223,000 Annually, August 2010.

79 Figure 3: Trends Impacting Business Models and their Span Push-to-Pull Centralized business models rely on the predictability of demand, TARGET INTERACTION CREATION ensuring product development, and optimizing the supply chain. These models are centered on the basis that Peer-to-Peer strategic decision making is best done Systems where consumers are part of the value creation at a central/corporate level. In an Push-to-Pull increasingly competitive environment Decentralized models with flexible value chains with shortened lifecycles, more complex distribution channels, and Crowdsourcing a more powerful and ever-better Outsourcing internal tasks to large undefined groups informed customer, the centralized Long Tail approach is destined to fail. Creating services / products aimed at serving multiple niche groups Decentralized models take the Fragment & Mash opposite approach, with the customer center stage. To ensure that customer- Modularization of entire business model centricity is not just an empty phrase, the entire value chain has to have the Source: Capgemini analysis flexibility to react quickly and to cope with varying customer requirements. key trends that have an impact on This often demands the adaptation business models (see Figure 3). of the entire supply chain and production methods to manufacture Peer-to-Peer individual or new products faster, The advent of new technologies more flexibly, and economically. is constantly forcing the disintermediation of the stages that Deutsche Telekom’s IPTV service make up the linkage between a in Germany, T-Entertain, offers a service provider and a consumer. In good example of a company that has extreme cases, the customer even addressed the impact of this trend. takes over tasks originally belonging The company offers a service called to producers. An example is the Liga Total that allows subscribers to question and answer site, Stack create customized live broadcasts of Overflow. The site offers around the Bundesliga soccer series. Users 34 distinct communities in which can put together their personal users can ask questions and get conference of matches happening answers from fellow members. The simultaneously and are alerted site attracts over 10 million monthly through on-screen pictures whenever unique visitors and is very popular interesting moments happen in other in the technical programming matches. Users can then switch to community15. that match and ensure that they do not miss out on the action. The Such examples indicate the trend and service shows how companies are the importance of involving users of taking a decentralized approach and a service and letting them create the are letting the customer take control, core that can then be monetized by while offering enough flexibility to the service provider. Stack Overflow mass customize16. sells advertising on top of content created by its users. Crowdsourcing Crowdsourcing refers to the outsourcing of activities that are traditionally done in-house to

15 TechCrunch, Stack Overflow Hits 10M Uniques, Boldly Goes Where No Q&A Site Has Gone Before, November 2010. 16 Company website.

80 external, undefined user groups, cost makes targeting niche groups a which in many cases are either potentially profitable business model. current or prospective customers. Companies increasingly source goods A successful deployment of the Long and services via open networks of Tail business model can be seen external service providers, extending in E-Plus, a German operator. The Trends from open source software to product advancement in IT systems has now design to research and development. enabled operators such as E-Plus to “impacting Such approaches help reduce actively deploy multiple MVNOs that procurement costs and time-to-market. can function with an independent identity, without incurring significant business models France Telecom has an established additional costs. The operator has, program called the Orange Partner over the years, entered into a series of broadly include program for allowing third-party agreements with MVNOs to launch developers to create innovative services focused on multiple niches services for Orange’s subscriber base. in the market. For instance, its BASE peer-to-peer, Developers enrich the application and service is aimed at heavy mobile service portfolio that Orange brings usage subscribers, while Simyo is push-to-pull, to its customer base, while being a targeted at low usage subscribers. part of the growth. The program has Similarly, it has a service targeting over 45,000 members17. Turkish immigrants and a separate crowdsourcing, service targeting teenagers. While Some companies have taken E-Plus was able to address this long-tail and crowdsourcing to interesting lengths. market even before the launch of GiffGaff, an MVNO in the UK owned such MVNOs, however, their launch by and operating on O2’s network, helped it create a strong value fragment-and- relies extensively on crowdsourcing proposition for customers. This focus in its business model. Subscribers are on long tail helped E-Plus weather the mash awarded points and are encouraged tough times in the German market to answer other customer support (see Figure 4). enquiries or submit ideas for marketing, advertising or pricing Fragment and Mash models. Users can then convert This trend describes the consistent ” these points to cash, mobile credit, modularization of the entire business or donations to charity. As of June model. Companies start building skill 2010, the company had a 6,000 sets across a range of sub-activities strong online community and over that are required to deliver a larger 40% received their first bi-annual activity. By standardizing the best cash payout with the average user practices and creating enablers for receiving UK£1418. The company letting such secondary skills flourish, claims that 100% of questions raised companies can create platforms for are answered by its community, with new services based exclusively on an average response time of four these skills. The result is the break- minutes19. down of the classical sequential value chain into a value network. Here, Long Tail the company’s competencies, which ‘Long Tail’ defines a new approach have been built up during the course based on technology enablers that of delivering services, are taken allows companies to profitably apart to help create new products serve niche segments that were not and services, thereby giving rise to a attractive to serve previously. The “mashable” company. basis of the Long Tail approach is that minimal/next to zero incremental

17 Orange website. 18 Guardian, Mobile Provider Giffgaff Makes First Customer Payouts, July 2010. 19 Company website, October 2010.

81 Figure 4: Mobile Service Revenue Growth for E-Plus Germany, (%), Mar 08-Sep 09 ecosystem. Companies that fail to do so expose themselves to the risk 10.00% of being undermined in their core 8.00% markets. Telcos should take a twin-

6.00% pronged approach at innovation that attempts to both change their 4.00% business model incrementally 2.00% while constantly expanding the 0.00% boundaries by experimenting with

-2.00% radical approaches towards delivering traditional and next-generation -4.00% services. -6.00% -8.00% Change Business Model

-10.00% Incrementally

Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Over the years, telcos have morphed into large complex organizations with Source: Enders Analysis, Mobile Revenue Growth and Outlook Q2 2010, September 2010 multiple layers. Such hurdles can create artificial barriers for innovative employees. Product development in One example of this trend is Amazon. the online space typically takes an The rapid growth of the online approach where start-ups rapidly retailer meant it had to establish iterate between various versions/ special technological competencies, features of a product, sometimes in especially the operation of highly weeks. However, in a typical telco scalable server structures for the environment, the timelines can span operation of its electronic trade multiple months, often exceeding a platform. As Amazon ventured into year, before a typical product release. Telcos other product areas, and as it gained scale, the company increasingly had Some telcos have realized that they to create systems that could scale need to bring in outside expertise should“ strive rapidly to support the increasing if they are to receive an innovation traffic. Amazon uncovered a new boost. One example is Orange to create a area of business from this emerging which has set up 18 innovation competency. Namely, the leasing of labs in research hotspots in nine these structures, which we also know countries. However, for telcos, it is culture that now as cloud computing. Amazon imperative that while they attract developed a complete business top talent, they should also create a encourages risk- model around this idea, from culture that encourages risk taking product development to accounting and rapid iteration. An innovation and administration processes to promoting culture distinguishes taking and rapid new marketing channels, currently itself by intensive, cross-functional marketed under the Amazon Web communication, creativity, error iteration Services brand. tolerance, and the entrepreneurial willingness to take risks. The Road Ahead for Telcos The need to innovate business models Telcos should also be flexible about has never been more pressing for incorporating best practices from ” telecom operators. Telcos will need successful players in other industries to innovate across all three elements and third parties. Online players have of the business model if they are to successfully proved that employee make a successful transition to a contribution can make a significant future digital society where they can impact on driving innovation. Telcos play a significant role in the entire need to create systems that encourage

82 lower-level employees to contribute Some telcos have already begun to Telcos need to embark on a series of ideas that they can potentially stretch traditional boundaries of such changes in order to ensure that consider. Some operators have begun telco operations. The US operator they can build upon their successes to move in this direction. Telstra, in Verizon and Google have come in delivering telecoms services. In Australia, has deployed a SalesForce. together to propose a framework the end, they will need to ensure com service to run a web-based that can potentially create dedicated that they continuously challenge forum that allows all employees monetization models for next established models and notions on and partners of the operator to generation services22. While the their role if they are to truly innovate submit and discuss ideas that can be proposal has sparked significant their business model. voted on before passing onto senior debate on aspects around net management20. neutrality, it is critical that Oliver Schön is a principal for the operators continue to engage with Capgemini Consulting Strategy and Experiment with radical approaches the larger stakeholders, including Transformation Practice. He helps Telcos should consider creating new other companies, regulators, and companies across various industries to value propositions by enabling access consumers, on the need for an design growth and innovation strategies to content anywhere and anyplace ecosystem where everyone, carriers as well as the required transformation through the use of new technologies. included, are compensated fairly for programs. Oliver is head of the strategy Similarly, they should look at creating their respective contribution. In doing competency within Capgemini Consulting new models of monetization where so, the benefits of such new business Germany and has published a range of they work closely with content model innovations need to be clearly articles and cases on Business Model owners and device vendors to create stated to both the industry and the Innovation. He is based in Frankfurt. innovative bundles that have the consumer. It should be subsequently potential to generate synergy. For separated from the controversial Philipp Zimmermann is a principal instance, 3 UK offers free bundled aspects of net neutrality, vis-à-vis in Capgemini Consulting´s TME access to The Times and The Sunday censorship of free speech, slowing practice. He specializes in serving large Times together with its mobile down “free” Internet services and the telecommunications, media and high- broadband connections21. creation of an alternate Internet. tech clients on a range of strategic, organizational, operational, and Going forward, telcos should consider Telcos need to actively look at regulatory issues, bringing 10 years working closely with content breaking new ground across all three of sector expertise. His clients include owners in defining new models that elements of the business model. some of the largest best serve mutual interests while They should move from providers operators and media companies in delivering the maximum value for of connectivity to aggregators and Europe, the US and the Middle East. He the consumer. For consumers to be innovators of third-party offerings. is based in Berlin. able to enjoy data-intensive content Telcos will need to continue to stretch services on the Internet, telcos need the boundaries of what current Subrahmanyam KVJ is a senior to convince content providers on the revenue models allow. While they consultant in the TME Strategy Lab. His need to consider the costs of building have traditionally followed B2B and recent work focused on identifying the high-bandwidth data networks in B2C models, increasingly, innovative telecom operator opportunity in social their business models. In the future, B2B2C models are more likely to be networking. He has worked extensively telcos can work towards creating the norm in the future. on the impact of convergence and models where they agree with content changing consumer behavior on telecom players on a dedicated Quality On the cost side, the opening up and media players. He is based in of Service provisioning to ensure of both the IT and processes will Mumbai. n network asset monetization. Telcos ensure that they seamlessly fit in can consider experimenting with with demands from new sectors. In models where they not only charge going forward in all these ventures, consumers for access to network it remains imperative that telcos resources, but also potentially work continue to utilize their core assets with content providers to create such as the ability to implement dramatically different pricing models complex IT systems in order to that move away from charges for data provide an ecosystem to other sectors. consumption.

20 Telecom Asia, Crowdsourcing the Workforce, November 2010. 21 CNET, 3 Offers Free Access to The Times, Don’t All Rush at Once, November 2010; The service is free for three months for prepaid and contract subscribers. After three months, the access remains free for prepaid consumers who top up every 30 days and it costs UK£2 a week for postpaid subscribers. 22 Google Public Policy Blog, Finding Common Ground on an Open Internet, October 2009

83 Strategy Bottlenecks by Michael G. Jacobides

Abstract: The competitive environment facing businesses is rapidly evolving. Companies in many different sectors increasingly face challenges arising from new technological developments. To draw an analogy with military services, companies need to move from “tactical combat”, undertaken in stable sectors with easily identified competitors, to a “guerrilla warfare” mentality, where they must rapidly switch tactics to fight non-traditional competitors. But with much of the existing strategy toolkit built around “tactical combat”, this is a challenging task. Successful, agile companies do not just compete within their own sectors; they seek to actively redefine and reshape those sectors. The most successful companies become the “bottleneck” in their sectors through a strategy of forging alliances, changing the rules of the game, establishing webs of dependencies, and knowing when and where to compete, or not. Identifying the core values that a company brings to its sector is key to this approach. Companies need to identify bottlenecks, use them to create architectural1 advantages, and finally make architectural thinking a part of their organizational fabric if they are to achieve sustainable success in the new business dynamics.

The role of bottlenecks in These companies encouraged shaping industry architecture competition by complementary Most fast-moving companies, whose parties in sectors where they did not value has increased substantially have a presence, and changed the Most over time, (e.g. Apple, Google, or rules of the game. They understood IKEA) have something in common. that making money is about They do not just compete within the structuring a set of relationships fast“ moving confines of their industry, but they around them to become the try to change its very definition. They bottleneck within their industry companies understand that competition is no (the most valuable part of a complex longer within a sector; it is primarily system, where the value accrues), i.e. about shaping the structure of a controlling without owning. do not just sector. Using traditional strategic analysis compete within For instance, Apple redefined the tools to analyze the way these mobile music device sector by companies build and capture value keeping a hold on the music format, is challenging. Some of the familiar the confines of selectively outsourcing hardware approaches such as Porter’s five production, and carefully managing forces are increasingly redundant in their industry, co-specialized companies such a world where industries are now as Toshiba or Foxconn providing defined not only by technologies, complementary products and services. IT, and globalization, but also by they change the Similarly, IKEA redefined furniture industry participants reshaping their retail by reshaping roles in its sector: own landscapes. Competition has definition of their final assembly is done by consumers shifted from identifying new value in their own houses; production by propositions and building new value subcontractors; logistics by external curves, to industry redefinition and industry providers; and retail by franchisors. leveraging of the ecosystem.

1 Industry Architectures describe the rules and roles that pertain to the division of labor in a sector; they define the templates ” and standards through which companies cooperate and compete within a sector.

84 If existing frameworks are not always Figure 1: Market Capitalizations, Computing Sector, 1992–2005 useful, what is? The answer lies in building new concepts that are more Industry Segments attuned to a world driven by alliances IBM Computer Systems and Hitachi Limited - ADR and the aim to reshape sectors. Today, Hewlett Packard Peripherals Toshiba Corp effective organizations leverage far NEC Corp - ADR Software Publishing Digital Equipment more than their own actions in order Microsoft Corp to both create and capture value. They Novell Inc Semi Conductor Apple Computer shape the rules and roles of their Oracle Corp Intel Corp sector, aiming to become a bottleneck Compaq Computers Electronic Component Sun Microsystem and “rule without owning” – that Manufacturing Dell Inc is, leveraging the skills and energy Computer System Fujitsu Ltd - ADR Design Ebay Inc of others. Companies sticking to Yahoo Inc Internet Service Google Inc traditional sector definitions often fail Providers Texas Instrument Taiwan Semicond to see how profits migrate from their Web Services SAP AG-ADR own, narrow part of the industry to Others 1992 1997 2005 other parts of the sector as the result The size of the pie charts represents the market capitalization of the industry segment of changes in the “rules of the game” Source: From the Structure of the Value Chain to the Strategic Dynamics of Industry Sectors, Michael G. Jacobides, around them. Without a change in Carliss Y. Baldwin & Reza Dijaji, 2007 worldview, they might find that their position becomes untenable2. and the means through which digital content can be monetized. For instance, the snapshots of market Now, it is trying to do the same Companies capitalization in the computing in mobile telephony. By providing sector (see Figure 1) show how value research and development and a shifted in the sector from computer platform (Android), it aspires to “sticking to makers such as Apple and IBM to obtain de facto control of browsing GUI/OS3 manufacturers such as and search in mobile devices. While traditional Microsoft and CPU4 makers such Google encourages competition as Intel. More recently, power has in complementary segments like migrated again, to ISPs5 and search handsets or programming and sector engines such as Google. Computer applications, it maintains its grip makers didn’t realize how the on the Android browsing and definitions “industry architecture” around search experience. Compared with them had changed until it was too the current model, where telecom late. By looking only at their direct providers control what happens in often fail to competitors they lost the opportunity the handset, it’s clear why Google is to create more value and strengthen keen on this version of the brave new see how profits their own position, allowing world. previously marginal participants like Microsoft and Intel to occupy Companies can add value by migrate from key positions in the industry and to reorganizing existing products and change the nature of the sector to ideas in a sector as long as they hold a their own, their advantage. powerful position in the value chain. Or they can unleash value by virtue Successful companies aim to impose of a new product or service-delivery narrow part of their own vision on the architecture model that integrates the value added of their industry. Competition today by an array of participants. Crucially, the industry to is about whose “vision” will succeed, companies do not need to own the and who will create and hang onto key resources they rely on, as existing the bottleneck. Google transformed theory suggests. They need to ensure other parts of Internet search, web advertising, that the parts of the value chain they the sector

2 Michael G. Jacobides, Thorbjorn Knudsen and Mie Augier, Benefiting from Innovation: Value Creation, Value Appropriation and the Role of Industry Architectures, Research Policy, pp. 1200-21, Vol. 35, 2006 and ibid, Who does What and Who takes What: Benefiting from Innovation, AIM Management Briefing, December 2006. 3 Graphical User Interface/Operating System. 4 Central Processing Unit. 5 Internet Service Provider. ”

85 are not active in are “contestable”, and and cheaper: it works closely with that they control the relatively scarce its suppliers but its rules make sure or unique parts. suppliers never forget that they are replaceable6. In the following sections, a guide on how to create or maintain an Create the conditions to become a industry bottleneck is provided. A bottleneck way to understand how and why the Companies can also change rules competitive environment is changing, and institutions to become the why this matters, and how companies bottleneck. The key is to become the can respond is offered and in addition least replaceable part of the sector (or some specific steps that managers a set of interconnected companies) can take to be more effective in these so that it can be controlled without increasingly competitive conditions even owning it. This requires taking are suggested. a view of the whole sector, identifying how to become less replaceable, then Redefining sectors to create seeing how to change the nature of architectural advantage the relationships. Identifying and Research has identified three tactics bringing the value-add to the other that companies employ to dominate industry participants is vital. within an industry architecture. Microsoft used alliances, standards, Enhance mobility across the value and industry conventions to become chain the bottleneck and achieve industry First, companies can enhance dominance. The industry made it mobility in the parts of the sector easy to be a PC manufacturer, but where they do not compete – while harder and harder to compete with collaborating closely with the firms Microsoft. The same strategy was involved. For example, Apple does not behind Apple’s ability to create a physically produce any components dominant position for itself in digital for the iPod. Instead, it retains music. Apple’s control of iTunes a small, tightly controlled set of locked customers in through its suppliers who are given substantial Digital Rights Management (DRM) parts of the value-add, but also know strategy. Files that were compatible they may be replaced at any time. with iPod only played on iPods or Apple becomes dependent on its PCs. Playability on computers induced collaborators to an extent, but these users to stick with iTunes. Crucially, dependencies are asymmetric; their the incompatibility of iTunes with partners always need them more. other portables creates dependencies on Apple, thus Apple can safely Toyota has a similar approach with retreat from hardware production, its suppliers, making sure that there knowing that it dominates the is potential mobility in the sector. bottleneck in the digital music sector. Its top-tier suppliers make more While Apple has moved away from profit than those in lower tiers. But using DRM as a tool for building a they know they must be extremely dominant position, nevertheless, the open with Toyota regarding their role that it played in building Apple’s cost structures to stay in the top dominance cannot be overstated. The tier. Toyota actively encourages skill of shaping the environment and competition between suppliers to of selling the vision is a key driver of ensure its vehicles become better success in companies such as Apple.

6 Michael G. Jacobides and David C. Croson, Small Numbers Outsourcing: Efficient Procurement Mechanisms, Working Paper, London Business School, November 2010.

86 Redefine roles and responsibilities Figure 2: Toolkit for Building Architectural Advantage With new expectations and a new vision proposed, companies can 1 2 3 redefine roles, or “who does what”. Identify Create Architectural Change Organization’s Bottlenecks Advantages Fabric This means looking, not only at what they themselves need, but also what I The bottleneck is the least I Create a map of current industry Encourage employees to: replaceable part of the value architecture, customers, and other players need. Companies need I Have a vision of the company’s chain or industry architecture products role in the sector to take a strategic approach when I Locate the bottleneck I Be ready to change vision I Identify how the industry it comes to choosing where they I Recognize that positions don’t participate and what roles to play in architecture could change last forever I Identify the impact of change in I Have the courage to change the industry architecture. They need industry architecture routines I Identify how to change current to be frugal with capital commitment I Be outward looking role and become the bottleneck and get the maximum amount of I Articulate vision outside the power to flow to them, even at the organization I Be strategic, not just nice expense of some short-term benefits. I Keep larger picture in mind

The final element in Apple’s iPod Source: Professor Michael G. Jacobides success is its dominance of the multi- billion accessories market, where it has encouraged others to prosper but A toolkit for building architectural has not entered itself. Its restraint is advantage calculated7. Even more calculated is Architectural advantage can be its control of downstream pricing: built through a three-step process Apple only gives 14% margin for of identifying bottlenecks, creating iPods, while the margin on iPod architectural advantages through accessories is 25%, so retailers bottlenecks, and finally making dedicate more shelf space to them. architectural thinking a part of the This increases iPod presence in organization’s fabric (see Figure 2). The most terms of retail and enhances the installed iPod accessory base (and Identify bottlenecks “successful dependencies on Apple), even though Bottlenecks are a key part of industry Apple is absent from the accessory dynamics. But where do they sit segment. By finding intelligent in the value chain? The bottleneck companies ways of convincing retailers and is the least replaceable part of the business partners to invest in the value chain or industry architecture, become the iPod architecture, Apple ensures where value accrues. The greater that the pie is large enough, and the mobility of adjacent segments, its allies strong enough, to beat the the more effective the bottleneck “bottleneck” in competition in unison. This contrasts becomes. Mobility and dependencies with Apple’s mistakes in the PC change over time, as does the position their sectors and sector, where its insularity shunned of the bottleneck (see Figure 3). collaboration and it focused too much on “the traditional PC sector”. “rule without Choosing where to focus should not owning” just concern a company’s strengths, or opportunities to make money; it should also be about how the firm can best support its position within the industry architecture: how its ” choices will shape the sector and help it become a bottleneck.

7 The Australian, Gecko Gear Makes the Case for Quality iPhone Accessories, October 2010.

87 Figure 3: Evolving Bottlenecks in the Computing industry, 1990s–Present It is essential to track shifts in the bottleneck. A bottleneck will Component not stay still; sometimes it will Assembler Distributor End User Supplier 1990s move upstream, and sometimes downstream. Challengers will try to change it, and will sometimes succeed. Automotive manufacturers, Component Assembler OS Provider Distributor End User

2000s Supplier for instance, have been better able to keep their share of value than businesses in other sectors. Even as they increased outsourcing, OEMs8 Component Web Service Assembler OS Provider Distributor End User defended their industry architecture Supplier Provider

2010s? and didn’t render themselves replaceable. Despite hard times for the sector, companies such as Toyota that carefully manages its supply

Bottleneck architecture have been successful. It Source: Professor Michael G. Jacobides comes down to relative mobility and how it changes over time.

Create architectural advantages When IBM outsourced the design through bottlenecks and development of CPUs and Clearly, companies need to look OSs, it believed that the bottleneck beyond the traditional definition rested with “owning the customer of their sector: they should shape base” through branding and support it as opposed to just competing services. But with PCs, this wasn’t in it. But how, in practice, can good enough. PCs were standardized, managers map their sector, design serviceable by anyone, and their architecture, and decide how customers were not limited to large to change their strategy? Companies companies. So, making and selling should take a five-step approach to computers waned as a bottleneck. gain an understanding of where the The bottleneck then shifted to how bottleneck is heading and how to the computer was used. It turned out build architectural advantage. that, once accustomed to particular software and a particular operating Create a map of current industry system, customers would not want architecture, customers, and products to change – and this meant that Companies should map different capturing this segment became roles in the sector (“who does what”), critical. Microsoft and Intel increased identify rules connecting players, their interdependencies, making and the industry architectures that the OS, the GUI, and the software is, the set of players, rules and roles even “stickier” and the CPU more that pertain to the division of labour. important – even as other parts of With these architectures mapped out, the sector became more and more executives should strive to understand replaceable. As a result, Apple and whether there is competition between IBM lost out to Microsoft and Intel. different architectures, and where With growing popularity of web that can potentially lead to. Finally, services, companies such as Facebook they must figure out how different (and their optimistic investors) appear participants make money (“who takes to be betting on them becoming the what”). new bottlenecks (see Figure 3).

8 Original Equipment Manufacturer.

88 Locate the bottleneck This five-pronged analysis will deliver Companies should focus on a vision of how a specific sector is identifying who calls the shots in changing, where a company currently the industry, and why. They should stands, and what its future role understand what drives value creation should be. It also provides a game in the sector, and who captures value. plan of short-term objectives to satisfy What is the logic with which the both customers and employees, as sector is structured? What business well as medium-term objectives in models, within the context of their changing the rules of the game. architecture, appear to be making more, and why? Executives should The next step involves convincing also explore whether there is a people, inside and outside the bottleneck and, if there is, how it can organization, to accept the company’s be maintained. vision.

Identify how the industry Make architectural thinking part of architecture could change the organization’s fabric Companies should figure out whether As well as creating and sharing a A company the current division of labor in sense of the sector’s rules and roles, the industry could change – and organizations must also be able if it can, how? They will need to to update their plans as the sector “becomes a understand what new technologies or evolves, by instilling in management regulations could change the sector, the skill to be proactive in seeking “bottleneck” and, consequently, who would gain new opportunities. To do so, the the most as a result. They should also right behaviors, skills, and attitudes keep an eye out for potential new must be promoted at manager and in a sector by entrants as the industry evolves, and employee level. how that might affect the sector’s forging alliances, dynamics. Have a vision of the company’s role in the sector Identify the impact of change in Employees and managers may lack changing the industry architecture a vision of how they can add value Companies need to identify how the to, and connect with, others in the rules of the game bottleneck and the value of current ecosystem. This leads to missed players might change as a result of opportunities, sending the wrong industry architecture changes. Key signals or eroding the company’s and establishing questions to consider include the relative position, and being dissonant direction in which the bottleneck with the narrative and image the webs of could potentially move and the company may want to propose. subsequent impact on existing companies. Be ready to change vision dependencies Executives sometimes lack the ability Identify how to change current role and openness to change their own and become the bottleneck views of their sector. Clinging to Companies need to consider what simple depictions of reality can prove ” sector conventions they could change disastrous in the long-term. to become more effective. They will need to identify their “desired Recognize that positions don’t last architecture” and how to achieve forever it. They should consider forming A new strategy will only last while alliances depending on the objectives conditions allow. Even with success, of other participants in the sector. the objective is still to seek the new bottleneck. It’s important to convey the sense that advantage is temporary,

89 making executives think more These priorities must be woven creatively about how to add value into the organization’s fabric. The continuously. real challenge is integrating these outward-looking insights into daily Have the courage to change routines operations. Changing a company’s Adapting to sector changes requires culture is no mean feat, but doing courage; employees will need to so can give these ideas real traction. revisit old habits. Executives should One way to make companies more be able to revisit practices and externally focused is to redesign, priorities as business models change. opening up the “pores” along the value chain to energize the firm Be outward-looking and make it more aware of different Within an organization, discussions opportunities. This might redress the can become introspective. Companies problem of introspection, inherent can combat this tendency by in traditional vertically integrated redefining rules and roles of the companies. This same principle firm, revisiting how they connect underpins many of the benefits of with others. To do so, they need to several “open” structures emerging of link internal responsibilities and late: it allows companies to be more Companies accountability with outward-looking adaptable. If we add “architectural objectives. cunning” to this more extrovert orientation, companies can thrive “should strive Articulate vision outside the even in challenging settings. Such organization architectural thinking is an integral to make With alliances forming in record part of organizations’ re-think of their numbers, it is crucial to foster own “playscript”— of the ways in employee skills that permit seeking which they can add and capture value architectural new sources of collaborative value in a rapidly shifting environment9. and support the company’s vision. thinking Selection and promotion criteria must Conclusion recognize these skills. Shaping the sector in which a part company operates and seizing new of the Be strategic, not just nice opportunities to win control of the Managers might believe that the industry’s architecture is increasingly organization’s company’s external orientation means becoming a priority. In a shifting creating many relationships with landscape a “guerrilla” mentality is outside partners, increasing alliances key to success. Companies need to fabric and so on. But it’s important to be be proactive in shaping their sector strategic and establish a clear sense and ensure that their preferred of why a relationship exists, how it vision and architecture can be is managed, and the benefits that are accepted and become dominant. ” expected of it. Alternatively, they can seek to improve their position within an Keep a larger picture in mind existing architecture. As globalization, Managers often focus on generating IT, and deregulation facilitate volume. This must be tempered disintegration and “re-combinations”, by a more strategic sense of how as options and trading partners grow this can actually improve the exponentially and alliances hit all- company’s position. This won’t time high levels, companies need happen automatically: it requires to take a strategic approach. With reinforcement, monitoring, incentives, new options come new challenges training, and effort. and, with opportunities appearing

9 Michael G. Jacobides, Strategy Tools for a Shifting Landscape, Harvard Business Review, pp. 76-85, Vol. 88, No. 1, January-February 2010 or ibid,The Play’s the Thing, Business Strategy Review, pp. 58-63, Vol. 21, Issue 2, 2010.

90 constantly, companies need to be strategic in the way they shape their environment. This is especially so in a time of crisis, such as the one facing firms from telecommunications to healthcare to financial services, the It is essential to track shifts possibilities to re-think and re-shape the architecture have never been in the bottleneck since the position 10 “ better .

Michael Jacobides holds the Sir Donald rarely stays still; sometimes, it Gordon Chair for Entrepreneurship & Innovation at the London Business will move upstream, sometimes School, where he is Associate Professor of Strategic and International Management. A Ghoshal Fellow at the Advanced downstream Institute for Management Research, he studied in Athens, Cambridge, Stanford and Wharton. His research looks at how technology, competition and de-regulation ” re-shape sectors, changing “who does what” and, as a result, “who takes what” and he studies strategic design, looking at how to restructure and reconfigure value propositions and value chains to cope with domestic and global forces. He works with organizations to help them re-think how companies navigate in shifting landscapes and re-writing their “playscripts”. He writes for The Financial Times and HBR in addition to major academic journals. He is based in London. n

10 Michael G. Jacobides, Don’t Let this Crisis go to Waste, Business Strategy Review, pp. 71-75, Vol 20, No 3, August, 2009 and ibid, New ways of thinking about Business, Financial Times Mastering Management Series, February, 23, 2009 (available online).

91 lite

BYTES Some vignettes and trends depicting the lighter side of our Telecom, Media and Entertainment industry

Mobile n What is more important, a wallet or a mobile? A Unisys study reveals that a lost wallet takes 26 hours to be reported, whereas a missing mobile phone is reported in just 68 minutes. Source: Output Links, The stars align for QR code, February 2010

n “4.2 billion out of 6 billion people in the world own toothbrushes and over 4.5 billion people own mobile phones,” was the most buzzed statement at the annual Mobile Marketing Association Forum, 2010 Asia Pacific conference. Source: Business Insider, Tips to take your business mobile, October 2010

n Children in the UK are more likely to own a mobile phone than a book. A latest study by the National Literacy Trust surveyed more than 17,000 school children aged 7 to 16. It found that 86% of pupils had their own mobile phone, compared with 73% who had their own books. Source: Literacy Trust UK, More British children own a mobile phone than a book – is this an issue for the Government?, June 2010

n Men are more active in mobile internet usage and their love for sports is evident here as well. Nearly 2 million Orange customers use social networking on their handsets, with men viewing on average 33% more pages than women. Sport is the main driver for mobile TV viewing and is more popular with men accounting for 50% of mobile TV content consumed by Orange customers. Source: Orange, Digital Media Index, April 2010

n The first commercial mobile phone in the world was a Motorola DynaTAC 8000X launched in 1983. It was more than a foot long, weighed almost 2 pounds, could store 30 numbers and sold for $3995. Source: Company website Internet n Why is Facebook blue? According to The New Yorker magazine, Mark Zuckerberg is red-green colorblind, which means the color he can see best is blue. That also happens to be the color that dominates the Facebook website and mobile app. “Blue is the richest color for me,” he told the magazine. Source: The Week, The New Yorker’s Mark Zuckerberg profile: 7 key revelations, September 2010

n Has Facebook affected your love life? As per a research study published in the magazine seventeen, 79% of people click “friend” within a week of meeting a new person. After adding a new friend 60% of people follow their crush’s profile once a day while, 40% check in on their would-be soulmate several times a day. Another study (SF Gate, 2010), revealed 48% of social media users check Facebook/Twitter after they go to bed and 7% indicated they’d even check during an ‘intimate moment’. Source: CNN, Boy meets girl: How Facebook functions in modern romance, November 2010

n You can now decide what is available on the internet about you and what digital traces you want to leave back. DeleteMe is a service starting at $10 that manages your internet history and deletes your past digital traces. It can delete your past accounts, search results, and other things you don’t want to be available online. Source: Company website

n Teenagers in Taiwan spend much more time accessing websites than dealing with their family members, according to findings of a survey conducted by the Taipei Women’s Rescue Foundation (TWRF) Source: China Post, Local teens spend more time online than with family, June 2010

n Is internet killing the TV? You need to think twice. Nearly 60% of people in the US were watching TV and surfing the Internet on their computers simultaneously, while the average monthly time spent doing both the activities was 3 hours and 41 minutes. Source: Nielsen, What Consumers Watch: Nielsen’s Q1 2010 Three Screen Report, June 2010

92 Insights is published by Capgemini’s Telecom, Media & Entertainment (TME) consulting practice. We are the leading global management consulting group dedicated to helping CEOs and senior executives in the converging communications industries address their most critical strategic and operational challenges.

For further information visit: www.capgemini.com/tme

Editorial Team: Jerome Buvat • Bobby Ngai Design: Stéphane Tchirieff

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93 Successful IT transformation “ entails fundamental organizational changes —John Wittekamp, Chief Information” Officer, KPN