Sustaining Agility Social Networking Application Stores Spectrum Valuation Spectrum Valuation Jan Wäreby, Ericsson Jan Wäreby, First Person Interview: Next Generation Customer Services Capgemini’s telecom, media & entertainment journal volume 8: summer.10

Capgemini’s telecom, media & entertainment journal volume 8: summer.10

CONTENTS

first person 4 An Interview with Jan Wäreby, Senior Vice President and Head of Business Unit Multimedia, Ericsson industry insights 10 Social Networking for Telcos 18 Mobile Application Stores: Assessing Opportunities for Telecom Operators 28 Web 3.0: Expected Evolution of the World Wide Web 36 Spectrum Valuation: A Holistic Approach 44 The Onset of Connected Devices: Opportunities and Challenges management insights 52 TechnoVision™ 2012 in the TME Industry 58 Next Generation Customer Service Strategies: Harnessing the Power of the Internet and Web 2.0 for Delivering Customer Care 66 Sustaining Agility and Growth: Why it is Important for Companies to Periodically Implement Significant Organizational Changes lite bytes 72 Mobile and Internet Vignettes and Trends

1 2 editorial

Welcome to the latest edition of our Insights journal.

As the TME industry emerges out of a tumultuous period, players across the value chain are faced with a number of challenges in returning back to growth. The shifting consumer preferences, ever increasing demand for ubiquitous connectivity, and evolving business models are offering a number of new growth avenues. Indeed, we see that various players are already pursuing a number of these opportunities pointing towards an early revival of the TME industry.

For our First Person interview, we had a chance to speak with Mr. Jan Wäreby, Senior Vice President and Head of Business Unit Multimedia at Ericsson. Mr. Wäreby is a seasoned marketer and has held various senior positions within Ericsson’s sales organization including head of the company’s mobile phone business. We discussed with him various growth opportunities for the TME industry and how it is expected to evolve over the next few years.

In our Industry Insights section we first examine the implications of the growing popularity of social networking sites on telcos, and the potential strategies for operators to best address this opportunity. We then assess the attractiveness of launching a mobile applications store for telecom players, in which we discuss the key benefits for operators to get into this space and also how they can compete effectively against device and operator system vendor stores. The third article talks about evolution of the Web, the onset of Web 3.0 and how it is expected to impact the digital content value chain. In the following article we evaluate the various methodologies for spectrum valuation and suggest a five step approach to arrive at an accurate value of the spectrum. We wrap up this section discussing the key opportunities and challenges presented by the connected devices market for mobile operators and the different business models that players can adopt to tap into this market.

In the next section, Management Insights, we discuss some of the broader technological and organizational issues that TME players need to consider while formulating their future strategies. In the first article we present Capgemini’s proprietary TechnoVision™ framework for TME players aimed at helping organizations to align their businesses with key technology trends. In the next article we discuss the importance of next generation customer services and the growing role of social media in providing superior and cost-effective customer care services. We conclude with an article on sustaining agility and growth by London Business School Professor Freek Vermeulen, in which we highlight the risks for TME companies that resist structural changes for too long and the need to periodically implement organizational changes.

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

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

3 industry INSIGHTS

Social Networking for Telcos 10

Mobile Application Stores: Assessing Opportunities for Telecom Operators 18

Web 3.0: Expected Evolution of the World Wide Web 28

Spectrum Valuation: A Holistic Approach 36

The Onset of Connected Devices: Opportunities and Challenges 44

9 Social Networking for Telcos: Assessing the Telco Opportunity in Social Networking by Jerome Buvat, Subrahmanyam KVJ, and Priyank Nandan

Abstract: In recent years there has been a sharp rise in consumer interest and time spent on social networks, driven by increasing consumer desire for multi-way communication and collaboration. Several telcos have ventured into social networking, however, their activity so far has been largely limited to partnerships with established online players in order to offer customized mobile versions. Operator challenges around venturing into social networking include competition from established social networks and coping with volatile consumer behavior. On the other hand, benefits such as new revenue streams, increased data traffic, and low capital investments make a foray into social networking a worthwhile proposition. Our analysis indicates that online social networking is not attractive, given the large network-agnostic subscriber base and global reach of market leaders. The real opportunity for telcos is presented by the nascent mobile social networking space where operators can leverage their existing strengths such as address book information, location capabilities, and brand recall. We recommend that telcos do not delay their entry into mobile social networking and quickly launch aggregation services. This should be followed by incrementally adding capabilities such as enhanced address book applications, geo-location based services, and a gradual shift towards pervasive social applications. Telcos should decide on the ideal combination of revenue models—such as local advertising, micropayments, advertisements, and subscription—based on the type of social network they decide to launch.

Figure 1: Evolution of Social Network Service Offerings

Social Networking Overview 1995-2002 2003-04 2004-05 2005-06 2007-08 2009 Social networking is one of the most Bulletin Boards Have largely rapidly evolving services on the Web. Basic one-to-many remained the text communication same Online bulletin boards of the mid forums 1990s have given way to interactive Profile & Content- platform agnostic social services (see based Social Networks Many-to-many Figure 1). Over the last five years, communication platforms social networking has witnessed several innovations with most Microblogging-based Social Networks services regularly updating their core Communication through status updates offerings through new features and

Mobile Social Mobile Only functionality. Networks Social Networks Social networking on the mobile platform Social networking is emerging as an important cross-platform service Pervasive Social Networks across the PC, mobile, and TV. As a Across platforms such as TV and gaming result of increasing consumer desire consoles to access their social networks on

Source: Capgemini TME Strategy Lab analysis; Tech Radar, So where’s China in the world of social networking Sites – the go, their usage on the mobile Facebook, MySpace, January 2008. Note: Mobile social network has been considered when a network has launched a dedicated mobile application; Comsenz is an enabler of bulletin board (BB) services in China, where there are over three platform has gone up significantly billion registered BB users

10 (see Figure 2). Many social networks Figure 2: Increased Usage of Social Networking on the Mobile Platform have also started offering their services on other emerging platforms. Mobile Internet Audience Growth, % of Market, UK Monthly Page Views (in Mn), Desktop and Mobile, For instance, while Facebook offers May 08-09 Mixi Japan, Q1 07-Q3 09 integration with Microsoft’s gaming 27% console Xbox LIVE, a Twitter widget 14% 11,400 11,600 is available to subscribers on Verizon’s 9,500 11% 7,800 FiOS TV. 10% 6,200 3,400 150% Impact of Social Networking on the 6,800 4% 6,000 Web 5,200 4,900 4,200 4,400 Social networks are gradually transforming the Web landscape with Apps & Browsing Social Networking Q1 07 Q3 07 Q1 08 Q3 08 Q1 09 Q3 09 more and more websites integrating (No Social Networking) social functionalities. The decline in May 2008 May 2009 Desktop Mobile time spent by users on other Internet Source: Company websites; Comscore, Social Networks on the Move, September 2009; Morgan Stanley, The Mobile activities can potentially be attributed Internet Report, December 2009 Note: 1) Percentage of total market refers to the number of mobile users using mobile Internet services during the three to the sharp rise in user engagement month periods ending May 2008 and May 2009. 2) Mixi is one of the most popular social networks in Japan, available on on social networks (see Figure 3). both the fixed and mobile platform

This increasing time spent on social networks is resulting in these portals current communication and content emerging as gateways to other content providers. Telcos should thus firm on the Web. In December 2009, 15% up strategies on how to mitigate any of traffic to major Web portals like likelihood of disruption to their core Yahoo, MSN and AOL came from services. In this paper, we qualify Facebook and MySpace1. the social networking opportunity for telcos and propose some As social networks move towards recommendations around how telcos The becoming the most popular can tap this market. communication and content platforms mobile social on the web, both fixed and mobile, “ they hold the potential of disrupting

Figure 3: Share of Time Spent on Internet Activities, %, July 2008 - July 2009, US networking

-9% 129% space offers -13.5% telcos an -22.7% 43.4% 39.6% attractive -15%

28.2% opportunity 24.4% 20.6%

14.1% 10.9% 9.0% 5.3% 4.5% ”

Content Communication Commerce Search Social Networking

July 2008 July 2009

Source: Capgemini TME Strategy Lab analysis; OPA Internet Activity Index

1 San Francisco Chronicle, Facebook directs more online users than Google, February 15, 2010.

11 Current Telco Initiatives in Social aimed at differentiating the operator’s Networking offering and driving uptake of social The popularity of social networking networking on the mobile platform. has prompted telcos to foray into this space (see Figure 4). Telecom players Aggregation have mainly entered this space Many telcos have also launched through partnerships, although some aggregation services such as Orange have chosen to acquire or build their Social Life, Virgin Mobile Connect, own social networks. This section and Vodafone 360 that pull content presents an overview of key telco from multiple social networks into social networking initiatives. one application. These services typically integrate address book, Partnerships social networking, email, and instant Most telco activity has been limited messaging (IM) contacts of users to partnerships with established into a single contact list and allow social networks to offer customized subscribers to manage multiple mobile versions of their services on social profiles from one location. the operator’s network. Such a model Such applications provide telcos with provides operators an easy entry route an easy opportunity to leverage the and the potential to benefit from the popularity of existing social networks popularity and user-base of existing by offering their subscribers an networks through increased mobile aggregated user experience. Internet, SMS, and MMS usage. For instance, more than 200 operators In fact, after partnerships with in 60 countries have partnered existing social networks, the launch with Facebook to promote mobile of aggregation services has been the products2. next step adopted by most telcos in their foray into social networking. Some operators have also partnered with device manufacturers to offer Acquisitions social networking focused handsets. Some telcos have acquired social For example, 3 has partnered with networking companies, either to handset vendor INQ on a range of leverage technology capabilities or social phones available exclusively to to gain user-base. In 2007, South its subscribers. Such partnerships are Korean operator SK Telecom acquired a leading regional social network, Figure 4: Summary of Telco Initiatives in Social Networking Cyworld, which had around three million subscribers at the time of In-House Partnership Acquisition Development acquisition, as part of its strategy to bolster its online portal Nate. Driven by the popularity of Cyworld, Nate overtook market leader Daum 2006-2007 Acquisition of popular Content-based social as South Korea’s most visited existing social network network for sharing pictures Internet portal within a year of the acquisition3. Another example is Vodafone, which acquired Zyb in

General fixed + 2008 in order to gain the technical mobile social network Acquisition for 2008-2009 competency required to launch an technology enhanced address book service. Vodafone has since used Zyb’s Partnerships to drive Virgin Mobile Connect data traffic technology and redeployed it in the form of its mobile social networking Source: Company websites and press releases offering, Vodafone 3604.

2 Facebook Press Room Statistics. 3 Asia Pulse, K COMM Overtakes Daum as Korea’s Most-visited Internet Portal, June 2004. 4 TechCrunch, Danish Mobile Social Network ZYB Acquired by Vodafone for €315-million, May 2008.

12 However, acquisitions have not been Figure 5: Social Networking Platforms Differentiated by their Opportunity for a very popular entry strategy for Telcos telcos so far mainly because of lack of attractive acquisition targets and Competition: Low fluctuating valuations. For instance, Intensity of Market Maturity: Facebook’s estimated valuations Competition: High Nascent have varied from US$750 million to Market Maturity: User Base of Market Mature Leader: No clear leader; Foursquare has US$15 billion. Furthermore, most User Base of Market Online Social Networking Mobile-Only Social around 300,000 users major social networks have not Leader: 400Mn Networking Estimated Revenues Estimated Revenues (US), 2009: $250Mn positioned themselves for sale and (US), 2009: $1,927Mn are either planning an Initial Public Estimated Revenue Estimated Revenue Growth Rate (US), Growth Rate (US), 2008-2013 CAGR: Offering (IPO) or are owned by large 2008-2013 CAGR: 39% conglomerates which are reluctant to 12% exit. Social networks that see significant traffic on both the fixed and mobile platforms In-House Development As exceptional cases, operators Source: Company websites and press releases; Informa, Mobile Social Networking Forecasts, 2009; Piper Jaffray, such as Orange and Telefónica have Pay to Play: Paid Internet Services, July 2009 experimented with launching their own social networks, however, these initiatives continue to be in considering online players’ large book services. Location information early stages of uptake. Orange Labs’ network-agnostic subscriber base and of users can be used to develop geo- initiative, Pikeo, a photo sharing wide reach on the fixed platform. location services. service, which was launched in 2006, continues to be in public beta phase The mobile platform, however, offers Telcos should thus launch mobile and has not been commercially telcos an attractive opportunity to social networks and benefit from launched in France Telecom’s home enter the social networking space incremental revenue streams, market. Similarly, Telefónica’s social considering the nascent state of increased data traffic, multiple networking offering, Keteke, which mobile-only social networks, their monetization schemes, and low was launched both for PC and mobile rising attractiveness, and certain key investment risks which make this platforms, is still in public beta since telco assets which can be leveraged proposition all the more attractive. 2008. to make the foray successful (see We detail these benefits in the Figure 5). subsequent sub-sections. The long gestation periods for operator-developed online social Most successful mobile-only social Incremental Revenues Through networks indicate that these networks have been launched as Multiple Monetization Models initiatives have not taken off recently as 2009 and this space is The rapidly evolving social as expected in the face of high witnessing a lot of innovation and networking space presents telcos with competition from established players. user traction. Foursquare, a mobile a real opportunity to boost revenues geo-location based social network, from non-core services. The success Opportunity for Telcos in Social which was launched in March 2009, of advertising, which is the mainstay Networking is currently seeing a check-in every of revenues on most social networks, 5 Telcos need to carefully evaluate second. We believe telcos should tap coupled with the emergence and the most attractive opportunities in this opportunity by leveraging their early successes of new monetization social networking before making assets such as billing systems, address models such as micropayments a leap. The PC-based online social book information, and location and subscriptions makes social networking space is dominated both information. For instance, telcos can networking all the more attractive for by large global players—such as customize existing billing solutions telcos (see Figure 6). Facebook and MySpace—and regional to enable transactions on mobile giants like China’s Qzone and South social networking services. Similarly, Korea’s Cyworld. Telcos are likely address book information could be to find it difficult to compete with integrated with IM, email, and social these established social networks, profiles to offer enhanced address

5 Tech Crunch, Foursquare Who? Gowalla What? MyTown Has 500,000 Users And 31 Million Check-Ins, January 2010.

13 Figure 6: Growth Indicators of Different Monetization Models in the Social Networking Space that Telcos Can Potentially Deploy

Facebook Revenue Estimates Revenues by Segment, Euro (Mn), Zynga Revenue Estimates (US $Mn), (US $Mn), 2007-2010E, Global Xing, Q2 08 – Q2 09, Germany 2008-2010E, Global (Predominantly Advertising) (Predominantly Micropayments) 0.4 0.13 0.36 0.21 0.37 355 0.06 0.7 1.12 1.31 0.05 0.6 710 1.23 0.61 1.1 167% 68% 1.02 550 CAGR CAGR 200 9.18 8.68 8.05 7.42 6.73 265

150 50

2007 2008 2009 2010 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 2008 2009 2010

Subscriptions eCommerce (Jobs & Best Offers) Advertising Other

Source: Capgemini TME Strategy Lab analysis; company websites and annual reports; Piper Jaffray, Pay to Play: Paid Internet Services, July 2009; Inside Social Games, The Latest Stats on Zynga: New Traffic, Revenue and a $1 Billion Valuation?, November 2009; Virtual Goods News, $50 Mil Revenue from Virtual Goods Sales for Zynga in 2008, January 2009. Note: 1) Zynga is one of the leading social gaming companies, operating popular games including Farmville, Mafia Wars, on Facebook. 2) Xing is one of the popular business-user oriented social networks operating primarily in Germany

The willingness of users to spend traffic make the proposition extremely money on social networks is another attractive. In December 2009, a healthy sign which presents potential leading social network, Friendster, Users on incremental revenue streams for which had nearly 50 million users telcos. In 2009, it was expected that was sold for an estimated €29 33% of the total social networking million8. Launching mobile social “the mobile revenue in the US came from paid networks typically costs even less. services such as membership fees, For instance, Gowalla, a leading platform are premium features, and virtual goods6. mobile geo-location based social Most interestingly, research indicates network, which had close to 100,000 that users on the mobile platform users within three months of launch, 2.5 times more are 2.5 times more likely to pay for required just US$2 million for initial web-based services than those on the funding9. Such moderate levels of likely to pay fixed platform7. Therefore, even from investments compared to capital- a monetization standpoint, venturing intensive telecom initiatives make into the mobile social networking social networking a low capital risk for services space is much more lucrative for proposition for telcos. telcos. than those Telcos’ entry into social networking, Low Investment Risks though, will be accompanied with a The low level of investment required set of challenges such as the dynamic on the fixed to launch a social network that can nature of the space and volatile potentially yield telcos high benefits consumer behavior. Maintaining platform in terms of incremental revenues, sustained market leadership will thus increased stickiness, and high data be difficult in the face of changing

6 eMarketer, Worldwide Social Network Ad Spending, March 2009; Piper Jaffray, Pay to Play: Paid Internet Services, July 2009. ” 7 Morgan Stanley, Mobile Internet Report, December 2009. 8 TechCrunch, Friendster Valued At Just $26.4 million In Sale, December 2009. 9 Venture Beat, How Gowalla landed $8.4 million for location-based game, December 2009.

14 consumer preferences. Moreover, behavior and monetization models demographic variations and regional and not be burdened by the history peculiarities will make target of the desktop Web. Considering Maintaining audience identification a significant these factors, a foray in mobile social challenge. For instance, there was a networking seems an attractive sustained“ market 1% fall between December 2007 and opportunity for telcos. December 200810 in unique audience composition of member community11 Recommendations leadership sites amongst the 18-34 year olds. In this section, we propose some In contrast, UK social networking recommendations around how telcos in social subscribers in the 15-24 year age can successfully launch, operate, segment grew at 14% between June and monetize their mobile social 12 2008 and June 2009 . networking proposition. networking

However, despite these challenges, How to Enter will be difficult social networks remain attractive A one-size-fits-all strategy will not and have garnered a substantial user- work for a telco entry into social base with steady revenue growth. networking. Instead, an operator’s in the face As the Web becomes more social, entry into mobile social networks telcos are well positioned to lead needs to be closely tied to their of changing this transition by virtue of their hold scale of operations and strength of on client address books, a user’s existing content offerings. Scale of closest set of contacts. Most of all, operations for an operator includes consumer the nascent state of mobile Web parameters such as subscriber base, provides an opportunity for telcos to geographic reach, brand strength, preferences define new paradigms in consumer and financial resources, all of which

Figure 7: Scale and Capabilities in Mobile Content Play a Significant Role in Determining Success of Operator Initiatives in Social Networking ” Positioning Grid for Telcos, 2009 Recommended Entry Options for Different Categories of Telecom Operators Category of Player

High Global Global Regional Regional 1 2 Challengers Frontrunners Leaders Aspirants

Global Challengers Global Frontrunners Leverage financial Build innovative Investment in a Building a new muscle to build mobile-only social new service is social network, Description : Global scale with Description : Global scale Build limited strength in content with significant capabilities in innovative networks, unlikely to justify with minimal networks on top of integrating current the costs involved, content strengths, offering content targeted content capabilities given the regional is not acquisitions nature recommended

Targeted Also look at Aggressively Acquisitions are acquisitions to targeted acquire regional not likely to Acquire 4 3 gain technical acquisitions to social networks generate skills required for complement that can be significant Rol a content foray existing strengths integrated into given minimal current services complementary Geographic Presence Regional Aspirants Regional Leaders assets Description : Regional scale Description : Regional scale with limited strength in content with significant capabilities in offering content Partnerships are not likely to deliver significant value Partnerships are Partner and are recommended only as a complementary activity the recommended to launching own social network option, with a focus on driving mobile data uptake

Low Strength of current content offerings High

Source: Capgemini TME Strategy Lab analysis

10 Nielsen, Global Faces and Networked Places, March 2009. 11 Note: Member Community implies Social Networking and Blogging websites. 12 Comscore, 15-24 Year Olds in the UK Encroach on their Elder’s Social Networking Space, August 2009.

15 will be critical in determining its for technology, global frontrunners social networking entry route. should build on their strong content Similarly, an operator’s existing capabilities to develop offerings content capabilities which include in-house. Alternatively, regional mobile content experience, existing leaders and aspirants should mainly Operator content partnerships, and application consider partnerships and selective development skills, will help create acquisitions to step in. Regional “entry into a platform for successful offerings. leaders should focus on acquiring For instance, micropayment-based regional networks, with considerable transactions on social networks are traction in local markets, and enhance mobile social inherently similar to content sales on them further by leveraging their operator mobile portals in terms of content strength. Regional aspirants networks needs immediacy of transaction and small on the other hand should partner amounts involved. Similarly, existing with existing social networks or partnerships with content companies application developers to create value- to be closely tied will play a key role in building a added offerings because they have mobile social network. minimal content strengths and scale to their scale to either build or acquire. From a social network entry perspective, telcos can be positioned How to Launch and Drive Uptake of operations in four categories based on their Telcos should adopt a chronological scale and capabilities in mobile launch strategy to quickly make an and strength of content: Global Challengers, Global entry into mobile social networking Frontrunners, Regional Leaders, and (see Figure 8). Operators should Regional Aspirants (see Figure 7). initially offer simple applications and existing content Telcos should formulate their incrementally add enhanced features. entry strategy in the mobile social Since the space is nascent and telcos offerings networking space based on their grid have limited prior experience, it position. is imperative that their first step is successful and helps generate Global challengers and frontrunners brand awareness. Telcos should should primarily enter through their thus step in quickly by offering a ” own social networks. That said, simple and addictive mobile social while global challengers should networking experience to garner a leverage their financial strength to large subscriber base and learn in the acquire social networking players process. This should be followed by integrating additional functionalities Figure 8: Chronological Launch Approach for Telcos in the Mobile Social such as enhanced address books, Networking Space location-based social features, and 1 2 3 4 cross-platform access. This approach Social Network Enhanced Address Geo-location Based Pervasive Social Aggregation Services Book Applications Services Applications will help telcos best leverage their strengths and establish a measured • Services which • Applications that • Services which • Applications which enable users to integrated social leverage a user's extend the reach of and steady footing in this space. physical location to Description access multiple networking contacts, social networks social networks on IM buddy lists and provide enhanced across platforms mobile phones email addresses with context aware such as TV, gaming through single a user's contact list services and consoles, etc. It is also important for telcos to adopt sign-on experiences • Easy to develop, • Integration of social • Once capabilities are • Future of mobile multiple promotion strategies such hence the quickest information with the developed, the next social networking lies entry route address book is the step involves adding in cross platform as partnerships, push marketing, and Rationale of • Strong acceptance in next logical location and context ubiquitous access of an open approach in order to drive Positioning market as they offer enhancement to applications social information users ubiquitous • Offers significant • Telcos are best • Telcos will need to uptake of their social networking access to their online value-add to equipped to offer extend their social social profiles on the subscribers by such services as offerings across proposition. Operators can partner go making contacts as they can bypass devices the center of GPS with device vendors to offer pre- communication bundled applications thereby creating • Social Life (Orange) • Vodafone 360 • Foursquare • Faceboon on Xbox Indicative • Connect (Virgin • MyCommunity • Gowalla LIVE a wider ecosystem for their social Examples Mobile) (T-Mobile) • Loopt • Twitter widgets on • SocialNet Verizon FiOS network. Furthermore, partnerships with innovative developers such as Source: Capgemini TME Strategy Lab analysis gaming companies will encourage

16 users to sign up through viral Figure 9: Different Monetization Models which Telcos can Adopt for their Mobile applications built on top of the Social Networks operator’s social network. Pushing Monetization Models their service to subscribers by Local Advertising Micropayments Display and Search Subscription integrating it into various traditional Advertising telco mediums such as MMS, SMS, • Telcos launching • Telcos launching • Telcos launching • Telcos launching and mobile portals, is another Works Best location-based social social gaming general purpose niche social networks For? networks applications social networks targeted at specific marketing strategy which can yield users operators rich dividends. This • Most features • Compelling social • Telcos have large • Users with specific revolve around a games stimulate existing subscriber interests are more approach will help transfer the user's location and users to spend on base, which if willing to pay Why? context virtual goods translated into users • In the online world operators’ existing subscriber base • Collaboration with • Asian geographies of their social too, most niche local vendors for stand testimony to networking networks have onto their social network. Most promotions offers the success of proposition hold successfully adopted signficant revenue micropayment model potential for the subscription importantly, in order to attract users upside generating revenues model from display and from competing networks and to search adverts foster community effects, telcos Source: Capgemini TME Strategy Lab analysis should not limit their service to users of their own network.

How to Monetize pricing can be a key differentiator for Jerome Buvat is the Global Head of the A successful monetization strategy operators. TME Strategy Lab. He has more than 13 for their mobile social networking years’ experience in strategy consulting offering will be of foremost concern In conclusion, mobile social in the telecom and media sectors. He is to telcos delving into this space. networking presents telcos with a real based in London. Operators will need to select the right opportunity to tap into their latent monetization scheme based on the assets and establish a firm footing Subrahmanyam KVJ is a senior kind of social network they decide in this nascent yet highly attractive consultant in the TME Strategy Lab. His to launch (see Figure 9). So while space. It is imperative for telcos to recent work focused on the convergence local advertising will work best for leverage the early mover advantage of the telecom and media markets, and telcos launching geo-location based and quickly enter mobile social the mobile industry. Prior to joining the mobile social networks, subscriptions networking by offering simple yet Lab, he worked with a leading electronics will be the way to go for niche compelling applications. Operators manufacturing services firm in a project networks targeted at specific user can then incrementally enhance their management role. He is based in groups. Though the primary business applications to offer greater value Mumbai. model of a telco should depend on add to their subscribers. In order to the type of social network, ideally, drive growth and generate significant Priyank Nandan is a consultant in a combination of multiple business user traction, telcos would need to the TME Strategy Lab. His recent models will engender greater gains. adopt an open approach and not tie work includes market assessment for in subscribers to their own networks. new service launch for a global media Pricing is another area where telcos Finally, to gain maximum revenue, conglomerate and identification of can bring in innovation. Data operators would need to adopt a acquisition targets within the digital plans from most operators are still combination of monetization schemes content space. Prior to joining the expensive and not very attractive based on the type of mobile social Lab, Priyank has worked for a major for accessing social networks on the network they decide to launch. IT product company. He is based in mobile platform. Introduction of Mumbai. n attractive flat-rate plans and targeted

17 Mobile Application Stores: Assessing Opportunities for Telecom Operators By Jerome Buvat, Sayak Basu, and Prenul Sogani

Abstract: Mobile application stores have generated considerable interest and discussion in the recent past. Particularly, the success of Apple’s application store for the iPhone has established online storefronts as an important distribution channel for mobile content and applications. This has led device players, Operating System (OS) vendors, and many mobile operators to launch their own application stores. We expect the mobile application market to be worth almost US$ 9 billion globally by 20131. For operators, application stores can be an important lever to grow data revenues—our estimates indicate that operators can improve their non-SMS data revenues by 10 to 11% over a five year period by leveraging direct revenue streams through application downloads, mobile traffic as well as indirect revenues such as advertising, and provision of billing services. However, telcos will need to compete with device and OS vendor stores to attract consumers and developers to their storefronts, which could prove to be a daunting task. Operators will also need to develop sustainable revenue streams from application stores, in light of falling ASPs2 and proliferation of free applications. We recommend global players with a large captive customer base to build end-to-end capabilities, while smaller regional telcos should undertake only select activities in-house, relying extensively on third-parties for the technology platform. Operators should launch platform-agnostic application stores, support non-device specific platforms in order to target a wider subscriber base, and expand the market for mobile applications. In order to maximize revenue potential from storefronts, operators should also experiment with innovative pricing models that are linked to the usage, popularity, and stickiness of the application. Moreover, operators can grow new revenue streams through the provision of white-label services such as billing support, customer management, and payments to other storefronts.

Application stores have gained consumers, storefronts provide a considerable attention in the single destination for accessing recent past and are emerging as reliable mobile applications across a an important channel for the variety of genres, with trusted and distribution of mobile content. secure mechanisms for managing the An application store is an online interactions. aggregation and distribution platform for downloadable applications for In this paper, Capgemini’s TME smartphones and high-end feature Strategy Lab qualifies the application phones. For developers, these stores store opportunity for mobile act as a channel to reach out to a operators and proposes some key large number of consumers, while recommendations on how telcos providing necessary functionalities can successfully launch and operate such as billing, payment gateway, mobile application stores. and customer management. For

1 Capgemini TME Strategy Lab analysis. 2 Average Selling Price.

18 Key Developments in the Mobile Figure 1: Major Changes Introduced by Apple App Store™ Application Store Market Application stores have been in existence for almost a decade. For Pre App Store Launch Post App Store instance, Handmark and Getjar, Application Creation Professional Companies/Self Professional Companies/Self + Retail both independent stores, have been Application Ownership Primarily Carrier Developers operational since 2000 and 2004 Application Development On deck – One among many Application Accessibility On deck – Dedicated store for apps respectively. However, the multiplicity services and proprietary nature of device Time to Market 2-3 months ~2 weeks platforms and consequent high entry Platform Openness Closed, permission-based Open subject to sign up barriers for independent developers Degree of Spectrum of devices – low-and-high- Supporting Devices Some high end devices have restricted these stores from Openness end garnering a wide developer and end- Content Restrictions Many non-competition restrictions Fewer restrictions High porting costs to support wide Porting Cost Limited device support user community. By 2008, around range of devices eight years since its inception, Getjar Costs for Entry Route & Complicated, differing pricing Streamlined processes, fees in-line Membership Fees amongst operators, aggregators had around 50,000 applications Developers with market Revenue Split 20/80 or 30/70 70/30 or 80/20 available on its store3. This number was surpassed by Apple’s App Store Source: Capgemini TME Strategy Lab analysis; Mobile app store overview, Distimo, November 2009; Mobile app store in less than a year of launch4. overview, 2005 Mobile Games White Paper, IGDA

The success of Apple’s App Store™ has resulted in a paradigm shift in Figure 2: Application Store Launches by Various Types of Players how mobile applications are created and distributed (see Figure 1). Apple OS Vendors Handset Vendors Telcos managed to build a strong developer Open, non-restrictive support for Hardware targeted stores Customer oriented stores community by allowing developers to app development launched for higher device uptake launched for better customer experience retain 70% of the revenues generated Oct ’08 Jul ’08 Dec ’09 from an application. Moreover, Apple Oct ’09 Q4 ’09 provided a captive customer base of Announced Apr ’09 over 36 million5 iPhone users who Nov ’08 Independent App Stores May ’09 have cumulatively downloaded more Aug ’09 Support for applications spanning Oct ’09 than three billion applications by the different platforms and devices Sep ’02 6 Sep ’09 end of December 2009 . Dec ’00 Q1 ’10 Jul ’09 Dec ’04 Q4 ’08 Aug ’08 The success of Apple’s App Store Nov ’08 Dec ’04 was followed by a number of Announced Q3 ’08 announcements from various players May ’06 around their decisions of entering the space. Device vendors such as Nokia Source: Company Websites and News Releases and Research in Motion (RIM, maker of the Blackberry smartphones); OS vendors Microsoft and Google; and telecom operators have all entered the applications store market (see Figure 2).

3 JetViewVietnam.com, GetJar exceeds half a billion application downloads, December 2008. 4 TechCrunch, State of The iPhone Ecosystem: 40 Million Devices and 50,000 Apps, January 2009. 5 Apple Insider, Apple’s iPhone was No. 3 worldwide smartphone in 2009, February 2010. 6 Apple Insider, Apple announces App Store downloads top 3 billion, January 2010.

19 Figure 3: Application Store Launches by Telecom Operators

Proprietary Stores White-label Stores Aggregate Third-party Stores

Existing Mobile Off-the-Shelf App Application Store Open Source Based Greenfield Stores Hosted App Store Portal Upgrades Store Solutions Aggregator App Stores

Operators with large Some operator Some operators buy These are similar to These stores have App stores have Typical telco customer base have portals already have platforms directly off-the-shelf stores multiple third party also been created developed own necessary elements from companies such but managed by stores accessible around open source application stores in place for a as Amdocs third parties such as through a single platforms such as successful store Ericsson platform Android or LiMo It involves Operators can provisioning of an acquire companies entry strategies These include Independent app Smaller operators This allows sharing “ extensive providing stores such as with a restricted the entire revenue third-party application store application store management, GetJar and customer base can with the developers, solution platform solutions revenue assurance, Handmark provide act as aggregators rather than mobile customer profile white-label stores OS vendors that are then into application management and service catalogs managed by them stores include Examples creating proprietary Source: Capgemini TME Strategy Lab Analysis. Company websites and news releases solutions, Telco Activity in the Application in India has engaged IT solutions Stores Space provider Infosys to implement an deploying white- Most leading mobile operators have application store, based on Infosys’ either launched their application application store platform called label stores and stores or have announced their intent “FLIP”. Similarly, operators are also to launch one in the near future. The tying up extensively with credit launch strategies range from creating card companies and online payment aggregating proprietary solutions to embracing merchants for a more convenient third-party hosted application stores application store experience for their third-party (see Figure 3). customers. The trend of launching these stores Telecom players are also collaborating stores is not limited to developed markets, to develop standards. The most with multiple players from the significant announcement has come emerging economies including Bharti from a consortium of 24 operators Airtel (India), China Mobile, and TIM who have come together to form the ” Brazil also announcing their entry Wholesale Applications Community into this space. (WAC)7, which aims to create an open platform for developers to reach the Operators have forged strong customers of its member networks. alliances as a part of their strategy Other initiatives include BONDI8 for competing in this space. These which is attempting to build a new alliances tend to be for accessing platform for secure mobile application technology, content, or other ancillary development and Joint Innovations services necessary to provide Lab (JIL)9, that is creating a widget application store offerings. Sprint ecosystem that provides developers partnered with Getjar to make almost with access to various operator assets. 60,000 applications available to its customers through a link on its While application stores are an portal, in an effort to increase the important growth area within the variety of content available. Aircel mobile data market, telcos are faced

7 The Wholesale Applications Community is a global alliance of leading telecommunications operators and device manufacturers that establishes routes to market for developers. 8 The BONDI initiative is backed by operators including 3 Group, AT&T, T-Mobile, Telenor, Telefónica, Telecom Italia and Vodafone. 9 Joint Innovations Lab (JIL) is a joint venture between Vodafone, Verizon Wireless, China Mobile and Softbank Mobile.

20 with the question of whether they Figure 4: CAGR, Revenue and Consumer Penetration of Various Mobile Data should launch application stores at all, Services, Worldwide, 2009-2013 and if yes, how should they position themselves in a space dominated by Bubble size correlates to forecasted 2013 data device players. In the subsequent 120% revenues sections, we assess the need for Traditional Services IM operators to launch application stores 100% in more detail. Images SMS 80% Email Emerging Services Rationale for Telcos to Launch 60% Music Streaming Application Stores Games 40% Ringtone We believe operators should launch MMS Location based 020% Applications application stores to retain their m-Commerce

Consumer Penetration Estimates, %, 2013 Music Download prominent position in mobile content Video Mobile TV distribution as well as to benefit from 0% -5% 5% 15% 25% 35% 45% 55% new revenue streams through the sale -20% Compound Annual Growth Rate of Mobile Services, Worldwide, % of applications, provision of access (2009-2013) services, and rendering of additional Source: Capgemini TME Strategy Lab Analysis; Informa, Global Mobile Network Traffic 2007-2012; Informa, Global services such as integrated billing Messaging End User Forecasts, November 2008; Morgan Stanley, Mobile Internet, December 2009; Nielsen, Mobile Media Europe: State of the EU5 Union, March 2009; ComScore, The Next Big Things: Mobile Internet & Applications - and access to network Application Gaining Momentum, 2009 Platform Interfaces (APIs). expected to grow beyond the early Revenues from Application adopters. The trend is expected to be Downloads are Set to Grow further strengthened by increasing Exponentially penetration of smartphones. Adoption Application stores are emerging as a trends of mobile data services indicate key distribution channel for mobile that 73% of smartphone users have content. An increasing number downloaded at least one application12. of users are consuming popular mobile content such as music or Similarly, on the supply side, games through downloadable mobile improved device capabilities such as applications. According to a survey, bigger screens, position sensors, and 70% of mobile users download mobile better user interfaces are expected applications, the highest amongst all to enable a number of innovative mobile content categories10. applications with compelling use cases for consumers. Easier We estimate the total revenue from application discovery and simpler paid mobile application downloads billing will enhance monetization in 2009 at around US$ 3.8 billion11. opportunities for developers, thereby However, indications are that this broadening the developer base and is only a fraction of the total market ultimately improving the adoption of opportunity. Changes taking place services. across the ecosystem are likely to result in both demand side pull as These factors are expected to give a well as supply side push, ultimately strong boost to the adoption of mobile resulting in growth of the segment. application services. We expect the market for mobile applications A major thrust from the demand to reach US$ 8.6 billion by 2013, side will be a result of the extension growing at a CAGR of around of the customer base for the 30% between 2010 and 2013 (see service. With greater awareness Figure 4). about application stores, uptake is

10 Xiam, Mobile content discovery, August 2009. 11 Capgemini TME Strategy Lab analysis. 12 Brookings, What Consumers Want From Mobile Communications in the United States, United Kingdom, Spain, and Japan, September 2009.

21 Figure 5: Revenue Uplift from Operator-Owned Application Stores with over a third of this incremental revenue coming from increased data usage. A key driver for this uplift Operators retain a little more will likely come from consumers 306 776 than 50% of the total revenues after sharing with upgrading their data plans. developers, ad server networks, etc. The revenue upside appears specially attractive since the investments 100 408 required for setting up an application 183 store would not be significant when compared to typical telco initiatives. 188 While the capital costs associated with launching the initiative would be fairly small in the telecom operator context, the main component of Revenues from Advertisement Billing Solution Incremental Total Revenue Revenue Application Sale Revenues Revenue Data Usage Retained by the operating cost would be around Revenue Operator marketing of the storefront.

Source: Capgemini TME Strategy Lab analysis Storefronts Help Attract and Retain High-Value Subscribers In addition to augmenting current The Potential for Uplift in Data data revenues, application storefronts Access Revenues is Attractive can also be instrumental in attracting Launching an application store and retaining subscribers with high- will provide operators with an spend on mobile data services. High- opportunity to augment their existing value customers exhibit a greater Mobile data services revenue. There are tendency to download and use mobile going to be primarily four revenue applications. For example, in the applications“ streams for operators, namely revenue US, while only 11% of subscribers share from sale of applications, with annual income lower than US$ mobile advertising revenue, data 25,000 download mobile applications, have emerged usage revenue, and payment the figure shoots up to 34.3% of gateway revenue. Relying on the the consumers for the category as a high-growth aforementioned revenue streams, we comprising income levels greater believe that a typical operator13 can than US$ 100,000 every year15. To expect a non-SMS data revenue uplift retain these potentially high-value and sustainable of up to 11% by 201314. customers on the network, it would be important for operators to provide avenue of Beyond the revenue potential that a compelling application store accrues from the various streams offering. depicted in Figure 5, operators will revenue also be in a position to drive the Application stores would also be kind of applications that are provided important for operators to build and generation on their stores. By encouraging create a robust content ecosystem. developers to write applications that Operator content strategies have only rely on data in the cloud, operators been moderately successful until can drive adoption of applications now. For example, between 2007 and that require a higher data usage. 2008, the share of mobile web traffic ” for operator portals fell from 57% to Our analysis suggests that such an approach holds the potential to 22%16. To re-establish their position drive up overall revenues from the in the content value chain, operators application store by as much as 17% would need to create a strong ecosystem.

13 We have considered a hypothetical Western European operator with a subscriber base of 50 million and data ARPU of US$12. 14 Capgemini TME Strategy Lab analysis. 15 Brookings Governance Studies, What Consumers Want From Mobile Communications in the United States, United Kingdom, Spain, and Japan, September 2009. 16 Nokia Siemens Networks, Nokia UK Smartphone Study.

22 A successful application store Key Challenges for Telcos offering could help operators take the While application stores present an preliminary steps in this direction. attractive opportunity for telcos, The storefronts allow operators success in this market is likely to to forge relations with content be faced with many challenges, owners and creators, which can be as operators will need to compete A successful leveraged while sourcing content for with well-established device and other initiatives. More importantly, OS vendors for subscribers as well “application store application stores can be a lever to as developers, while focusing on create a user-base comfortable with growing data revenues. This section purchasing and using operator- details some key constraints telcos will be critical provided content and services. A large are likely to face in launching and base of content users will also have a operating an application store. for operators to knock-on effect on content providers, who would be more willing to Device Vendor-owned Application the provide their services through mobile Stores Likely to Dominate maintain operators. The growing opportunity in the applications store space is likely right subscriber “Do-Nothing” is not an Option to result in intense competition Operators are threatened by the among players to try and grab a mix by retaining prospect of being rendered mere dominant position in the market. “bit-carriers” due to the expansion Among the device manufacturers, of online and device players across Apple, with its existing dominant high-value the value chain. The emergence of position in the market and access application stores as primary channels to the early adopters of technology customers for mobile content distribution can with a propensity to spend on mobile further impact operators’ positioning services is likely to continue as the in the value chain. With popular dominant application store. RIM, with services such as web browsing, access to a niche, enterprise audience games, and social networks being is also likely to be a strong contender ” increasingly consumed over the in this segment. Nokia can leverage mobile platform, application store its large base of existing users and its expertise is increasingly becoming strength in the emerging markets. critical in disseminating these services to consumers. Consequently, Among the various platforms, inaction in this space would Android is likely to gain traction in undermine not only the competitive the market driven by its success in positioning of operators vis-à-vis creating a good developer community. other players who actively launch Bolstered by the growing optimism application stores but also the ability around the success of Android-based to drive data consumption amongst devices and relaxed policies around existing consumers. content restriction, the developer community for the Android Store However, a well-planned application has grown rapidly and had made store offering can present an available around 16,000 applications opportunity to operators to retain on the store by early December a share of mobile content revenues, 200917. However, the biggest possible retain control over the end-consumer, game-changer in this space could and be in a position to define the be Microsoft’s launch of Windows overall data consumption experience. Mobile 7 Series, whose launch was followed by rave reviews. Considering

17 Techcrunch, Google: Actually, We Count Only 16,000 Apps in Android Market, December 2009.

23 the fact that Microsoft has extensive Declining Average Selling Price of established developer relationships, a Applications technologically superior offering from Driven by the proliferation of free the organization along with suitable and mass market applications, the encouragement for developers will average selling price of applications Application be able to enhance the possibility of is likely to drop – analyst estimates success of the Windows Marketplace. indicate a value of US$ 1.72 by 2014, stores can be as compared to a value of US$ 3.83 in “ 18 Given the inherent advantages 2009 . The positioning of a storefront enjoyed by the device vendors, it is in the market has a huge bearing on an important likely that they will continue to be the the ASPs, as indicated by differential dominant players in the applications pricing of certain applications on lever for telcos store space in the years to come. various stores. For example, the Device vendors have the advantage popular gaming application Tetris of being able to position their stores is priced at US$ 4.99 on the Apple to prevent on-deck for the large base of users App Store, while it is priced at US$ that they have. Also, in addition to 6.99 on the Windows Marketplace19. disintermediation having strong brands, they will be the Consequently, storefronts will need best positioned to offer applications to closely examine their positioning which make optimum use of device in the market and formulate from the functionalities. While operator strategies accordingly for maintaining stores would be able to leverage profitability of the application store their existing customer experience operations. mobile content management capabilities, they would have to create a strong proposition In summary, application stores can for users as well as developers to be an important lever for telcos to value chain compete in the market. We expect prevent disintermediation from the that independent third-party stores mobile content value chain and will find it difficult to compete in help retain as well as grow data this space, and will need to get into revenues. However, operators will ” extensive partnering agreements to need to compete with device and OS continue to be relevant. vendor stores for developers as well as revenues, which could prove to be Fragmentation of Developer a daunting task. Operators will also Community need to develop sustainable revenue One of the consequences of the streams from application stores. In multiplicity of platforms, devices the next section, we elaborate on how and application stores will be that telcos can overcome these challenges developers will align themselves to successfully launch and monetize with particular storefronts. Since the application stores. success of a storefront is intricately linked to the quality of applications Recommendations available on it, the competition for With the entry of a number of new retaining the best developers on the players in the application store space, major stores is going to be intense. competition is expected to be intense. The ability to attract developers to Device vendors with their early create applications exclusively for entry into the space and capability of particular storefronts will depend on addressing customers across the globe a number of factors such as revenue are expected to continue performing share offered, developer support for strongly. However, operators can take testing and marketing of applications, a number of steps, some of which extent of content restrictions, captive leverage their existing competencies, customer base, and ease of application which will help them successfully creation. launch an application store offering.

18 Ovum, Telecoms 2020, 4Q09. 19 Distimo, Mobile Application Stores State of Play, February 2010.

24 Choose the Right Positioning Based Figure 6: Positioning Strategy for Operators in the Application Store Space on Scale Operators need to decide on the Customer Creation Aggregation Networks Devices extent of activities that they would Management undertake in the application store segment. While global players with Examples Retail Billing Reach Support

a large captive customer base might Lease Out Partnership esting Support Customization Feature phone T Platform Support want to build end-to-end capabilities Category Support in the space, smaller players might Integrated decide to undertake only select Stores activities in-house, relying extensively on third-parties for the technology Truncated platform (see Figure 6). Stores

The rationale for larger operators to White-label build extensive capabilities would Stores be their existing capabilities around sourcing and distributing content, and hence the prior existence of Source: Capgemini TME Strategy Lab analysis a strong ecosystem. For smaller operators, the lack of negotiating leverage with scale players such as device vendors will be a key a distinct positioning option for constraining factor in attempting end- operators, thereby avoiding direct to-end capabilities. The existence of competition with vendor partners. a number of white-label solutions for various activities of an application There are a number of commercial store will make it easier for operators solutions already available in the to enter the space by forging suitable market such as appMobi, Rhodes, alliances. For example, Ericsson’s and PhoneGap that allow developers recently launched eStore solution to create applications across allows operators to easily set-up platforms. In addition, there are their application stores, while ongoing industry initiatives such as simultaneously giving them access JIL and the Wholesale Application to a number of applications across Community, which are trying platforms and devices. T-Mobile has to create a common platform for taken a similar approach in creating application development. its storefront “web2go”, for which it has sourced the platform solution Another option available to from mobile Internet platform operators to encourage device- provider SurfKitchen. agnostic application creation would be to actively promote web-based Support Device-Agnostic Platforms applications. The evolution of network to Expand User Base speeds will enable more complex A critical component of operator applications to be delivered over the strategy to compete in the space web using software technologies such would be their support of device- as HTML5, Flash, and JavaScript. Not agnostic platforms. This will allow only will this allow platform agnostic operators to support a much wider application creation, but it will also device portfolio through their help operators to extend the user base storefront, while simultaneously to feature phone users. Appropriate reducing porting efforts, and pricing strategies will allow operators hence costs and time-to-market for to garner greater data usage revenues developers. Additionally, platform- from users accessing more services agnostic applications will allow over the web.

25 Consider Aggressive Revenue Share Additionally, operators could with Developers experiment with innovative revenue- Since the quality and reliability of sharing models to attract developers. Aggressive applications available on a storefront For instance, popularity-based will be dependent on the strength revenue share arrangement can of the developer community, it is provide the necessary incentive for “ revenue imperative that operators provide the developers to put their best work on necessary incentives for the creation the operator storefronts. sharing with of exclusive applications for their storefronts. We believe that aggressive Enhance Revenues through revenue share arrangements, wherein Innovative Pricing developers can operators allow developers to retain a Operator storefronts also need to higher share of application revenues ensure that they formulate optimal help operators when compared to other storefronts, monetization strategies. Operators can help operators play the role should strive to develop pricing of “disruptor” and corner a higher models that are optimized based play the role of market share. While a revenue share on the nature of the application, of at least 75% for the developers will with popularity, market potential, a “disruptor” be necessary to remain competitive, and stickiness of an application analysis indicates that by increasing being the defining criteria. For developer share to 80%, operators instance, applications in categories and corner a can get incremental revenue uplift such as medical and finance are of around 11% points, resulting highly customized, resulting in a higher market primarily from a greater market share limited number of such applications. of application downloads (see Figure However, because of the utilitarian 7). nature of these applications, the share consumer willingness to pay is fairly high. As a result, these applications are suitable for subscription pricing (see Figure 8). Similarly, application ” categories such as games and entertainment although popular, Figure 7: Effect of Developer Support on Operator Revenue have low consumer willingness to pay for such services. Consequently, such applications are better suited for 1 2 3 advertisement-based monetization Scenarios Optimistic Realistic Pessimistic 550 1 models. Operators should play 500 Developer Share of an active role in formulating 80% 75% 70% 450 2 Revenue the monetization strategies of 400 3 Developer Support 350 applications, so as to ensure the (Beta Testing) Yes Yes No 300 greatest returns from their storefronts.

250

Developer Support 200 (Marketing of Yes No No Operators should also closely Applications) 150 Revenue Potential (US$ m) examine the possibility of 100 augmenting their revenues through Registration & No Minimal Yes 50 Upload Restrictions the provision of white-label services - 2009 2010 2011 2012 2013 such as APIs for providing access to Revenue Uplift for +11% Base Case -11% Operators Optimistic Realistic Pessimistic network resources, billing support, contact centre management, and other existing telco assets to other Source: Capgemini TME Strategy Lab analysis storefronts.

26 In conclusion, while application Figure 8: Monetization Model for Various Application Categories stores provide operators with a great opportunity to re-establish their position in the mobile content value Specialized applications Applications are specialized with a niche target audience ASP (US$) Medical and typically customized chain, the opportunity requires The niche audience allows a Business (Entry not to scale) Subscribers are often willing premium pricing of to pay a premium for these a strong operational strategy for applications Reference services success. Operators need to leverage Navigation existing capabilities so as to be Mean of Productivity ASPs across Education Books Finance Popularity categories able to create a robust offering for considered: Health & Fitness US$2.07 Sport the consumers. The opportunity Travel Weather Music should be looked at from the Lifestyle Games News Social perspective of a strategic imperative Networking Entertainment Although popular, the Applications in this category Utilities consumer willingness to pay to reverse the present trend of are catering to services for these applications is low already available for free in These would be best disintermediation from the content competing domains monetized through an ad based model ecosystem rather than from a pure Targeted through micropayments, subscription, etc Targeted through in-app advertisements revenue enhancement point of view. Targeted at a niche segment and hence priced at a premium Neither widely used nor catering to a niche segment

Over the next few years, as the Note: Size of the bubble represents the number of applications available in that category; popularity of application stores as a Popularity of an application category defined on the basis of number of downloads content distribution platform grows, operator initiatives will emerge as the Source: Capgemini TME Strategy Lab analysis; Charles Teague blog, July 2009 cornerstone of their overall mobile data strategy.

Jerome Buvat is the Global Head of the Sayak Basu is a senior consultant in the Prenul Sogani is a consultant in the TME Strategy Lab. He has more than 13 TME Strategy Lab. His recent projects TME Strategy Lab. His recent projects years of experience in strategy consulting include analyzing entry strategies in include evaluating measures for mobile in the telecom and media sectors. He is emerging markets and formulating cost operators to reduce operating costs based in London. rationalization strategies for operators. and assessing business diversification Prior to joining the Lab, Sayak worked opportunities for a Nordic media for a leading satellite communications company. Prior to joining the Lab, provider. He is based in Mumbai. Prenul was working with a leading Indian research organization, delivering business intelligence projects to a large European telecoms operator. He is based in Mumbai. n

27 Web 3.0: Expected Evolution of the World Wide Web and Opportunities for TME Players By Riku Rintanen and Gurdishpal Ahluwalia

Abstract: The World Wide Web (the Web) is evolving continuously. Web 1.0 entailed top-down distribution of content and information by website owners. Web 2.0 already enables users to create and share information/content with each other rather than just passively consume it. Over the next few years, the Web is expected to undergo significant changes across the digital content value chain. Key features of Web 3.0 include intelligent applications, cloud computing, open technologies, and advanced data mining. Intelligent applications entail programs that source data from all over the Internet; search tools that segregate results into relevant sub-categories; and mash-up programs that use data/functionality from multiple external sources. Cloud computing involves on-demand access to software applications and computing facilities over the Internet. Open source codes, Application Programming Interfaces (APIs) and platforms decentralize the application development process and encourage the development of the many types of applications around a central platform. Lastly, advanced data mining techniques profile consumers in real-time and help deliver relevant content/advertising. Web 3.0 presents significant opportunities to TME players. Original Equipment Manufacturers (OEMs) should lead the development of open technologies/platforms to gain a central role in the ecosystem. Operators should leverage their hardware assets and customer relationships to become significant players in the cloud computing market. They can also create open platforms for which applications can be developed by multiple independent players. Media players should leverage semantic technologies to better disseminate content over the Web and also use advanced data mining to segment customers and serve highly relevant contextual ads. Web 3.0 is in the early stages of growth. Uncertainty about the exact nature of expected features is perceived to be a challenge. However, TME players should ensure that they are not thwarted by the underlying uncertainty. In fact, they should aim to play a more active role in shaping the upcoming landscape of the next generation of the Web.

The only thing that is constant is change. Nothing epitomizes this adage better than the Web.

Web 3.0 is expected to foster Web 1.0 entailed top-down distribution of content. The Web “not only the development of was used primarily as a publishing platform. The sole source of data/ information/content for various web new services but also new ways pages and applications were website owners. Application development of delivering services to end for Web 1.0 was complex and limited to a few developers because of the extensive use of closed APIs consumers throughout the ecosystem.

In the current stage of Web 2.0, distribution of content is no longer ” just a top-down process. Popular websites and applications—such as Flickr, Wikipedia, MySpace, and

28 YouTube—enable users to create Figure 1: Selected Definitions of Web 3.0 and share information/content with each other rather than just passively consume it. Application development Definition Type Definition has been simplified significantly as Web 3.0 is best defined as the third-decade of the Web (2009 - 2019), during which time several key technologies will become widely used. Chief among them will be compared with Web 1.0 due to the Technology-based RDF and the technologies of the emerging Semantic Web… Web 3.0 is an era in Definition APIs provided by players such as which we will upgrade the back-end of the Web, after a decade of focus on the Apple, Google, and Facebook. front-end

Going forward, the Web is likely to Web 3.0 will consist of applications that are pieced together - with the characteristics undergo significant enhancements Application-based that the apps are relatively small, the data is in the cloud, the apps can run on any Definition device (PC or mobile), the apps are very fast and very customizable, and are due to the continuing efforts of distributed virally (e.g. social networks and email) various ecosystem players such as Internet players, software products/ Note: RDF: Resource Description Framework services vendors, device OEMs, and Source: Nova Spivack, Web 3.0—The Best Official Definition Imaginable, October 2007. Eric Schmidt, Seoul Digital operators. Multiple developments Forum, August 2007 are happening simultaneously in In this paper, Capgemini discusses an interconnected manner and the key expected features of Web 3.0 they promise to reshape the Web and offers a snapshot of the likely significantly. Although there is no evolution of the Web over the next unanimity as yet on the definition few years. Subsequently, we identify of the next stage Web 3.0, due opportunities for TME players to to the relatively nascent nature of Key features leverage these developments and to developments, a couple of definitions benefit through improving reach as capture the essence of what Web 3.0 well as the monetization and offering o“f Web 3.0 include promises to deliver (see Figure 1). of new products or services. Web 3.0 is expected to foster not only intelligent Key Features of Web 3.0 the development of new services but also new ways of delivering services Key features of Web 3.0 span across applications, to end consumers. This will greatly the digital content value chain and increase customer choice as well as include intelligent applications, cloud convenience. computing, open technologies, and cloud computing, advanced data mining (see Figure 2).

Figure 2: Key Features of Web 3.0 across the Digital Content Value Chain open technologies,

Digital Content Value Chain and advanced

Applications / Customer Platforms Devices Content Management data mining

• Semantic W eb • Advent of “on- • Open-source • Superior online technologies demand” software platforms customer behavior (RDF, OWL, computing and (e.g. Android) data SWRL, SPARQL) infrastructure • Open Web • Personalization • Content being Application and ” • Stronger online sourced from collaboration Programming contextualization multiple sources • Service Oriented Interface (e.g. of content and

Web 3.0 Web • Content stored in Architecture Apple APIs) offerings a more modular (SOA) • Single digital and machine • Web Services identity / Single readable Interoperability sign-on method “microformat”

Intelligent Cloud Open Advanced Data Applications Computing Technologies Mining

Note: RDF: Resource Description Framework. OWL: Ontology Web Language. SWRL: Semantic Web Rule Language. SPARQL: SPARQL Protocol And RDF Query Language (recursive acronym) Source: Capgemini TME Strategy Lab analysis

29 Figure 3: Illustration of Categorized Results from Yahoo! Search to quickly jump to relevant pages/ sections.

Microsoft acquired Powerset in 20081 to enhance its capabilities in semantic search technologies. Yahoo! currently uses RDF for its open search platform SearchMonkey. Through semantic technologies Yahoo! and Microsoft try to overlay content with contextual information to improve search results and provide more relevant data. Figure 3 demonstrates how SearchMonkey helps Yahoo! to display search results with information categorized as per potential user interest areas.

Web 3.0 will also facilitate the Source: Yahoo! Developer Network website development of mash-ups, which are web pages or applications that Intelligent Applications use data/functionality from multiple Web 3.0 will see the emergence of external sources to offer enhanced applications that will be intelligent services to consumers. LinkedIn enough to source data from all over allows users to incorporate data from the Internet rather than just local multiple websites on their profiles. databases. Intelligent applications Similarly, TripIT mashes up data will be enabled through semantic from different confirmation e-mails web technologies aimed at bringing sent by various travel sites to create a structure to web content and enabling master itinerary for the user. It then software agents to better interpret intelligently sources weather, local the context of various documents. maps, and city guides from websites This will permit browsers and other such as Google, Wikipedia, and applications to find, share, and Flickr to create a customized travel combine information more easily. document with mashed-up data.

Search tools will also benefit through Cloud Computing new semantic technologies that can Cloud computing2, which is a key process descriptions/annotations component of Web 3.0, entails readily associated with web documents. This available and scalable “on-demand” will help search programs to identify processing capabilities for web-based the context of the search and return services and devices. Although data more relevant query results based storage and retrieval services such on the context rather than just the as Flickr (cloud-based storage of keywords. Moreover, search results photos) have been around for a while, can be segregated into relevant sub- Web 3.0 will push cloud computing categories, thereby helping consumers further through offerings such as

1 Microsoft Press Release, Microsoft Live Search Acquires Powerset Search Company, August 2008. 2 Cloud computing refers to Internet-based computing wherein one or more of the key constituents of software—platform, application, hardware resources, and information—are made available over the Internet on an on-demand basis.

30 Software-as-a-Service (SaaS) and the storage infrastructure. For instance, cloud Infrastructure-as-a-Service Google recently announced that it (IaaS). would allow users to upload, store, and organize any type of file in Software-as-a-Service (SaaS) Google Docs6. Even traditionally SaaS is a form of software “on-premise” software players such deployment. An application is as Microsoft have started building licensed for use as a service and hybrid models wherein on-premise provided to customers on demand applications are integrated with over the Internet. SaaS has found cloud-based services. Microsoft applicability across multiple functions launched MS Office Live that allows – Sales, Customer Relationship documents to be stored and shared Management (CRM), Customer online through cloud-based services. Service Management, and Business It also launched Windows Azure Applications such as Inventory Platform in 20097 to allow developers Management and e-Commerce. Many to build cloud-based applications. players are already active in the SaaS space. Key vendors include Salesforce. Open Technologies com, NetSuite, Siebel, and SAP. Another key constituent of Web 3.0 will be the increased prevalence of Cloud Infrastructure-as-a-Service open technologies. These refer to This entails Platform-as-a-Service publicly available source codes, APIs, (PaaS) and IaaS. PaaS delivers or platforms that enable individual operating systems and associated developers and software development services over the Internet without firms to extend the functionality of a downloads or installations3. core product/service offering. Salesforce.com, apart from offering SaaS, also offers platform services on Open Source and Open APIs on the which developers can build custom Internet applications4. Open technologies on the Internet entail open source codes and open The latter refers to an organization APIs. using computing resources—servers, storage, hardware, and networking Open source code encourages components—on an “on-demand” developers to play a more active basis. The service provider owns and role in developing new consumer maintains the resources and rents out applications. Open APIs, along capacity to multiple clients. Amazon with semantic web technologies EC2 (Elastic Cloud Computing) would help applications to use allows users to rent computing services and information from each resources (effectively virtual other, thereby ushering in quick computers) on which they can run development of “mashed” applications their own applications5. that use functionality/data from other applications. The widespread Internet players are particularly adoption of open source code and aggressive in offering cloud-based open APIs is expected to significantly services by leveraging their extant increase the choice and relevancy

3 www.platformasaservice.com. 4 Company website. 5 Company website. 6 The official Google Docs Blog, Upload and store your files in the cloud with Google Docs, January 2010. 7 Microsoft Cloud Services Vision Becomes Reality with Launch of Windows Azure Platform, Company Press Release, November 2009.

31 of applications and services made Advanced Data Mining available to end users. Data mining provides knowledge of user profile and needs, which can Google Maps API allows developers be leveraged for targeted marketing. to assimilate interactive maps from Although data mining is already Google into their own websites, being used to some extent, Web thereby creating enhanced, mashed- 3.0 promises to leverage advanced up sites. Developers can thus data mining for tracking consumer more effectively convey location behavior real-time and delivering information to their consumers relevant content/advertising. This without developing mapping would lead to increased relevancy of functionalities of their own. content/advertising and consequently, superior monetization prospects for Open Platforms for Mobile Devices value chain players. Open platforms for mobile devices are similar to their web-based Advanced data mining includes counterparts. These entail open publisher-side data mining for source operating systems, such as contextual advertising9 and ISP10-side Android, for mobile devices and open data mining for behavioral targeting11. APIs for storage, media, graphics, and hardware access similar to Apple’s Publisher-side Data Mining iPhone APIs. This entails tracking and analyzing consumers’ surfing activities as The last few years have already well as search patterns to classify witnessed a number of developments them into relevant sub-segments in open technologies for the mobile and deliver relevant, contextual ads. platform. While new entrants such This can be implemented by either as Google chose to enter the mobile individual publishers or advertising platform space through their open networks in collaboration with source offering Android, existing publishers. players such as Nokia have also decided to open up access to the In case of implementation by Symbian operating system8. individual publishers, consumers are served ads based on their previous Opening mobile platforms to interactions with the publisher and third-party application developers current interests (identified through decentralizes the application their recent browsing history). With development process and allows advertising networks, data mining platform providers to focus on is applied to consumers’ previous developing core components of their and current browsing history across offering. Open platforms also leads multiple websites. to increased choice of applications/ content to users and result in greater Semantic technologies, discussed usage. earlier, will further help advertisers to understand the online behavior of customers and improve contextual

8 Symbian Completes Biggest Open Source Migration Project Ever, Company press release, February 2010. 9 In contextual targeting ads are served on web pages featuring relevant content—for instance, car ads on automotive websites. 10 Internet Service Provider. 11 Behavioral targeting uses data from an individual’s Internet activity (‘click-stream’) to identify the relevant ads to deliver to that individual. 12 Company website.

32 advertising. Companies such as Figure 4: Expected Evolution of the Web Kontera perform real-time semantic analysis of a web page, identify terms/ Web 1.0 Web 2.0 Web 3.0 words that could be of interest to the user, and deliver contextual ads12. Central Entity Applications Users Data This enables advertisers to display Tags created by users All the content tagged Managed Directories highly relevant in-text ads based on used to classify and search universally with a uniform Content Search source of finding content the content that a user is reading. for content format

Another variant of publisher-side Data Stored as Pages Objects Linked data structures data mining uses consumer profiles Open, simplified environment Intelligent applications able Closed, developed only by from projects such as OpenID. Applications allowing large number of third to source data from all specialized companies Here, users are authenticated and party developers over the Internet identified across multiple sites through a common ID that is linked Source: Capgemini TME Strategy Lab analysis. to a wide range of user demographic information such as name, date of birth, location, and sex. Coupled Behavioral advertising delivered with behavioral data, this will help through ISP-side data mining is websites to segment and target their expected to be more effective than customers better. OpenID has already contextual advertising delivered gained significant adoption with over through publisher-side data mining one billion OpenID accounts and as the former allows advertisers to more than 50,000 websites accepting gauge interests of target audience in a OpenIDs for login. Players such as comprehensive manner. Google, Facebook, Yahoo!, France Telecom, and Telecom Italia either To summarize, the progressive issue or accept OpenIDs.13 development of the Web 3.0 features discussed will have significant ISP-side Data Mining effect on the constitution of the ISP-side data mining is similar to Web. As highlighted in Figure 4, publisher-side data mining, except the next generation of the Web will that the analysis is performed either be centered on data rather than by an ISP or through a network that applications or users. Content search includes multiple participating ISPs. will be more effective and context relevant. Applications, driven by The key advantage offered by ISP- semantic web and open technologies, side data mining is that the analysis would be intelligent enough to source of user behavior is not restricted their data from all across the Internet to a selected set of publishers. In rather than be confined to locally fact, complete online interactions of sourced data. We will also see a participating users can be monitored greater adoption of services delivered and relevant ads can be delivered over the cloud and advertisers will be based on previous and current online able to leverage advanced data mining behavior of consumers. techniques.

13 OpenID Foundation website.

33 Recommendations for TME operators to leverage their existing Application stores would also enable Players assets and offer cloud-based services. operators to enrich their value add Recommendations for OEMs services portfolio. For OEMs, the major opportunity lies Operators already have strong in the adoption of open technologies. customer relationships and the Lastly, operators can also participate OEMs should not only support experience of managing large data in ISP-based behavioral tracking. but also lead the development of centers. Moreover, with their control However, they need to be careful open technologies/platforms to over last mile access, operators are about consumer privacy issues and gain a dominant position in the better positioned to provide high ensure that all stakeholders are emerging landscape. OEMs should quality cloud services as compared notified about trials or deployments focus on aggregation rather than with online players such as Amazon and also have an option to opt out. in-house development, foster the and Google who currently do not growth of developer communities, have access to complete end-to-end Recommendations for Media and encourage the development of networks. Players myriad applications on the underlying Media players should actively support platform. Some telcos have already started semantic technologies such as RDF leveraging existing assets to offer and SPARQL. These technologies A case in point is the early success cloud-based services. For instance, enable websites to store contents such Apple’s App Store, which now offers Verizon has launched its cloud that they can be used by third-party around 150,000 applications14 and services called Computing-as-a- websites and applications easily and has witnessed more than three Service (CaaS) through which it more relevantly. With increasing billion application downloads in offers a hybrid solution of virtual adoption of these technologies by less than two years15. The success of infrastructure and traditional physical third-party websites, publishers can Apple’s model has prompted other infrastructure delivered over the better disseminate their content over 20 device vendors such as Samsung cloud . the Web and reach out to a much and Blackberry to launch their own larger audience through syndications. open platforms and provide SDKs16 to Through cloud services, operators can In fact, publishers such as BBC and third-party developers. move beyond the role of connectivity Reuters have already started using providers and move up the value semantic technologies to make their Moreover, OEMs should also chain. Cloud services will not only data more searchable and capable of 22 encourage developers to use semantic lead to higher network utilization being used in mash-ups . technologies17 to enable applications but also provide incremental revenue to source data from all over the streams. Players should also leverage advanced Internet. This will significantly data mining, especially publisher-side improve the utility of applications and Another opportunity for operators techniques, to segment customers and therefore, also improve the uptake of can arise through the adoption serve highly relevant contextual ads. services. of open technologies / platforms. However, only larger media players Telcos can follow a model similar with multiple Web properties should Recommendations for Operators to that recommended for OEMs by look at independent development. Key opportunity for operators lies in offering third-party applications, Small- and medium-sized publishers the cloud computing market18, which centered on an open platform, to their should participate in consortiums or is expected to grow from US$46.4 subscribers. Orange has launched its partner with an Internet player to billion in 2008 to around US$150 App Shop targeted at its subscribers deliver contextual ads. billion by 201319. This rapid growth across multiple countries such as 21 provides a huge opportunity for France, UK, Belgium, and Spain .

14 159,433 applications on AppStore, 148apps.biz, February 24, 2010. 15 Apple’s App Store Downloads Top Three Billion, Company press release, January 2010. 16 Software Development Kit. 17 Semantic technologies include RDF and SPARQL. 18 Includes the following services: Business process services: e.g. payroll, printing, ecommerce delivered over the cloud Application services: All paid applications delivered over the cloud Application infrastructure services: Application platform-as-a-service System infrastructure services: server/compute, server operating system (OS), client OS, storage, or networking on which the consumer can run a variety of applications Management and security services: operational management of access, consumption, delivery and service-level agreements associated with cloud-based services Forecast: Sizing the Cloud; Understanding the Opportunities in Cloud Services, Gartner, March 2009. 19 Forecast: Sizing the Cloud; Understanding the Opportunities in Cloud Services, Gartner, March 2009. 20 verizonbusiness.com. 21 Orange Newsroom, Orange launches Application Shop, giving customers click-and-go access to thousands of applications, services and games, December 2009. Orange Partner website (www.orangepartner.com). 22 W3.org, Case Study: Use of Semantic Web Technologies on the BBC Web Sites, January 2010 Newsonnews.net, More on Reuters Insider Launch, May 2010. Research-live.com, All in good time, March 2010.

34 Operators are better positioned“ to provide high-quality cloud services as compared with online players

In conclusion, TME players should Riku Rintanen is a managing consultant leverage the expected enhancements in Capgemini” Consulting’s TME practice. to the World Wide Web to improve He has more than 11 years’ consulting reach as well as monetization and and industry experience in ICT and also offer new products/services. telecom sectors. His major areas of Although there is still a great deal of expertise include online marketing, sales uncertainty about the exact nature of and service and business transformation. developments as the new ecosystem He is based in Helsinki. is still being shaped by innovation efforts of larger and smaller players, Gurdishpal Ahluwalia is a senior TME players should not get bogged consultant in the TME Strategy Lab. His down by the challenge. In fact, they recent work includes advising a major should aim to play a more active role broadcaster on its programming strategy in the emerging Web 3.0 ecosystem and analyzing the distribution models as maximum benefit will eventually of telcos in India. Prior to joining the accrue to dominant players. Lab, Gurdishpal has worked for a major IT services company. He is based in TME players should be aware of the Mumbai. n opportunities arising from Web 3.0, identify existing strengths/assets, and build a medium-term roadmap towards developing products and services that can benefit from the developments in Web 3.0. Moreover, they should assess their internal capabilities and identify the optimal mix of in-house and partner-driven product/service development. Change is inevitable. TME players should aim to be at the forefront and shape new developments rather than passively accept the new order.

35 Spectrum Valuation: A Holistic Approach By Philippe Blanc, Nathalie Bes, and Sayak Basu

Abstract: The mechanism for spectrum allocation1 has evolved over the years from “beauty contests”, to lotteries, onto the present market driven auctioning process. In the coming years, we are going to witness a significant amount of spectrum being put up for auction. A variety of factors including technological advancements, increased efficiency of broadcasting technologies, and the tendering of remaining 3G frequencies to meet increasing data demand are combining to create a market for spectrum. The single biggest challenge for operators in constructing winning bids for the spectrum is to reconcile the gap between internal valuation and market perception of the price of the spectrum. Consequently, operators run the risk of either over-bidding or under-bidding for the assets and losing out in a competitive auction. It is also pertinent to note that peer market comparisons serve only a limited purpose while arriving at spectrum pricing. The wide variation in auction prices around the world makes sole reliance on any such benchmarking exercises fraught with risk. In this paper, Capgemini proposes a four-step approach for arriving at the right price for the spectrum. The first stage involves a comprehensive understanding of auction specificities and the key success factors for a winning bid. Subsequently, operators need to quantify the economic value of the license that they can realize. This is followed by the evaluation of the competitive context wherein they look at the competitor business case and financial strengths to gauge the expected market value of spectrum. Finally, the inputs from the earlier stages are aggregated to define the bid price for the spectrum which maximizes the chances of a successful bid while being aligned to the operator objectives.

Evolution of Spectrum Auctions The lottery system was designed to Historically, spectrum allocation be fair and more transparent than has evolved significantly in terms comparative hearings. However, The coming of the methodologies adopted by this system saw the FCC receive governments the world over. In thousands of applications. Spectrum “years are going the US, for instance, the evolution allocations finally moved to a market- of the spectrum distribution has driven process through auctions, to witness A moved from a command-and-control which were inherently transparent structure towards a market-driven and encouraged only the serious process. In the initial years, the US participants to take part. significant communications regulator, FCC2, used comparative hearings to For regulators, auctions offer a amount of determine spectrum allocation. In potent mechanism for ensuring that this process, applicants set out their the owner of the spectrum—the cases for being awarded a license government—receives a fair value. spectrum being and the licensing authority then Moreover, since market forces are determined the best applicant based involved in discovering the price for on a combination of objective and the spectrum, the process is perceived put up for subjective criteria. As an evolution to be fair. from comparative hearings, the FCC auction ” tried lotteries in the mid-1980s.

1 Spectrum allocation refers to the issuance process for usage rights of radio frequency bands of the electronic spectrum, by the government or the regulator. Currently, the process in most developed markets involves auctions to arrive at a market determined price for these assets. 2 Federal Communications Commission.

36 Current Market Opportunity Figure 1: Spectrum Auction Calendar Across Europe and most of the developed world, regulators are 2010 2011 2012 2013 2014 looking at spectrum auctions driven Germany Belgium Italy Singapore Czech Ireland by the explicit need to address • Europe's first 4G • Auction for five 15 MHz • 2.6 GHz and • The regulator Republic • 2.6 GHz spectrum auction blocks of 2.6 GHz 900 MHz is expected to • 2.6 GHz auction is distinct market opportunities for of 800 MHz, 1.8 spectrum will start in spectrum release 4G auction would expected in GHz, 2 GHz and September 2010 likely to be spectrum in take place 2014 2.6 GHz took made 2012 after 2012 next generation services and to raise France place in available in Latvia April 2010 • Allocation of 2.6 GHz 2010-11 • 2.6 GHz funds. A combination of factors is spectrum is expected in spectrum contributing to spectrum release, Denmark H2 2010 France allocation • The regulator • Allocation of expected after Spain 2014 chief amongst which is the advent completed the • Planned 2.6 and 3.5 GHz 800 MHz auction for 2.5 auctions in 2010 spectrum is of new technologies and associated GHz in May expected in 2010 2011 spectrum dynamics. Technological Austria Netherlands • The regulator plans to UK auction 2.6 GHz in • Auction of 800 developments have given rise to the September 2010 • Auction of the MHz and 2.6 Legend usage of the 2.6 GHz spectrum band 2.6 GHz • 3.5 GHz spectrum had GHz proposed frequency been allocated in for mid-2010 Completed 3 completed in Q1 January 2009 Pending for LTE . Similarly, improvements 2010 in broadcasting technologies (such 4 as the advent of DTT ) have led the Source: Various regulator websites; Fitch Ratings, European Telecoms—Spectrum Issues for the Fore, November 2009 industry towards a path of spectrum Note: The auction dates for certain geographies are Capgemini estimations based on industry interactions optimization thereby enabling usage of existing spectrum for other purposes. This spectrum is part of what has been considered the digital Challenges in Spectrum Pricing dividend for the telecom industry. In Telcos need to arrive at an optimum many European countries, regulators price for spectrum based on a are eventually looking at tendering combination of the business-case The key the remaining 3G frequencies as driven value and the market-perceived data demand continues to grow value to a contender. Here, the key driven by the advent of high-powered challenge is less about valuation and cha“llenge smartphones such as the Apple more about pricing. Examples from iPhone. Spectrum release is also recent spectrum auctions are proof tied to local market consolidation. of this challenge. For instance, the for spectrum In markets that see mergers and recent auctions of remaining 3G acquisitions among operators, a blocks in Italy and France led to very acquisition portion of spectrum could also be different spectrum prices reflecting potentially released back into the contrasting competitive bid situations open market. rather than fundamentally different is less about economic spectrum value for the Keeping in mind these market bidders. In Italy, three out of the four valuation and opportunities, a number of European Italian operators each bought a block countries have initiated the process to of 5 MHz for €88.8 - 90.2 million more about auction spectrum for next-generation (slightly above the reserve price services over the coming years (see of €88.7 million) whereas French Figure 1). auctions led to €582 million for two pricing blocks (far above reserve price of In this paper, we look at key €120 million per block). challenges associated with pricing spectrum for a bidder. We also While operators can have a better ” present the case for a holistic understanding of how they value approach that strives to work beyond spectrum based on their own the challenges and adopts a highly projections (intrinsic value), the structured approach towards pricing spectrum.

3 Long Term Evolution. 4 Digital Terrestrial Television.

37 Figure 2: The Spectrum Pricing Challenge

Optimum Price

Combination of Intrinsic and Market Values

Intrinsic Value Market Value Price arrived at through Lowest market-driven price internal business case that can win a bid

To be maximized to ensure To be kept down to the profitable returns from minimum required to win spectrum the auction

Source: Capgemini TME Strategy Lab analysis

market perceptions strongly vary results in mobile operators ending from market to market and with up bidding significantly higher than every round of the auction (market what can be called a fair market price, value). Consequently, telcos face considering the incremental revenues significant challenges in arriving which would accrue due to the at an optimum price that will see spectrum assets. A classic example them win a spectrum bid. The of such a situation was witnessed in biggest challenge for telcos is to the 3G spectrum auctions in the early arrive at a price that will see them part of this decade. While operators neither over-bid nor under-bid. The over-bid one another, the bigger optimum price is usually a function challenge proved to be in coming up of bidder’s objectives including with applications at price points that profitability, need-to-win, brand would encourage mass uptake. image, and other external factors including financing capacity, impact The intangible factors involved in on share price consequent to winning valuing spectrum also sometimes or losing a bid, or other potential play a much larger role than was indirect impacts on future auctions intended. A case-in-point is that (see Figure 2). Telcos should also of Vodafone UK. In 2001, the exercise caution in using peer- operator believed that their market market comparison techniques such leadership would be under threat if as benchmarking in arriving at an they did not acquire 3G spectrum optimal price. at the first auction. Consequently, the company took a strategic bet Risk of Over-bidding on the importance of the spectrum One of the biggest challenges and raised their bid, factoring in a facing mobile operators across the premium for this strategic potential. world is to accurately estimate the When the results were out, it was perceived importance of spectrum revealed that Vodafone paid UK£6 to competitors and the perceived billion for spectrum for which the attraction of newer services to other operators O2, T-Mobile, and consumers, along with their Orange paid UK£4 billion each. This inclination to pay. The fluid nature over-bidding accompanied by a large of these assumptions almost always debt hastened Vodafone’s decline to a number two position in the market.

38 Risk of Under-bidding and Losing Figure 3: Spectrum Price Paid in Select European 3G Auctions and Worldwide While operators face a significant risk 4G Auctions in USD/MHz/Pop, in Relation with GDP per Capita of over-bidding in their enthusiasm to ensure that their bids are accepted, 6 there also exists a real challenge of UK operators potentially under-bidding 5 in comparison to their market peers, Germany especially in single-round auctions. At 4 its core, the key issue around under- bidding lies in estimating the extent 3

to which competitors can and will US $/MHz/Pop 2 stretch themselves in a bidding war. Italy Canada

Denmark Austria 1 Limitations of using Range-bound Georgia US Bulgaria Czech Republic Belgium Denmark Sweden Switzerland Norway Assumptions 0 While the discovery process of 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 optimal spectrum price from GDP per Capita a combination of intrinsic and market price is a popular approach, Source: Capgemini TME Strategy Lab analysis; Telecom ParisTech, Spectrum Valuation—Principles and Methodology, October 2008; Fitch Ratings, European Telecoms—Spectrum Issues to the Fore, November 2009. Note: 3G auction many telcos also use peer-market prices adjusted with 2007 exchange rates. comparison too as a guide for spectrum pricing.

A key drawback of using comparisons from other geographies as a reliable approach towards valuing spectrum lies in the fact that the price paid for spectrum in each market is closely Spectrum price is affected tied to a host of local factors, resulting in wide variations in these values “by a host of local factors, between geographies (see Figure 3). While broader metrics around price of spectrum per capita can be derived resulting in wide variations from other markets and used as pointers, in reality, a combination across geographies of macro and micro factors impact spectrum valuation. An indicative set of such factors include the market saturation, threat of new entrants, ” number of licenses on offer, round of spectrum licensing, financial strength of incumbents, population density, and economic spending power of potential consumers in that region. Under these circumstances, it is prudent that operators use such benchmarking approaches as only one of the input methods towards spectrum valuation rather than as a full-fledged methodology that drives their auction strategy, given its simplistic approach to the complex issue.

39 Holistic Approach for Spectrum Analyze Auction Specificities Pricing The details of the spectrum allocation Based on projects conducted for directive, as defined by the regulator, operators in different geographical should be analyzed in-depth as settings, Capgemini has built a the first step of the spectrum robust methodology for a successful valuation process. The specificities spectrum bid process, which of the allocation process help in the captures the key lessons from various identification of the critical success engagements (see Figure 4). factors for a successful spectrum bid. The various clauses for the spectrum allocation process also give a sense of Figure 4: Capgemini Consulting Approach to Successful Bidding the attractiveness of participating in the process, by detailing parameters

1 2 4 such as amount of spectrum on offer, Quantify economic value of license for Definition of bidding tactics coverage obligations, and the bid the bidder (intrinsic value): (right price): Analyze • Estimate NPV with and without new • Leveraging auction rules process. The eligibility criteria laid auction spectrum • Assessing expected specificities competitor behavior down by the regulator also gives a and critical 3 • Benchmarking and sense of the likely competitors during success estimation of Assess competitive context (rational factors 'psychological price part of market value): the spectrum auctioning process. Regulators points' License • Estimate NPV with and without new call for Bid license bid spectrum The details of the auction specifics

Build up the bid book help in establishing the various analyses that would need to be Manage external communication with the regulator and the market carried out. For example, if there are

Covered in the Study multiple blocks of spectrum available, Out of Scope for the Study a detailed analysis is required to understand whether all of them are identical in terms of the allocation Source: Capgemini TME Strategy Lab analysis process and fit with the bidder’s requirements. This step is crucial in establishing the timelines for the various steps subsequent to this stage. Figure 5: Estimation of Spectrum Value by Calculating the Deviation from Base Case NPV Estimate the Intrinsic Value of Spectrum for the Bidder Successful acquisition of spectrum NPV assets results in potential revenue NPV with new spectrum NPV without new spectrum, where • The value will be dependent on the assets are acquired by uplift, through provisioning of new spectrum acquisition by competitors competitors • Value might be dependent on services, ability to accommodate spectrum acquisition by a greater number of customers on competitors the network, cost savings, and by preventing competitors from taking certain positioning in the market. The intrinsic value of spectrum captures this potential revenue uplift

Current estimate of NPV by assessing the difference between (without accounting for new spectrum) the operator net present value (NPV) with and without new spectrum (see Figure 5). However, the analysis of Spectrum Value benefits accruing from new spectrum must also factor in the cost of licence and coverage obligations.

Scenario 1 Scenario 2 The NPV from the scenario where the operator is unable to secure

Source: Capgemini TME Strategy Lab analysis new spectrum might be drastically

40 different from the base case NPV. access to this asset for competitors. Strategic plans rarely capture the base In these cases, pre-emption revenues case scenario, which estimates the need to be considered and the NPV in the absence of fresh spectrum intrinsic value of spectrum should allocation in the market. Alternative be adjusted accordingly to a higher strategies to compensate for the figure (see Figure 6). absence of additional spectrum such as investments in other technologies Assess Competitive Context and densification of existing network In order to arrive at a winning need to be captured in this analysis. bid, telecom operators also need The possibility of other players in to consider the other crucial piece the market establishing a strong of the puzzle, the market price. Optimum competitive advantage through the The market price is the minimum acquisition of new spectrum and the amount an operator would need resultant negative impact must also be to pay to ensure a successful bid p“rice for factored into the business case. for spectrum. The market price is a function of the willingness of spectrum should The business case and hence operators to pay for spectrum assets, the intrinsic value is specific for which also reflects the spectrum each operator. It is a function of scarcity in the geography in which capture the its positioning in the market, its it is being auctioned. If there is long term strategy for utilizing the enough spectrum for each potentially business-case spectrum, and its existing assets interested player, asset value will such as the network infrastructure. come close to the reserve price Consequently, the business case defined by the regulator. On the driven value for the market leader will vary contrary, if there is perceived scarcity, significantly from that of the third or operators are likely to increase price and market- fourth placed player in the market for to their limit (either maximum the same spectrum asset. intrinsic value or perceived value for competitors). perceived The intrinsic value for markets with a scarcity of spectrum has an additional For instance, European 2.6 GHz LTE worth to a component to reflect the value of auctions are currently characterised obtaining spectrum to prevent the by availability of significant amount of contender

Figure 6: Intrinsic Value from Spectrum Acquisition Reflecting Pre-emption Revenues ” NPV Benefits from new spectrum Benefits from preventing competitors from obtaining new spectrum

Pre-emption revenues

Incremental revenues

Cost savings

Source: Capgemini TME Strategy Lab analysis

41 spectrum (2*70MHz) in comparison likely competitors to ascertain their to the 800 MHz LTE spectrum. This desire to emerge as the winner of the led to very low price levels for the 2.6 auction. GHz spectrum as compared to 800 MHz LTE auctions where spectrum is Building the business case for more constrained and characterised competitors is a complex but by better propagation features. In insightful task which helps to Germany where both spectrum establish the amount competitors are blocks were allocated in the same likely to bid if they behave rationally. process, price per MHz for 800 MHz The NPV analysis will be conducted band went 32 times higher the price similarly in many respects to the one for 2.6 GHz band. for the bidder, although less detailed. It provides a fairly reliable indication The spectrum allocation process of operator intent as most of these may also be designed to influence players are presently under fairly market prices, as regulators may try strict cost management scrutiny, and meet their government’s quest therefore exhibiting less unpredictable for new budget contributions. The behaviors. Specific customer tendering process may artificially dynamics profiles need to be built boost spectrum value by granting for each competitor within an overall asymmetrical features to the various consistent acquisition and churn auctioned spectrum blocks. Bidders market model. Similarly, specific might be tempted to bid higher network profiles have to be built for for blocks that are offered without each provider. coverage, national roaming, or wholesale obligations. Similarly, Bidders will exhibit different some regulators tend to adapt the bidding behaviors, based on the auctioning process to the level of style of their management, their risk expected competition. When the appetite, their willingness to get a degree of competitiveness is unclear, good bargain, and their estimates regulators may favor low visibility of what a winning price would be. auctions (sealed auctions) whereas An aggressive bidder will use its clear demand for spectrum may lead maximum NPV (or the competitor’s to simultaneous multi-round auctions. maximum NPV if required) whereas The reserve price of the spectrum also a cautious player will just try and plays a significant role in impacting position slightly above the “first the market value. If positioned too loser”, keeping room for maneuver high, they will deter contenders from within its own NPV range. Such bidding or drive a “wait and see behavioral patterns will help weigh situation” as in Italy in 2009 when the the various NPV calculations made 3G reserve price was set at close to according to possible alternative €460 million. On the contrary, when market and technology scenarios. positioned low in poor economic Hence, psychological levels should situation, they tend to polarize bids. not be neglected when fine-tuning competitive price expectations. To estimate the “market value” of the spectrum, it is necessary for a Define the Right Price bidder to assess the probable bid In the end, defining the right price for each of its competitors. The will be about designing bidding assessment will have several elements tactics and price levels that such as quantifying the intrinsic maximize winning chances vis-à- value for each competitor through a vis planned competitive bids, while business case, evaluating their ability being compliant with the bidder’s to invest capital, stock exchange objectives and external constraints. and shareholder sentiments, and It is imperative that the right price assessing the character traits of captures the operators’ motivations

42 for acquiring spectrum while in well as that of other competitors some cases profitability will be the that are participating in the exercise. operative criterion for the interest A holistic approach that factors in in spectrum and in other cases the all the variables in the process is bidder might want to win the auction required to arrive at the right price. at any price, because of other factors. The bid price for spectrum should maximize the probability of winning Complex auction processes, which the bid, while being compliant with combine various criteria create the bidder’s objectives and external opportunities for several approaches considerations. A holistic that need to be considered both for the bidder and their competitors. Philippe Blanc is a vice president within the Telecom, Media & Entertainment “approach is In order to assess the probability practice of Capgemini Consulting. He is a of winning for each potential bid, specialist in strategy & market-oriented required to we identify competitors’ possible topics, including bid strategy. Philippe behavioral response and probabilities has successfully led many European for various scenarios in a bid. These license and spectrum acquisition projects, arrive at the behaviors depend on the competitors’ in the mobile context (3G auction, 3G business case but also on non-rational beauty contest), fixed (wireless local right spectrum elements such as psychological price loop), media (radio, m-TV licenses) as points. Potential psychological price- well as content (football rights auctions). points can be gathered through He is based in Paris. price benchmarking references from spectrum allocations in international Nathalie Bes is a principal within markets as well as by studying Capgemini’s Telecom, Media & the local context. For example, Entertainment Consulting practice. She is ” previous allocation process in the a specialist in marketing and technology home country, prior announcements strategy as well as in business modelling. around spectrum value, and analyst She has successfully led several spectrum projections all contribute to setting acquisition projects including auctions, these check-points for the bidders. for new entrants as well as for existing players. She is based in Paris. In the case of the intrinsic value being far above the estimated Sayak Basu is a senior consultant in the competitor willingness to pay, the TME Strategy Lab. His recent projects right price will be defined by market include analyzing entry strategies in value. In the case that the intrinsic emerging markets and formulating cost value is lower than market value two rationalization strategies for operators. types of behaviors are possible. If Prior to joining the Lab, Sayak worked there is strategic value in winning for a leading satellite communications the spectrum (e.g. brand benefit, provider. He is based in Mumbai. n better alignment with strategic goals, improvement in customer experience) that is not reflected in NPV calculation, an operator can bid above intrinsic value to maximize its chances to win. In other cases, some operators adopt a rational behavior and bid around their most probable intrinsic value.

In conclusion, arriving at the right price for spectrum is a complicated exercise. It requires appraisal of both the bidder’s business case as

43 The Onset of Connected Devices: Opportunities and Challenges by Olivier Gouteix and Subrahmanyam KVJ

Abstract: The rapid evolution of consumer electronic devices and their ability to wirelessly communicate is leading to the formation of a new category of connected devices. For mobile operators who have thus so far limited themselves to enterprise M2M1 services, the connected devices space offers the potential for creating new revenue streams. Devices such as e-book readers, digital photo frames, portable navigation devices, among others, are proof of this evolving device class. The pervasive availability of content, technological developments in portable devices, and the expansion of network capacity and speed are driving the uptake of connected devices. Indeed, it is estimated that by 2020, there will be over fifty billion connected devices2. At the same time, this emerging segment faces key challenges around managing scale, adhering to regulatory requirements, costs of 3G modules, and the lack of industry standards. Mobile operators will also face a significant challenge around creating new and innovative business models. Mobile operators should consider taking a step-by-step approach involving wholesale deals, third-party retail, and direct retail based models for addressing the connected devices opportunity.

The advent of next-generation devices device technologies and shifting focus markets with an opportunity for and digitization is driving significant to pervasive-content services have growth in an otherwise saturated changes in content consumption led to the emergence of “connected market. In doing so, telcos are patterns. Consumers increasingly devices”—a range of devices that have increasingly looking to expand their view connectivity as a pre-requisite always-on connectivity and access to scope to offer B2B as well as B2C for all digital devices and this is likely remote services. The growth potential services around devices from sectors to bring the next big opportunity for offered by this new generation of as diverse as consumer electronics, telecom operators. Advancements in devices presents telcos in developed healthcare, and automotive.

Operator involvement in data services Figure 1: World M2M Market, eBillion, 2009-2013 for devices, traditionally offered as part of their M2M offerings, has 27.4 been limited to specific services such as monitoring, security alarms, 22.5 and point of sale (POS) terminals. Moreover, operator strategy to address 17.9 the opportunities in this space was 14.2 largely built around a third-party wholesale model. The high cost 11.2 of provisioning and activation for thousands of SIM3 cards was one of the primary reasons why most telcos chose to address the enterprise M2M market through resellers and MVNOs4. Consequently, large 2009 2010 2011 2012 2013 operators have not formulated group-

Source: IDATE, Mobile 2010: Facts & Figures, 2010

1 Machine-to-Machine. 2 Ericsson estimate. 3 Subscriber Identity Modules. 4 Mobile Virtual Network Operators.

44 level strategies at addressing this opportunity. Figure 2: Analyst Estimates for Select Connected Device Worldwide Shipments, ’000s, 2006-2013E

The arrival of devices where 150,000 connectivity can add significant value to the core product, such as 120,000 the Amazon Kindle and the Apple iPad, has encouraged operators to take a proactive stance towards the 90,000 setting up of dedicated business units focused at these connected 60,000 devices. For instance, AT&T has set up two divisions to target emerging devices focused on the consumer 40,000 and enterprise M2M opportunity.

Similarly, Deutsche Telekom is 30,000 creating an international M2M competence center5. In December

2009, Telefónica created a global 2006 2007 2008 2009 2010 2011 2012 2013 M2M unit while Vodafone signed a partnership with Verizon-Qualcomm’s MP3 Players E-readers 6 M2M joint venture nPhase . In Personal Navigation Devices Portable Media Players addition, O2 has partnered with Digital Photo Frames Handheld Game Consoles Wyless group, a network enabler of M2M solutions, to extend its connectivity footprint. Operators are Source: In-Stat, Mobile Graphics and Multimedia Review, November 2009 looking to address this expanded M2M market that is poised to grow devices. Industry players from significantly in the coming years (see multiple segments are increasingly Figure 1). realizing the value that wireless connectivity can add to their In this paper, we analyze the traditional devices. opportunity surrounding this The emerging category of connected Market Size devices and the challenges that “connected Early estimates indicate the strong telecom operators will face in tapping growth potential of this market. into this new growth area. We also Ericsson estimates that there will be recommend some key next steps for devices market over 50 billion connected devices, telcos and the roles that they can including traditional mobile handsets, potentially adopt in the connected an opportunity dongles, netbooks, and a whole new is devices ecosystem. category of emerging devices by 7 for telcos to Market Overview 2020 . Figure 2 shows the growth forecasts for a subset of these devices. These are still early days for Telcos have a key role to play in expand connected devices. However, the this space, given their strengths in share introduction and early success of distribution and bundling devices devices such as the Amazon Kindle with services. According to one of consumer and the interest in the Apple iPad estimate, over 60% of all Internet- highlight the untapped potential connected mobile devices will be sold in provid ing connectivity to a new through telecom operator controlled wallet category of consumer electronics distribution channels by 2013. For operators, the service is already

5 Company websites. ” 6 GSMA, Embedded Mobile Newsletter, March 2010. 7 Intel, Network 2020 Vision: From Telco to QoE Service Provider, May 2009.

45 beginning to add significant value. pictures directly onto their frames. and the strong potential for extensive It is estimated that while operators By embedding 3G chipsets inside the data usage through this segment are take a hit of US$50-100 in subsidy frame, these vendors, in collaboration driving telco interest in the category15. for a netbook contract of two years, with telecom operators, are offering Other device vendors are also actively the total value generated over the monthly subscription services where looking at introducing similar duration of the contract is as high as the frame gets its own unique email products to compete in this category. US$1,440 or more8. Early examples ID with the operator providing access. Similarly, device vendors are also of such devices have also begun to For instance, the Cameo digital introducing laptops with embedded appear in the marketplace. Vodafone frame that retails for US$40 offers a 3G chipsets. has partnered with navigation monthly subscription plan of US$2 equipment company TomTom for a for providing email connectivity. Emerging Pricing Models portable navigation device to offer T-Mobile USA provides the access The evolution of such innovative over-the-air connectivity in 33 network for this device12. device categories will also require countries9. operators to adapt their current Tracking and Monitoring Devices pricing models in order to drive The telco opportunity in these Vendors are increasingly coming up uptake of these devices and services. devices is not limited only to mobile with devices that can be used for connectivity. Devices such as portable tracking, monitoring, and informing Subscription Pricing gaming consoles, and portable purposes. For instance, a product This model is valid for services that media players can also leverage fixed called “Smart Insoles”, which is being are offered on a continuous usage WiFi networks for connectivity. tested by AT&T, can alert old-age basis. For instance, services that offer Consequently, operators could look at users when they are about to fall pervasive network access to portable tapping this opportunity with triple- down, through the intelligent use devices come under this category. play packages, devices such as the of accelerometers. The product can Apple’s iPad is a ready example of MiFi10, and WiFi hotspot networks. also detect falls and call for help this category of pricing model. Here, automatically using the cellular AT&T, the partner operator provides Upcoming Device Categories network13. Such products can be data packages on a tiered subscription Telecom operators and independent combined with other tele-health package. Similarly, in-vehicle device vendors have both been devices such as a pill dispenser and computing is also a potential device experimenting in creating the next bundled as part of a larger service class for this pricing model. This genre of connected devices. package. model can also be deployed for device categories where the potential to E-Readers In-vehicle Computing Solutions consume significant data exists. Electronic readers have rapidly grown Telecom operators are also working to become a category of their own, with hardware and software vendors Pay-per-use Pricing after the success that Amazon has to provide connectivity to innovative This pricing model is typically seen with Kindle. Amazon claims in-vehicle solutions. Sprint offers used for services where network that for every ten copies of a physical connectivity services to an in-vehicle connectivity adds value to the overall book, the company sells six Kindle computer which is built into select device, but is not inherently critical copies11. Such strong figures have Ford vehicles, called the Ford Work for regular usage. Digital cameras that encouraged many companies to enter Solutions. The service is priced at a allow for direct uploading/emailing the e-reader market with simple monthly subscription rate of US$5014. of pictures constitute a potential over-the-air download solutions candidate for this model. powered by telecom operators. Portable Computing Devices Barnes & Noble’s Nook e-reader An area that is gaining rapid traction Bundled Pricing allows consumers to download books in current consumer markets is This pricing model can be adopted through AT&T’s 3G network. portable computing devices in a for devices where the device vendor tablet form-factor. Apple’s release already has a strong relationship with Digital Photo Frames of its tablet, the iPad, is generating the customer and connectivity could Digital photo frame vendors have significant interest in this segment. significantly enhance the value of the come up with products that allow The fact that Apple has already sold device. For instance, such a model wireless reception of emailed over two million iPads in two months can be applied to device categories

8 In-Stat, Mobile Graphics and Multimedia Review, November 2009. 9 Mobile Entertainment, TomTom partners Vodafone for GO LIVE 1000, April 2010. 10 A MiFi device is a class of wireless router that utilizes cellular connectivity to create WiFi-based local networks. 11 Beta News, Amazon CEO: We sell 6 Kindle books to every 10 books, January 2010. 12 Washington Post, T-Mobile Cameo Parrot Digital Frame, June 2009. 13 BusinessWeek, Could AT&T Prevent Falls among the Elderly, May 2009. 14 Michigan Wllz, Ford Work Solutions Integrates Computer into Vehicle, September 2009. 15 Apple, Apple Sells Two Million iPads in less than 60 Days, May 2010.

46 such as e-book readers. Amazon’s Figure 3: Overview of Emerging Connected Devices and Potential Pricing Models Kindle reader is a real world example of this category of pricing. Amazon Subscription Pay-per-use Bundled bundles the cost of the network access in the cost of the device and content, E-Book Readers while the network partners Sprint and AT&T provide seamless network Digital Cameras connectivity. Such pricing models can Digital Photo Frames also be adopted for devices that are Tracking & Monitoring not likely to put a significant strain Devices on the networks. In-vehicle Computing Solutions Figure 3 depicts the various Portable Computing Devices categories of devices and the potential Portable Navigation subscription models. Devices

Portable Media Players Key Challenges Facing Connected Devices Degree of The connected devices space, while Suitability Least Most experiencing strong traction due to Source: Capgemini TME Strategy Lab analysis multiple growth drivers, is, however, not without its share of challenges. models including free, pay-per-use, Managing scale/volume and tiered pricing. Integrating these A key challenge with traditional requirements with an existing billing M2M services involving asset relationship that the consumer has tracking and monitoring has been with the telco will likely prove a Mobile the high maintenance costs that are further challenge that operators face. associated with managing thousands “operators will of connections that make up a Navigating a fragmented value single M2M customer. Operators chain were reluctant to spend significant At present a key challenge need to adapt amounts of time in carrying out confronting the connected devices provisioning, billing, and customer industry is the fragmented nature their current service to enterprises that typically of the value chain. The inherent generated very low per-SIM ARPU. character of the industry, which For instance, average monthly ARPU requires provision of services across pricing models generated by an electricity or gas different industry verticals, is the meter is as low as €1.516. This was major cause for the complexity in order to one of the primary reasons why most and the resulting fragmentation telcos chose to address the enterprise of the value chain. This results in M2M market through resellers and the creation of isolated pockets of drive uptake MVNOs. With the rapid rise in expertise, and a proliferation of connected devices, operators will supplier/buyer interfaces, ultimately of connected continue to face this challenge from leading to a complicated product multiple fronts. They will now have and service development process, to cope with devices that connect longer time-to-market, and increased devices to their network using multiple costs. Additionally, it raises the technologies, including 2G/3G/WiFi; important question of who “owns” the using multiple connection modes, customer—the device manufacturer including constant-on, passive, and or the telecom operator—in the case ” burst, and using multiple billing of embedded devices.

16 Jasper Wireless Mobile Messaging Analyst, Service Providers are a New Market for M2M Network Jasper, October 2008.

47 While in the past, the limited size the 3G module in itself is becoming of the opportunity caused the bigger a significant stumbling factor. In players to address the market through the Kindle e-book reader, the cost intermediaries, it is expected that of the mobile broadband module is with the market reaching a critical estimated to make up for as much as mass, some of the larger players are 21% of the total cost of the device18. going to play a more direct role in the space, leading to future consolidation. To address this challenge, operators are attempting to limit the number Regulatory requirements of modules required for solution Device vendors and telcos alike face implementation. For example, the challenge of standing up to the concentrators are being used to demanding regulatory requirements enable the use of a single module of the healthcare and automotive for multiple smart meters. This verticals. In the case of medical has allowed Enel to have around devices where patient monitoring 400,000 modules for 30 million data is transferred remotely to health smart meters in Italy, while EDF workers, operators will need to ensure expects to deploy 700,000 modules that they work with device vendors to support almost 33 million meters and healthcare service providers in France19. Additionally, industry proactively in creating a high quality players are attempting to drive scale of service with minimal latency. benefits by having a common set of guidelines for modules from different Lack of clear industry standards vendors. Towards this end, the GSM A key challenge facing developers, Association has formed an alliance telecom players, and device vendors with 25 major players from the is the lack of clear industry standards industry to develop a set of guidelines for the development of such devices. for the design and implementation of Cost of A major hurdle for device vendors, embedded modules. in particular, is in customizing their 3G“ modules devices for multiple telecom networks Challenges in bringing the service that follow opposing standards, to market thereby limiting their ability to drive With a proliferation of connected is becoming volumes. Currently, telcos have gained devices, operators will face the significant experience in certifying challenge of encouraging consumers a major handsets for use on their networks; to sign up for a variety of plans for however, going forward, they will their multiple devices. Moreover, a need to gain newer capabilities if bigger challenge could revolve around challenge in the they are to certify connected devices the risk of cannibalization of more from various industries. This creates profitable service offerings. a greater need for the establishment growth path of clear industry standards for both Telcos will also face internal devices and the APIs17. challenges over bringing such services of connected to the market. For instance, they will Cost of 3G modules need to clearly state the governance One of the biggest challenges faced of such new services. Most of these devices by connected devices in their growth services are typically consumer curve is the cost of the 3G module facing, handled by the retail (B2C) that is being embedded into these division, while these services still devices. While developers and are technically M2M services that ” content providers are coming up are handled by their enterprise (B2B) with compelling and innovative ideas division. Operators will face the for connected devices, the cost of challenge of minimizing such channel conflicts.

17 Application Program Interface. 18 GSM Association, Embedded Mobile—a new era of connected devices Ana Tavares Lattibeaudiere, GSMA, February 2010. 19 GSM Association, Embedded Mobile Newsletter—Issue 3, October 2009.

48 Next Steps for Telcos Figure 4: Potential Operating Models for Telcos in Connected Devices The connected devices ecosystem presents the right opportunity for High 1 telcos to utilize their existing assets Operators develop complete solutions in close while ensuring that they have a collaboration with vendors strong potential to create innovative 1 2 and steady future revenue streams. Operators build subscription plans around third-party Direct Retail Given the diversity of devices that devices (Service/package bundling) e.g. E-Health services make up the connected devices space, 3 operators are faced with the option of Operators provide basic connectivity Third-party Retail choosing between multiple operating e.g. Digital photo frames models. The choice of model is

Incremental Revenue Potential 1 Subscription closely tied to the role of connectivity Wholesale 2 Pay-per-use for the device and the potential e.g. E-book readers revenue uplift that it can offer telcos 3 Bundled (see Figure 4). Indeed, it remains Low imperative that telcos approach each Low Criticality of Connectivity to Device Function High connected device opportunity with a clean sheet of paper, rather than be Source: Capgemini TME Strategy Lab analysis constrained by historical approaches.

Wholesale connectivity as a value-add to the Wholesale option offers the most product. Bundled pricing offers the straightforward strategy for telcos in most potential for this category, given their approach to connected devices. that the primary focus remains on the Operators should focus their energies device and not the value derived out The on ensuring that they provide a of connectivity. superior packaged wholesale solution to device vendors that want to embed Third-party Retail “wholesale model connectivity into their devices. Telcos The third-party retail strategy allows should strive to set up certification operators to tie a data plan with offers the most laboratories that will pre-test and emerging connected devices that will pre-qualify multiple 3G data modules be sold at traditional retail stores. that independent device vendors can This allows device vendors to tap straight forward directly pick and choose for inclusion into the distribution strengths of in their device. Such streamlined traditional retailers, while allowing route towards processes help vendors reduce their telcos to bring new customers time-to-market, while helping telcos into its fold. In this model, telcos to rapidly enable connectivity over a typically pay a subscriber acquisition monetizing wide range of devices. commission to the retailer, and monetize the customer through the connected Telcos should typically adopt the regular data subscription and pay-per- wholesale approach for devices where use plans. device-connectivity is a “nice-to- devices have feature”, rather than a “must- This approach is suitable for have” feature. A case in point is traditional consumer electronic opportunity e-book readers where the content devices which when combined with consumption happens over an wireless connectivity provide a much extended period of time. For these more compelling user experience. devices, operators should strive to Digital photo frames, when embedded with mobile modules and the ability ” work with module vendors in driving down the costs of 3G modules, while to remotely and wirelessly receive encouraging device vendors to embed images, create a new product class

49 in themselves. Telcos can also adopt Beyond gadgets that allow for content Conclusion this approach when dealing with consumption in varied forms, The connected devices space offers consumer devices such as the iPad telcos should focus on packaging significant potential for mobile that have a fixed-wireless WiFi radio solutions around specific customer operators to drive new revenue and a wireless module as an optional needs, such as healthcare. In this streams and innovative business attachment. context, telcos should focus on models. The range of potential partnering with healthcare providers devices opens up opportunities Direct Retail and device vendors and work with for players across the value chain, The direct retail strategy is usually them early on at the design stage to including application developers, reserved for those products and create compelling remote healthcare device manufacturers, content players, services for which connectivity is services. and telecom operators. However, in critical to their core function, and order to reach their true potential, for those products that offer the For long term success in this market, it is imperative that all players maximum potential for revenue uplift in addition to adopting appropriate work collaboratively in collectively for telcos. These products usually are operating models, telcos will also developing the market. For telecom high-value consumer gadgets such need to ensure that they develop operators, the nascent state of as mobile Internet browsing devices, or acquire the necessary technical the market presents a significant e-healthcare devices, and security expertise. Telcos would need opportunity to drive the space in solutions. For such products, telcos capabilities which allow real-time terms of business models while should put their entire marketing processing of data gathered from a continuously expanding their reach and distribution strengths behind the large number of devices, so as to be into consumers’ homes and increasing products and work closely with the able to provide intelligence around their share of wallet. device vendor to create a compelling the status of the connected devices. user experience. Telcos can also Additionally, because of the large Olivier Gouteix is a principal in look at potentially building service number of devices that the new Capgemini Consulting’s TME practice. packages that combine these devices environment would need to support, He has been working on strategic and with other traditional telco services. operators would need to develop operational issues with industry leaders Telcos could package wireless systems and processes for instant and for more than 12 years. His major connectivity to mobile Internet automated provisioning of services, areas of expertise include broadband, devices for their fixed-line broadband along with a scalable backend system mobile multimedia and fixed-mobile customers or create a floater data to support continued operations. convergence. He is based in Paris. usage policy for a household that Telcos will need to work extensively could potentially include all of with other members of the value Subrahmanyam KVJ is a senior the connected devices within the chain to drive standardization of consultant in the TME Strategy Lab. His household. A subscription pricing the technologies so as to ensure a recent work focused on the convergence model is best suited for this category more vibrant ecosystem, allowing of the telecom and media markets, and of devices. scale benefits to kick in for the entire the mobile industry. Prior to joining the industry. Lab, he worked with a leading electronics manufacturing services firm in a project management role. He is based in Mumbai. n A direct-to-retail strategy “works best for devices where connectivity is critical to the function ”

50 management INSIGHTS

TechnoVision 2012™ in the TME Industry 52

Next Generation Customer Service Strategies: Harnessing the Power of the Internet and Web 2.0 for Delivering Customer Care 58

Sustaining Agility and Growth: Why it is Important for Companies to Periodically Implement Significant Organizational Changes 66

51 TechnoVision™ 2012 in the TME Industry By Patrick Steemers and Priyank Nandan

Abstract: The Telecom, Media and Entertainment (TME) industries are highly technology-dependant and prone to rapid and disruptive changes due to the evolution of technology. Capgemini’s TechnoVision™ framework is designed to enable organizations align technology trends with business objectives. The framework identifies twenty-two developing technologies that are mapped to six operational and one technology cluster. Developments in access technologies and devices are enabling highly personalized and rich multimedia services delivery, allowing TME players to create the “You Experience” for consumers. The changing nature of services is mandating that TME players look outside their organizations for sources of innovation. Telecom players are achieving this by leveraging the “We Collaborate” cluster – many are opening up their network and data assets in a controlled manner to the external development community through Open Application Programming Interfaces (APIs). The new environment also demands a high-level of agility from TME players, and requires organizations to adopt “Process-on-the-fly”, which refers to modular, reusable process and IT solutions that allow companies to respond to change in real-time. TME players are increasingly “Thriving on Data”, as new business models and services are expected to make extensive use of customer data analytics. An increasing number of telecom players now outsource network and IT management to managed service providers who offer “Sector-as-a-Service” solutions that allow telcos to focus on service creation and customer management, and thereby improve operational efficiency. IP-based next generation telecom networks constitute the “Invisible Infostructure” for the TME industry on which content and applications are delivered to end-users, agnostic of the underlying physical layer technologies. TechnoVision also provides the tools for telecom players to map these technology developments to the key business drivers for the industry – the need to generate new revenue streams, optimize cost structures, recreate barriers to entry and prepare for the new wave of convergence.

The Telecom, Media and Framework, and maps the clusters Entertainment (TME) industry is defined in the framework to key technology-intensive. Consequently, technology trends in the TME space. Rapid pace the rapid pace of technology We then identify the key business development necessitates frequent drivers that lead to the adoption strategic realignment for players of each technology cluster by TME “of technology across the value chain. The players. introduction of new technologies development can lead to the emergence of new TechnoVision business models, can facilitate Capgemini has identified 21 necessitates player movements across the value key technology building blocks, chain and can sometimes displace structured into 6 broad operational incumbents from leadership positions. clusters that help narrow down the frequent Hence, it is imperative for players to emerging trends in technology and keep a tab on emerging technology provide a detailed perspective on the strategic trends, anticipate the likely effect on impact of these trends on different their businesses and plan long-term businesses (see Figure 1). strategic responses. realignment Capgemini’s TechnoVision framework The TechnoVision framework enables organizations to identify thus has six operational clusters, for TME emerging technology trends and and one technology cluster use this knowledge to achieve better “LiberArchitecture”, which is not alignment between technology operational itself, but underpins all players and business objectives. This the others. We take a detailed look ” paper introduces the TechnoVision at each of these clusters, and how 52 Moreover, the development of touch- Capgemini’s TechnoVision screen display technology, increased processing power on handsets, and framewo“ rk is designed to enable full-featured desktop-level operating systems on handhelds have brought about a significant improvement organizations align in the user experience on mobile devices. Indeed, key trends such as ipodification, application stores, full- technology trends with fledged personalized Internet access and ubiquitous access to social media business objectives platforms have been made possible by the rapid and continuous expansion of Internet backhaul capacities and they can be mapped on to the TME In the TME context, the online “You simple, yet highly advanced device industry. Experience” will constitute a range interfaces. of improvements” in mobile and You Experience fixed access technologies, as well as An interesting example of the The “You Experience” cluster the development of device interface intersection of high-speed networks constitutes a wide range of user technologies that facilitate highly with innovative applications, and interface technologies that delivers a personalized services for end-users. highly customized experience to end devices can be seen in the case of the Slingbox. The device allows users. “You Experience” envisages Telecom firms have continuously for place-shifting, where it enables a shift away from the conventional invested in upgrading end-user consumers to remotely view the approach of strait-jacketed and pre- bandwidths across both fixed and content of their home’s cable, satellite packaged off-the-shelf solutions. wireless networks. Wireless operators or PVR2 programming. Access Instead, it marks the advent of a new are investing in 4G networks networks laid out by fixed operators class of technology deployments and multiple fixed-line operators to the consumer’s home allow the tailored to meet the specific customer are currently rolling out FTTx content to be streamed to anywhere interface requirements that the networks1. These upgrades in access in the world. The mobile application service demands. speeds allow consumers to involve of the Slingbox, Slingplayer, allows themselves in a highly interactive this content to be streamed through and immersive user experience. high-speed mobile networks onto the consumer’s mobile devices. Figure 1: Key IT Trends and TechnoVision Clusters Throughout this process, the focus is on the consumer experiencing a seamless service and accessing

Real-Time content in a manner that is most Business Human convenient to the consumer. Online Process Mashup Management Interaction Cloud Mesh Execution media giants are taking interactivity Real-Time Packaged to the next level. For instance, Yahoo! Intelligence Sector Service Composite Solutions Orientation has recently launched widgets that Applications Advanced Analytics are embedded on television sets. Smart Business Consumers can customize these Networks iPodification Sensing Utility Networks Business Business widgets based on their preference and Infrastructure Rules! Open Software- Standards pull email/social networking feeds/ as-a-Service Jericho-Style documents on their TV sets3 whilst Security Wikinomics Open Data Rich Internet Mastered simultaneously viewing their desired Applications Data Management programs.

Source: Bernard Helders, Pierre Hessler, Ron Tolido, and Ard Jan Vethman, Capgemini TechnoVision, 2010

1 Fiber to the Node/House. 2 Personal Video Recorder. 3 Business Week, Yahoo!’s Next Frontier: Internet TV, January 2009.

53 the TME industry to add dynamic Development of device capabilities to core processes such as customer acquisition, provisioning and fulfillment, retention and self- interface“ technologies facilitates care, based on actual customer- dependant variables. Increasing a highly personalized “You adoption of such flexible on-the-fly business processes is enabling TME players to achieve cross-channel Experience” for end-users agility and cost efficiency. For instance, with rise in real-time charging capabilities, most operators We Collaborate developer portal are other notable are looking at targeting multimedia The “We Collaborate” cluster initiatives. ” consumption in the prepaid segment. describes capabilities that help Similarly, multiple mobile operators organizations tap the power of Media publishers have embraced around the world have introduced internal and external collaboration. social network technologies, wikis pay-as-you-use mobile Internet By connecting to the outside and blogs to create highly interactive plans, on the back of such on-the-fly world, fixed, predefined business online publications that seek to business processes. It is estimated transactions become ongoing capture consumer opinion and that revenues from such customized relationships with clients and feedback, and in some cases even services will deliver over $2.9 billion partners, facilitating the collaboration, to create content. For instance, Sky revenue by 20129. innovation and co-creation of News plans to install a Twitter client concepts, ideas, knowledge and on its journalists’ computers to Thriving on Data tangible products. encourage use of social media into Detailed insight into crucial their news gathering efforts7. BBC data and events is a necessity for In the TME context, this cluster will Global News is encouraging news organizations that want to navigate constitute the gamut of technologies journalists and editorial staff to make a constantly changing, information- that allow telecom operators and use of social media and online tools rich environment. Organizations that media players to involve external to be more collaborative in producing know how to connect the use of data developers, content partners and open news content8. to their strategic business objectives communities to participate in service are “Thriving on Data”, constantly creation and innovation on traditional Process-on-the-fly reading, analyzing and reacting to communication and media offerings. Frequently changing rules and information inside and far outside the regulations, risk management, company boundaries. Information Telcos are now encouraging developer mergers and acquisitions, thus is becoming a corporate asset, communities to tap into core telco collaborative product development which serves all strategic and data assets such as user identity, and service management require operational parts of the business. billing, presence, location, messaging telecom organizations to rapidly align and call control functions through processes and systems to change. With the proliferation of services, APIs and development tools, that “Process-on-the-fly” cluster includes and increasing touch-points in their facilitate open innovation on core capabilities that allow enterprises to interactions with consumers, TME telco products and services. The respond to critical business events in players have access to a wealth of data Orange Partner Program4 offers over real-time. around consumer interests and usage 22 APIs5 to external developers to patterns. Garnering such data for create applications for Orange mobile The TME industry throws up precision marketing and advertising customers. On the fixed platform, the challenge of managing large not only creates new revenue streams BT’s 21CN SDK6 provides developers organizations that need to respond for players in the TME sector, but also tools to create applications for its next promptly to the changing consumer improves the effectiveness of their generation IP-based fixed network. preferences, and evolving enterprise marketing campaigns. Vodafone’s Betavine, Telefónica’s voice and data requirements. Rapid OpenMovil APIs, and T-Mobile’s evolution of business process With their traditional businesses management tools has allowed saturating, operators are increasing

4 Orange Partner Program website. Telecoms.com, Orange sees API Uptake, but Operator Cooperation Needed, 2009. 5 API: Application Programming Interfaces. 6 SDK: Software Development Kit. 7 EConsultancy.com, Sky News wants its Staff to Embrace Social Media, January 2010. 8 Guardian.co.uk, BBC Journalists must keep up with Technological Change, February 2010. 9 Mobile Marketer, Carriers Prioritizing Personalized Services over Advertising: ABI, April 2009.

54 focus on usage, location and customer and Ericsson now offer “Sector-as-a- as-a-Service solution. By integrating data for revenue augmentation. For Service” offerings viz, network design, its wireless data solution into the instance, when Vodafone offered maintenance and management, and hardware, and offering seamless premium turn-by-turn navigation now, even content delivery platforms, connectivity through its existing services with the now defunct to telcos on a managed basis as network, Sprint allowed Kindle to Wayfinder acquisition10. Combining relatively standardized services. create a compelling user-experience. customer intelligence and ad server technologies unlocks such innovative The TME sector has progressively Invisible Infostructure additional revenue streams. advanced to a significant level IT infrastructure such as servers, of maturity over the years, and storage, application platforms and Media companies are also increasingly consequently, has been able to networks gradually evolve into a profiling and delivering targeted standardize a number of services, utility-style “Invisible Infostructure”, advertising to their consumers, processes and software packages. Best supplying all the infrastructural based on historical usage patterns, of breed platforms and pre-integrated services that an organization needs as well as peer behavior. In the solutions are being used to simplify to responsibly and securely run UK, BT, in collaboration with the business processes and decrease its business on. Organizations are BBC and ITV, is planning to mine the total cost of ownership. Services liberating themselves from the customer usage data for delivering such as telco billing, provisioning complex tasks of having to run these targeted advertising as part of and CRM solutions are increasingly basic infrastructural services. These “Project Canvas”11. Similarly, precise made available through the Software- infostructural services increasingly implementation of behavioral as-a-Service model or as part of will be supplied from a cloud, targeting will demand real-time an outsourcing solution, thereby which hides the details of suppliers, integrated business intelligence reducing the time-to-market and cost technologies and systems. solutions and a comprehensive of ownership. Telco-specific software data management capability for the packages and suites also support In the TME context, “Invisible enterprise of the future. MVNOs12, allowing these players to Infostructure” refers to solutions that replicate the necessary functions of a allow network-agnostic applications Sector-as-a-Service typical operator without getting too that can be modular, reusable Business solutions for horizontal involved in the nitty-gritty of the non- and scalable. Telecom players are services such as office automation, core aspects of the business. introducing infrastructural elements CRM, HRM and finance, are that allow innovative business delivered as little-customized, Telcos can also act as a managed models to be put into play on top package-based software. The scope provider to other businesses by of them. Telco building blocks such of business solutions now extends offering its assets to other companies as Service Delivery Platform (SDP) beyond “support” functions, and is and help drastically reducing time- and IP Multimedia Subsystem (IMS) increasingly relevant to sector-specific to-market, as well as aid in adding provide the necessary technology services. Cost cutting, simplicity, significant value to enterprises. infrastructure for a host of services. efficiency, economy of scale and Amazon’s Kindle e-book reader These technology platforms isolate industrialization drive the need for depicts a good example of a telecom the service creation process from the organizations to adopt managed operator, Sprint, offering a Sector- underlying network infrastructure. services.

Like in other industries, in the TME space, the adoption of managed Organizations that know services is not limited to IT management and non-core activities, how to connect the use of data but to functions that were considered “ to core to the telco business viz. network management, billing, CRM and so on. their strategic business objectives As margins on core telco equipment shrink, equipment vendors have moved into the managed services are “Thriving on Data” space. Vendors such as Alcatel Lucent

10 MocoNews, Vodafone to use Wayfinder for Location Based Advertising, May 2009. 11 Telegraph, BT Vision Vows to Tackle Slow Take-up, January 2009. 12 Mobile Virtual Network Operators. ”

55 IP technologies allow applications to leverage network assets without Open standards and SOA having to be rewritten for multiple access and core network technologies. (Service“ Oriented Architecture) Additionally, ownership of network infrastructure enables telcos to be are the key principles underlying providers of “Invisible Infostructure” to other businesses. Telcos such the “LiberArchitecture” as AT&T in the US have begun to offer what are the building blocks of such structures. AT&T offers cloud- based storage services, application hosting services, among other industry. Disruptive ”technologies beginning to result in a cascading services to other enterprises. For effect in the mobile industry. such as VoIP and Internet messaging instance AT&T’s Synaptic “Compute are threatening core telco revenue As a Service”, offers computing Service orientation is being streams, even as saturated processing power that can be used for adopted across sectors to provide and competitive markets exert development of in-house apps or as the foundation for other processes considerable pressure on pricing. a testing and development platform and workflows. In the Media and Telcos need to balance revenue for external enterprises. The service Entertainment industry, SOA is enhancement through new services, is a pay-per-use cloud-based “virtual being used for processes like rights whilst focusing on structural cost server” service for companies and management, production and content reduction. Investments in new developers. AT&T provides and delivery. In the telecom industry, technology to recreate entry barriers manages the virtualization-based players are using SOA to interface also stay in focus, even as telco-media server infrastructure over a private across the large legacy systems, so convergence compels fundamental or Internet-based cloud, and the as to be quicker and more flexible changes in business models and customer manages the database and with the delivery of products to the services. 13 applications . markets. The key business drivers for the TME LiberArchitecture For the TME sector, the impact of industry can be directly mapped This seventh, non-operational cluster these clusters is very pronounced as into one of the seven TechnoVision contains the enabling principles the sector is not only subjected to clusters, thereby offering companies a that underpin the other operational the changes brought about by these clear view of the emerging trends that clusters. This cluster includes the trends, but also acts as an enabler are likely to impact their business in technology architecture elements that to these platforms. Consequently, the coming years (see Figure 2). enable organizations to collaborate players in the TME space not only and communicate effectively beyond need to plan for the potential impact New Revenue Streams their traditional boundaries by of these clusters, but also need to With their traditional businesses adopting uniform norms. Open develop a deep understanding of the saturating, the TME industry is standards and SOA (Service emerging trends so as to tailor their constantly looking to identify new Oriented Architecture) are the key service offerings according to their revenue streams. Mobile firms are principles of systems based on the requirements. looking to “Thrive on Data” to deliver “LiberArchitecture”. targeted mobile advertisements, and Putting TechnoVision to Practice location-based services among others. Open standards and technologies in TME Operator entry into areas such as are today re-defining the traditional A strong understanding of the link cloud computing, and wholesale contours within which players in the between the various TechnoVision solutions for the M2M industry mark value chain have operated. Increasing clusters and the business drivers of the beginning of the development collaboration amongst TME players is the TME industry will help TME of Sector-as-a-Service and Invisible leading to the development of a new players steer in the right direction. Infostructure solutions, in the open ecosystem where consumers, Rapid evolution of technologies, process, creating new growth areas developers, and third-party as well as changing consumer for telcos. Additionally, the move to businesses can participate equally. For behavior, is throwing up a set of open standards and SOA will assist instance, the rising popularity of open unique challenges for the TME in launching innovative services and mobile platforms such as Android is applications, often provided by third

13 AT&T’s Synaptic Compute as a Service Website. PC World, IBM and AT&T Unveil Cloud Computing Services, November 2009.

56 parties, to widen the base of revenue Convergence & the Digital Supply players to identify the future trends generating activities. Chain in Information Technology and High-end devices such as the assess the potential impact on their Transformation to Cut Costs Apple iPhone herald the arrival business in the coming years. When To tackle the business imperative of of convergence as a long-term assessed in conjunction with the cost rationalization, telco players need phenomenon that is here to stay. business drivers in the industry, the to look internally to try and achieve Such devices have spurred TME TechnoVision framework articulates maximum efficiency. Empowering the players to deliver a “You Experience” how TME players can successfully organization with flexible processes experience that allows high levels leverage these trends to not only which allow easier launch of services, of differentiation. Consumers now survive but thrive in the changing with minimum disruption to existing look for a compelling user experience business landscape. systems, will save precious resources in services that they are already for the organization. Similarly, use of used to. Likewise, the advent of the Patrick Steemers is a principal with “Process-on-the-fly” based managed third screen is forcing operators to Capgemini Consulting for Telecom, services, and Invisible Infostructure, identify and create touch-points Media & Entertainment. He has which allows outsourcing of non- through which they can reach out over 18 years of experience in the core activities, further cut costs by to consumers, and consequently telecommunications industry and is ensuring that the organization is monetize their interest. a trusted advisor and thought-leader lean. The migration towards open to some of Capgemini’s most strategic standards and service orientation will The increasing digitization of media, clients. Recent work involves strategic allow players to engage with different along with corresponding rise in programs around mobile broadband, vendors, thereby allowing them to device capabilities and network customer experience improvements, the choose the most cost effective options. speeds are ensuring that customers global roll out of mobile social networks today have multiple touch-points and online strategy. He is based in Recreate Barriers to Entry with TME players. Media is now Utrecht. With growth saturating in developed increasingly time-shifted and place- markets and competition rapidly on shifted and all of this is leading Priyank Nandan is a consultant in the rise in emerging markets, telcos to increased interaction of TME the TME Strategy Lab. His recent are looking to recreate entry barriers players with consumers and amongst work includes market assessment for across their service portfolio. They consumers themselves. Availability new service launch for a global media are achieving this by bringing in of affordable bandwidth is enabling conglomerate and identification of a unique, personalized experience media players and companies acquisition targets within the digital to their consumers, thus limiting from outside the TME space to content space. Prior to joining the the risk of churn. Operators will increasingly build services and Lab, Priyank has worked for a major also need to ensure that they forge solutions that utilize existing network IT product company. He is based in close ties with their consumers infrastructure. Mumbai. n after analyzing the usage patterns of their customers closely. Strong In conclusion, TechnoVision provides relationships with customers create a structured approach for TME a sense of loyalty acting as an entry barrier for competitors.

Figure 2: Relevant Drivers for TechnoVision Clusters

Technology Clusters Business Drivers You We Process-on- Thriving on Sector-as-a- Invisible Experience Collaborate the-fly Data Service Infostructure

Seek new revenue streams ✓ ✓ ✓ ✓

Transformation to cut costs ✓ ✓ ✓

Recreate barriers to entry ✓ ✓ ✓

Convergence and digital supply chain ✓ ✓ ✓

Source: Capgemini TME Lab analysis

57 Next Generation Customer Service Strategies: Harnessing the Power of the Internet and Web 2.0 for Delivering Customer Care by Alain Gerset and Sameer Vaidya

Abstract: Customer service plays an important role in combating churn and operators should look at extending their portfolio of customer service channels by leveraging the Internet and Web 2.0. Developing web-based consumer care will enable operators to “be where the customer is” and consequently, also find user acceptance. Key next generation customer service strategies include the use of social media interactions, chat-bots1, and multi-channel integration. The power of social media can be harnessed for delivering customer care through the proactive identification and dissemination of important information. Social networks can also be used for delivering consumer care. And existing customers can be encouraged to solve other users’ problems. Operators can make the customer service even more cost-effective and efficient by leveraging interactive chat-bots. These are computer programs designed to simulate the responses of real customer service agents. In addition, operators should offer integrated multi-channel service experience to customers. This entails consistent user experience across channels, persistence of context while switching from one channel to another, and the recommendation of optimal channels for problem follow-up and resolution. However, operators should be cognizant of the possible implementation challenges and proactively adopt appropriate mitigation measures. Some of the key challenges that operators need to anticipate include managing customer expectations from social media and chat-bot care, escalating problems from one channel to another seamlessly, handling complex queries through chat-bots, recording customer interaction history across channels, and integrating customer data scattered across multiple silos. Lastly, operators should quickly develop a presence in the new channels and aim to improve their services in a phased manner based on a defined, long-term roadmap and customer feedback. Once implemented, these next generation customer service strategies promise to provide a significant boost to the churn management initiatives of operators.

Figure 1: Selected Key Reasons for Churn among North American Voice Fixed and mobile operators, who Customers*, 2009 continue battling stagnation and

75% high subscriber acquisition costs in developed markets, do not underestimate the importance of customer retention. High-quality customer service is a key element in the battle against customer churn. 34% In fact, customer service is one of 25% 20% the most important factors affecting customer experience; poor delivery 11% 11% on this front is highly likely to lead to 3% 4% 1% churn (see Figure 1). Want to Need better Current Need better Need Moving to Want to save A different Others reduce customer provider call quality converged new area through service not monthly bill service does not services bundled being offered value me as products by current a customer provider

* Base of 106 US online consumers who were looking at switching home phone providers; multiple responses were allowed. Source: Forrester Research, The Science of Churn: When and Why Consumers Switch Service Providers, January 2009

1 A chat-bot is a computer program designed to simulate the responses of a real support agent.

58 Figure 2: Average Daily Minutes Spent by a User on Social Networking Sites, Selected Developed & Emerging Markets*, 2007-2009 and % of Online Consumers regularly using the Internet for Researching / Purchasing Products**, Europe, 2009

Average daily minutes spent by a user on social networking % of online customers regularly using the internet for sites, selected developed and emerging markets, 2007-2009 researching/purchasing products, Europe, 2009

CAGR: ~60% 10.8 45%

31% 5.9 4.2 21%

2007 2008 2009 Research Make Use Products Purchases Comparison Shopping Sites

* Countries include US, UK, Australia, Brazil, Japan, Switzerland, Germany, France, Spain, and Italy ** Responses of European online consumers to the question “Which online activities do you do at least monthly?”; multiple responses were allowed Source: Capgemini TME Technology Services Lab analysis. Nielsenwire, Led by Facebook, Twitter, Global Time Spent on Social Media Sites up 82% Year over Year. Forrester, A Deep Dive Into European Consumers’ Online Behavior, 2009, August 2009

Although operators have started High-quality complementing traditional customer service channels such as call-centres and IVR2 with messaging (e.g. e-mail, custome“ r service SMS) and online self-service, there is an opportunity for operators to is a key element extend their portfolio of customer service channels further by leveraging the Internet and Web 2.03. Customers in the battle are spending increasing amounts of time on social networking sites and against customer are also using the Internet extensively for researching and buying new Operators products (see Figure 2). Developing churn web-based consumer care channels can“ extend their will enable operators to “be where the customer is” and consequently, also find user acceptance. Moreover, as communications portfolio of products and applications are” often In this paper, Capgemini identifies critical from customers’ point of customer service ways in which operators can leverage view, they expect customer service the Internet and Web 2.0 to develop to be readily and globally accessible. next generation customer service Therefore, operators are continuously channels further strategies and deliver smarter, more trying to identify new customer efficient customer experience. We service channels that can help to also highlight key challenges and by leveraging quickly solve problems in a cost- mitigation measures that operators efficient manner. should focus on to ensure effective the Internet and use of these new customer service channels. Web 2.0

2 Interactive Voice Response. ” 3 Web 2.0 includes applications, services and sites such as social networking, video-sharing, blogs and wikis.

59 Key Next Generation Customer Customer service through Social Key next Service Strategies Networks The key next generation customer As discussed earlier, to “be where the service strategies include the use of customer is” will be important for “generation operators going forward. An effective social media interactions, chat-bots, and multi-channel integration to way of accomplishing this is through customer service offer quick and optimal response to fostering an active presence on customer queries or problems. We popular social networking sites such strategies will now discuss these strategies in as Facebook and Twitter. Dedicated detail. agents can be used to monitor user activity / queries. include the use Social Media Interactions The power of social media can be For instance, AT&T has a team of social media harnessed for delivering customer of dedicated social media care care in three ways—proactive agents. Each agent has a Twitter ID identification and dissemination of and handles approximately 1,000 6 interactions, important information, customer tweets per day . AT&T also has a service through social networks, and Facebook page where users can post chat-bots, and encouragement of existing customers their queries on the wall or click to solve problems of other users. on the links to other customer care channels7. multi-channel Proactive dissemination of important information Similarly, Vodafone UK has a integration Operators can monitor consumer Facebook page where customers can discussions of their products / post issues for discussion. Simple services on social networks and queries are resolved by the web other Web 2.0 sites such as blogs relations team. For complex issues, and discussion forums to proactively users are directed to other care ” identify customer issues, pain- channels and are advised to provide a 8 points, or information needs. Having reference to Facebook conversations . identified these requirements, operators can proactively make available the desired information through their websites, e-mails, or other media. For instance, Comcast Operators monitors Twitter for customer conversations and proactively contacts “should also the customers to address their concerns and resolve issues4. leverage the Additionally, operators should also leverage the interactivity and rich- knowledge media delivery capabilities of the Internet to convert their plain-text FAQ / self-help / product-overview of existing sections into an audio-visual experience for the users. Device customers for vendors such as Apple have started using this route to educate their customers about the finer aspects of query or problem their products5. resolution

4 Businessweek.com, Comcast’s Twitter Man, January 2009. 5 Company website. 6 SocialMediaToday.com, How 5 Top Companies Win with Twitter, February 2010. 7 Facebook and AT&T websites. ” 8 Vodafone UK’s Facebook page.

60 Encouragement of peer resolution can ask a question or request a task is a similar virtual agent service. Operators should also leverage the and the chat-bot responds with ‘Ask Verizon’ also has a virtual agent knowledge of existing customers for appropriate answer or action. Chat- called Frank who answers customers’ query or problem resolution. This bots vary in maturity based on the support queries and points to other can be accomplished by encouraging degree of interaction and query appropriate channels if he (it!) is customers, especially those who resolution capabilities (see Figure 3). unable to answer them11. are technology- or product-savvy, to respond to problems that are Simple self-service assistants typically Advanced chat-bots can perform posted on social media applications / direct the user to appropriate web- a multitude of tasks and support platforms by other users. pages based on selected keywords extended natural language in the user’s query. For instance, conversations with users. For One way to implement this is to ‘Ask Laura’ from T-Mobile (UK) instance, they can ask pointed create discussion boards that allow allows users to write a question questions to dig deeper into a posting of customer issues and and in response, directs them to problem or seamlessly escalate the also encourage peer resolution. the appropriate answer in the FAQ issue to an agent-assisted channel. Another way is to use existing section10. PayPal’s ‘Sarah’ is a multi-lingual social networking sites such as chat-bot capable of bringing up Facebook and Twitter. For instance, The next level of chat-bots entails dynamic pages based on context and Twitter pages of AT&T and Comcast simple interactive conversations addressing complex issues, such as allow peer resolution in addition through which customers are guided disputes and refunds12. to dedicated support provided by towards appropriate web-pages, social media agents. Vodafone UK’s offered advice on using the correct Early results indicate that chat- Facebook discussion board also channels, and provided basic support bots will gain consumer appeal and allows customers to respond to or information. acceptance. For instance, O2 UK’s problems reported by other users9. ‘Ask Lucy’ gets about 1,000 questions For instance, O2 UK’s ‘Ask Lucy’ per day and BT’s call center volumes Chat-bots service can remember user names were reduced by 700,000 annually Customer service can be made across sessions, answer customers’ after the launch of ‘Ask Emma’13. more cost-effective and efficient by queries, and offer support by Moreover, these chat-bots can also leveraging interactive chat-bots. A suggesting solutions or providing help position an operator as market- chat-bot can participate in intelligent directions to the appropriate leading in deploying customer- conversations wherein a customer knowledge source. BT’s ‘Ask Emma’ friendly new services/technologies.

Figure 3: Key Types of Chat-bots

Simple Self-service Basic Chat-bots Advanced Chat-bots Assistants

• Assistance based on keywords • Simple interactive • Interactive dialogues in user searches conversations with users • Answers to complex questions • Direct users to appropriate help • Provide basic • Troubleshooting content support/information • Seamless escalation to agent • Assistance in finding the assisted channel correct pages on the website • Advice on appropriate channels for problem resolution

Source: Capgemini TME Technology Services Lab analysis. CreativeVirtual.com News. Virtuoz PayPal case study

9 Vodafone UK’s Facebook page. 10 Company website. 11 Company websites and press releases. Creativevirtual.com news articles. 12 Company website. VirtuOz ’s (www.virtuoz.com) PayPal case study. 13 Chatbots.org and Creativevirtual.com news articles.

61 Verizon’s website was regarded as the Therefore, operators should look on her preferences and call history. best support site for a US operator in towards offering an integrated This would also entail switching from a survey conducted by the Customer multi-channel service experience to one channel to another in case the Respect Group with a special mention consumers (see Figure 4). initial contact is made through a less of Frank, the chat-bot featured in ‘Ask preferred channel. In turn, this would Verizon’14. An integrated multi-channel help operators to delight customers service experience entails multiple while reaching out to them proactively Multi-channel Integration components. First, the user should or while following up on calls. Customers now have access to get consistent experience across all multiple customer care channels such channels in terms of services and The key benefits of next generation as call centers, websites, SMS, emails, resolutions offered. In other words, customer service strategies discussed social media, and chat-bots. Faced consumers should be sure that they above include enhanced consumer with these choices, consumers can will get the same response regardless convenience, potential reduction of select any of the channels based on of the chosen channel. voice call traffic to contact centers their convenience to initiate contact through offloading of queries to web- and follow-up on inquiries. At times, Next, the user should be able to pages or social networking sites, and consumers may want to use different seamlessly switch over from one resultant decline in customer care channels for initiation and follow-ups. channel to another for further expenses. For instance, a consumer may flag a discussion of a problem. An problem first through a chat-bot, and important aspect here is persistence However, implementations of follow it up with calls to a contact of context; information about the these strategies bring forth a set center in case the query has not been customer, the current problem, and of challenges as well. We now resolved. the solutions already tried out. For discuss the key challenges and their instance, a user should be able to mitigation. In such cases, it would be user- switch from a chat-bot discussion friendly if the operators can session to live discussion with an Key Challenges and Mitigation remember the context of those calls. agent without losing context of the Challenges with Customer Care In that case, consumers would not situation. Delivered through Social Media have to explain the problem from The foremost challenge associated scratch when they use a different Lastly, the integrated service should with using social media for customer channel for follow-up as compared be able to recommend optimum call care is managing consumer with the channel used for initial strategy, in terms of customer care expectations. If the user is not clear contact. channels used for problem follow-up about who is going to resolve issues— and resolution, for a customer based customer care agents or fellow customers—it can lead to confusion Figure 4: Key Components of Multi-channel Integration and dissatisfaction. Similarly, if a customer expects immediate problem resolution while using social media Key Components of Multi-channel Integration and if that expectation is not met, Channel the customer will not only become Customer contact recommendation and switch-over frustrated but also become averse to Consistent Persistence of Channel using the platform again. Experience Context Recommendation

Automation Therefore, operators should specify who is going to respond to their queries and also indicate approximate turnaround times to consumers using next generation customer care

Recommend optimum call Escalate from a self-service Escalate from a bot session channels. Additionally, operators

strategy based on ’customer’s session to bot session without to agent assisted session should moderate discussions on channel preference and call losing context without losing context types, etc. forums and blogs to ensure that correct advice is provided to a

Source: Capgemini TME Technology Services Lab analysis customer by fellow users.

14 Creativevirtual.com news articles.

62 Customer identification through social network IDs is also an important issue. For problems such as The foremost challenge billing disputes, operators would need to know details such as customer ID “associated with using social media or phone number. Here, the customer can manually provide the details for customer care or the operator can use a mapping is managing software to link social network IDs with customer billing, Customer consumer expectations Relationship Management (CRM), and other records. In either case, privacy issues become important, and operators should either seek explicit customer care channels. For instance, handle complex” queries or decipher buy-in from customers or restrict Comcast enables social media data the use of slang or abbreviations by the usage of social networking and integration with CRM data by customers. The key challenge here is Web2.0 sites to technical problem manually entering social media and to ensure that customers do not get resolutions. account data (phone number) into a frustrated while dealing with a chat-bot. system called Grand-Slam15. However, Another important challenge is the the need of the hour is to implement In order to mitigate this, operators seamless escalation of a customer integrated multi-channel system should ensure that they set reasonable query or problem to other channels architecture, discussed in detail later. customer expectations in terms of the in case it cannot be solved through kind of problems that their chat-bots social media. Some operators have Challenges with Bot-care can solve and also provide chat-bot started using partially manual Operators need to be careful while interaction guidelines. solutions to make social media deploying chat-bots for customer interactions available to other service as they might not be able to Operators should also work towards deploying sophisticated chat-bots with advanced natural language Figure 5: Conceptual Structure of a Sophisticated Chat-bot processing and conversation capabilities. The key components of Virtual Agent/Chat Bot natural language processing include spelling and grammar analysis, User Interface slang / abbreviation and dictionary Avatar Simple Dialog Box support, and semantic analysis. Spelling and Grammar Slang, Abbreviation and Semantic Analysis—Bots Enhanced conversation capabilities Natural Analysis—Bots need to Dictionaries—Bots need to need to understand the Language correctly understand the understand the intended correct meaning and can be developed through well- Processing words and sentence meaning wherever the customer context of the sentence structures uses slang or abbreviation defined business rules, dynamic

Business Rules—Bots Dynamic Decision Instant Solutions—- Social Protocol— decision support trees, instant need to have access Trees—Bots should be Bots should store Bots should follow solution support, and social protocol Conversation to correct business able to make run-time instant solutions for the social etiquette Manager rules in order to decisions during the most frequent for an effective adherence. Lastly, chat-bots should properly respond to conversation questions conversation customer queries have open standardized interfaces with internal data sources such as Bots should have open standardized interfaces with internal data sources Product Catalog, CRM, Billing, and and knowledge repositories Knowledge Repository systems. Figure 5 highlights the conceptual Product Knowledge

Catalog CRM Billing Repository structure of a sophisticated chat-bot.

Source: Capgemini TME Technology Services Lab analysis

15 Techtarget.com, Social CRM Customer Data Management can be the Hard Part, February 2010.

63 Challenges with Multi-channel Moreover, customer information has Integration multiple aspects and different types The lack of customer interaction of data are usually stored in different history across multiple channels types of databases/systems such as and customer data scattered across CRM and Billing. However, with multiple silos are the key challenges next generation customer care, the faced by operators in their attempt traditional integration of databases/ to enable integrated multi-channel systems is not enough. Information customer service. such as social networking IDs and interaction history need to be To elaborate, existing systems cataloged and stored as well. would typically not include history of customer interactions over new Therefore, operators need to media / applications such as social implement integrated multi-channel networks and chat-bots. Therefore, customer service architecture with context and history information could new channels, shared customer be lost easily, leading to sub-optimal history, and single view of data (see customer service. Figure 6).

Figure 6: Schematic of Integrated Multi-channel Customer Service Architecture

EXTERNAL INTERNAL Uniform experience Interface across user interfaces Gateway Social Media Gateway

Product Knowledge Social Media Data CRM Billing Catalog Repository

Single view of Phone No. Mobile No. Twitter Handles Interaction data for uniform History Interaction History customer Facebook IDs Customer Data experience across channels

Customer Data Integration Customer Identity Management

Universal customer Channel selection interaction history and engine for optimum run-time interaction Universal Customer Run-time Customer call handling strategy

information for Interaction History Interaction Information

persistence of context

Routing Channel Selection Engine

Workflow Management Cross-channel Workflow Management

Source: Capgemini TME Technology Services Lab analysis

64 Figure 7: Phased Approach for Launching Various Next Generation Customer Care Services Operators

Long-term Mid-term Short-term Customer should quickly Simple self-service “ Service assistant Transformation Simple chat-bots Advanced chat-bots develop a Social media presence Chat Bots

Dedicated social Uniform experience presence in media care teams across channels Automated social media monitoring and analytics next generation Availability of cross- channel interaction Social media history integration customer Optimized call handling strategy with seamless Social Media Interactions switch-over care channels Integrated Multi-channel Customer Service Source: Capgemini TME Technology Services Lab analysis and improve their services In conclusion, next generation customer care delivered through social media, chat-bots, and multiple in a phased integrated channels will enable operators to “be where the customer manner is” and help deliver superior customer Alain Gerset is vice president and service. Developing these channels business development director of should be seen as a continuous Capgemini’s global Telecom, Media & process by operators (see Figure 7). Entertainment practice. He has over ” 40 years’ experience in the ICT and Operators should quickly develop a telecom industry. He holds a doctorate presence in next generation customer in computer sciences and is a respected care channels and aim to improve industry spokesperson. He is based in their services in a phased manner by Paris. not only using a roadmap but also incorporating customer feedback Sameer Vaidya is a senior consultant that will help them customize their in Capgemini’s TME Technology Services services appropriately. Lab. He has eight years’ experience in Telecom IT solutions design and Once effectively implemented, these development. He has worked in various next generation customer service roles such as business analyst and end- strategies promise to help operators to-end solution designer. He is based in to position themselves as leaders in Mumbai. n customer care. Consequently, they would boost the arsenal of fixed and mobile operators in their continuing quest against churn. Not adopting next generation care is hardly an option for leading operators.

65 Sustaining Agility and Growth: Why it is Important for Companies to Periodically Implement Significant Organizational Changes By Freek Vermeulen

Abstract: Telecom, Media and Entertainment (TME) companies typically do not implement major organizational changes when things are seemingly under control. However, if a company persists with the status quo and avoids making significant organizational changes for too long, unhealthy structures and patterns start to develop. These insidious effects include the formation of rigid internal boundaries that stifle communication and cooperation; the adherence to narrowly defined routines that hamper agility; and the emergence of strong power centers that divert resources. If an organization has not been restructured for some time, silos tend to develop along business unit lines. The key problem here is that employee communication and cooperation primarily takes place only within the well defined boundaries of the business units or functions. This can lead to a company executing tasks inefficiently or becoming unresponsive to the needs of the market. Employees and departments who repeatedly perform the same task stifle imagination, innovation, and the search for new opportunities. This, in turn, leads to the stagnation of the entire organization. Lastly, if an organization resists change for too long, it faces the risk of power centers emerging. These entrenched interests will strengthen themselves further to the detriment of the future growth and profitability prospects of the entire company. Therefore, TME companies should conduct periodic check-ups of their internal health in order to take preventive measures, i.e. organizational changes, at the right time. These changes should be directed towards forming new employee networks, disrupting rigidity of thinking and routines, and shaking up the entrenched power centers.

If the financial top and bottom lines make organizational changes. In are robust, TME companies usually this paper, London Business School Unhealthy avoid making far reaching changes professor Freek Vermeulen1 highlights for fear of upsetting the balance the unhealthy structures and “ structures within an organization. Moreover, patterns that take root in a company many analysts and experts may also if changes are not made regularly. criticize sweeping changes made They also emphasize the need for and patterns when a company appears outwardly companies to periodically make healthy. significant organizational changes. take root in Subsequently, we present frameworks Although the business environment that can help companies to assess may seem calm and not outwardly their internal health; identify whether a company demand immediate harsh changes, it is necessary to change; and also unhealthy structures and patterns determine the type of change that is if changes might start to develop internally needed. in an adverse manner. Therefore, postponing major changes until the Development of Unhealthy are not made health of the organization deteriorates Structures and Patterns within significantly is not the optimal an Organization regularly approach. In fact, it is extremely If a TME company continues important for TME companies to to maintain its existing set up periodically assess their internal and avoids making significant health and recognize the need to organizational changes for too long,

1 This paper is based on joint work with Phanish” Puranam, London Business School, and Ranjay Gulati, Harvard Business School. See also the article Change for Change’s Sake, Harvard Business Review, June 2010.

66 unhealthy structures and patterns Figure 1: Unhealthy Structures and Patterns that develop in Organizations start developing internally. These destructive effects include the formation of rigid internal boundaries 1 that stifle communication as well Rigid Internal Boundaries as cooperation; the adherence to stifling Communication and Cooperation narrowly-defined routines that hamper agility; and the emergence of strong power centers that divert resources (see Figure 1). Unhealthy Structures and Patterns Rigid Internal Boundaries Stifle that develop in Organizations Communication and Cooperation Typically, TME companies and 3 2 business units have organizational Strong Power Centres Adherence to Narrowly diverting away Firm Defined Routines structures that are centered on Resources Hampering Agility a particular criterion such as product, customer type, function, or geography. However, the key Source: Freek Vermeulen, Phanish Puranam, and Ranjay Gulati problem with such structures is that they give rise to rigid internal product, which helps to expand the In 2001, Cisco reorganized its boundaries in which communication network of the company’s employees structure from line-of-business and cooperation primarily takes place and to encourage communication to function (see Figure 2). In the within the well defined confines of and collaboration in a much wider line-of-business organization the business units or functions. This fashion than before. This happens structure, employee interaction and can lead a company to execute tasks because when a reorganization takes collaboration were restricted to the inefficiently or become unresponsive place, employees not only create boundaries defined by the three to the needs of the market. new networks within their new business units. business units but also retain their For instance, a company organized previous networks and cultures, at The changes proved beneficial for as per customer type may carry least for a while2. Therefore, after a Cisco. Its new centralized Research redundant functional sub-units reorganization, employees cooperate & Development (R&D) group within each business unit and this along both informal (previous) and encouraged engineers to exchange could lead to the replication of formal (new) networks over the near- ideas and collaborate not only with resources and activities. Similarly, term and the firm benefits through each other but also with their peers a company that is organized along increased cross-pollination of ideas. across the company. The centralized functions is less likely to recognize shifts in the marketplace, new product opportunities, or changing customer behavior. Unhealthy structures include Although matrix structures have been deployed by many TME companies “the formation of rigid internal to force the interaction across two dimensions such as products boundaries; the adherence to and functions, they can result in unclear responsibility, ambiguous accountability, and slow decision narrowly defined routines and making. the emergence of strong power A potentially better solution is to periodically restructure the organization around a different centers that divert resources criterion—say from function to 2 This was first observed by professors Jackson Nickerson and Todd Zenger from Washington University. ”

67 Figure 2: Schematic Representation of Cisco’s Organization Structure Change and growth frontiers, they start losing their capability to look ahead,

Organization Structured Around Organization Structured Around imagine, innovate, and discover Lines-of-Business Functions game-changing opportunities. This,

Business Unit 1 Business Unit 2 Business Unit 3 in turn, leads to the stagnation of the (based on (based on (based on Customer-type 1) Customer-type 2) Customer-type 3) entire organization. Thus, adherence Business Unit 1: Customer Customer Customer R&D Type 1 Type 2 Type 3 to narrowly-defined routines R&D R&D R&D significantly hampers organizational agility. Business Unit 2: Customer Customer Customer Marketing Marketing Marketing Marketing Type 1 Type 2 Type 3 One way to break routines is by opening up the inter-department Sales Sales Sales Business Unit 3: Customer Customer Customer Sales Type 1 Type 2 Type 3 boundaries as discussed earlier. However, relying on just one . . . . type of change for too long is . . . . counterproductive as the change itself can become routine! Many Source: Freek Vermeulen, Phanish Puranam, and Ranjay Gulati companies, such as Hewlett-Packard, have periodically vacillated between centralization of functions (such as sales, marketing, finance, product R&D group did not lose the pulse of on Cisco’s strategy, products, and development) and decentralization Cisco’s customers, as feared by many, services4. This was necessary as the into product groups every few years5. because employees did not hesitate old, informal networks had decayed Such changes may yield benefits to meet or phone their old colleagues and stopped being effective in initially, but eventually they become to develop optimal, cross-technology capturing the voice of the customer. a routine process and employees solutions. A combination of new simply start alternating between the networks, old and informal networks, Adherence to Narrowly-defined two—what they are doing presently and Cisco’s customer-oriented Routines Hampers Agility and what they were doing a few years culture helped Cisco to innovate and Routines can be good for improving back. streamline its product offerings3. efficiency; however if a routine goes on for too long, it becomes Therefore, as indicated in Figure 3, Eventually, however, employees entrenched and can be difficult to during successive changes, companies lose contact with their previous break out of. should place different emphasis on colleagues, the informal network different change areas (structures, subsides, and the new formal If an organizational structure is rewards, and processes). Moreover, network becomes well entrenched. stable for too long, things continue within each area, they should Thus, once the beneficial near-term to happen in a particular way within restructure the organization around impact of a restructuring wears off, each department or sub-unit. Of different key aspects of the change silos re-emerge as employees start course, employees and departments area. Rewards could be based more limiting their communication and become more efficient in performing on recent employee performance in cooperation within their new teams. repeated activities as specified by the one year and on medium to long-term The solution, once again, is to change narrowly defined routines. However, capability development in the next. the organizational structure. the flip-side here is that when the external environment changes and Strong Power Centers Divert away Coming back to the Cisco example, market / competitive pressures Company Resources the organizational structure was rise, they find it extremely difficult If a TME company resists changing changed once again in 2004 with the to adapt and make the necessary its organizational structure for creation of three business councils transition. too long, it faces the risk of power representing a partial reversion centers emerging within it. These to the previous grouping. These Worse, employees and departments power centers or entrenched interests units spanned across functions as become complacent and stop seeking will concentrate on strengthening well as technologies and helped to out new opportunities. As employees themselves further and more better capture customers’ feedback stop exploring new opportunities importantly, on garnering the

3 Freek Vermeulen, Phanish Puranam, and Ranjay Gulati. 4 Ibid. 5 Ibid.

68 maximum share of its resources Figure 3: A Regime for Change: Avoiding Routines rather than passing them on to smaller, needier units with good Change Area Key Aspects growth potential. • The organization can be re-structured along one of the following criteria: – Function (such as sales and marketing, finance, operations, R&D) A company will initially allocate more Structure – Customer-type resources to a large business unit – Geography – Product and the more resources a department gains, the more its size will grow even • One or more of the following aspects can be emphasized for appraisal ratings and compensation determination: if it is a relative under-performer. – Performance of the individual, team, or the entire firm Rewards Thus, the allocation of funds in – Long-term development or recent performance an organization is typically a self- – Revenues, operating profitability, or value-added propagating cycle that favors and • The manner in which work is carried can be changed by altering one or more of the strengthens larger business units. following: – Focus (e.g. customer or product oriented processes) Processes – Distribution (e.g. centralized or decentralized activities) To begin with, this is not a problem – Location (which processes/departments are physically located next to each other or in close vicinity as the department may genuinely need resources to develop new products or markets to grow its Source: Freek Vermeulen, Phanish Puranam, and Ranjay Gulati market share. However, over the medium- to long-term, the resources and, therefore, the power allocated senior executives are unlikely to be to the department may not be challenged for not supporting up-and- justified. The department could find coming units as long as they deliver Firms itself selling products or services their targets in their strong business in a stagnating or declining market units. “should conduct and may be unwilling or unable to identify adjacent rapid growth Such insufficient cooperation will opportunities. lead to suboptimal resource allocation periodic check- for the smaller units, thereby In such circumstances, the jeopardizing their growth prospects. ups of their organization is better off allocating less funds to the powerful unit and Frameworks for Assessing more funds to smaller business units the Internal Health of an internal health with good growth potential. Organization and Identifying Remedial Measures in order to Many TME companies try to address As discussed earlier, although there the issue by establishing cross-unit may not be any external symptoms teams, starting centralized corporate of underlying problems—top line take preventive funds, or creating specific integrator and bottom line growth could be functions. However, obtaining the in alignment with stakeholder remedies, i.e. requisite buy-in and support from expectations—TME companies senior members of powerful business should be aware that they might units is an extremely challenging become victims of their own success. organizational process due to the conflicts of interest Unhealthy structures and patterns involved. These senior executives could be taking shape inside the change at the are primarily judged based on the organization and could jeopardize performance of their own business future success. unit and are therefore, highly likely right time to be uncooperative exhibiting Therefore, it is very important for tardiness while attending meetings companies to periodically perform or providing only lip service while a health self-check and identify the agreeing to provide information and appropriate time to change. ” other resources. Moreover, these

69 constrained by the boundaries of Each organizational change formal structures. This leads to increased communication as well as “will need to place a different collaboration between business units and benefits the organization due to the increased cross-pollination of emphasis on different change ideas. The caveat here is that informal networks, which arise primarily from areas, contacts with previous colleagues, i.e. structures, rewards, decay with time and do not survive for too long. Therefore, firms should and processes be prepared to repeat the process periodically to ensure that new We now present a framework, in In order to determine the type of informal networks keep developing. the form of a questionnaire6, which change required, it is necessary to can help to identify whether the examine ”the scores in each category. If the maximum score is in the time has come to affect significant “Adaptability” section, it indicates organizational changes. The If the highest score is in the “Quality that the firm is finding it difficult framework (see Figure 4) tests of Communication and Cooperation” to innovate or identify/capitalize on whether communication and section, then managers should new developments and opportunities cooperation are being restricted by consider changing the criterion in the marketplace. To mitigate this, departmental boundaries; employees (product, customer-type, function, companies should expose employees have started adhering rigidly to geography) around which the to new aspects of their tasks. routines; or powerful business units organization is structured. More However, to break routines, managers and executives have started diverting specifically, a high score in this should ensure that the upcoming resources away from future growth section indicates that the company change is significantly different from units into business units more is already suffering from a decrease the previous one. Moreover, to sustain relevant in the past than in the future. in cooperation among its various an organization’s capacity to adapt, business units. the firm should be ready to not rest The framework depicted in Figure 4 on its past successes and accept a can help an organization to determine Changing the structuring criterion constant state of mild disruption. The whether it is an appropriate time to and the organizational structure existing way of working is challenged redesign the company. It can also can help the company to grow continuously. help them to decide the type of informal networks that are not changes to be implemented. Figure 4: Framework for Assessing the Health of an Organization In the framework, the “yes” responses Response carry one point each. If the overall Category Questions score, after summing up the (Yes / No) 1. Do employees primarily interact only with people from their own groups or 1.X responses to the 12 questions, is less departments? Quality of than three points, the firm is in good 2. Are there strong subcultures within business groups or departments? 2.X Communication shape and does not need any changes and Cooperation 3. Are there breakdowns in communication due to rigid inter-departmental boundaries? 3.X at the moment. The advice in this 4. Has cooperation among groups decreased over the past five years? 4.X case is to run the self-assessment after 1. Are many employees not comfortable with change? 1.X 6 to 12 months. If the score is 3 to 7, 2. Do employees and groups/departments operate according to set routines? 2.X it is just the right time to change. If Adaptability 3. Has it been long since the organization developed a significant new source of 3.X the score is more than 7 points, the revenue? need to change is urgent. In fact, it 4. Has the % revenue contribution from new streams declined over the past five years? 4.X indicates that the company is already 1. Do powerful groups/departments or individuals gamer most of the firm's resources? 1.X late to change and the scale of the Power Balance 2. Is it difficult for employees/departments not in the dominant group to obtain resources? 2.X required changes is large. among 3. Do powerful groups/departments or individuals hamper decision making? 3.X Departments 4. Have the groups/departments or individuals that were influential five years back 4.X increased their power or influence?

Source: Freek Vermeulen, Phanish Puranam, and Ranjay Gulati

6 The questionnaire should be distributed to all managers of the firm from time to time. Their anonymity should be preserved to ensure that respondents answer honestly.

70 Lastly, if the highest score is in the Figure 5: How to Change: A Framework “Power Balance among Departments” section, it indicates that there is a Focus of Change Solution Ensuring Sustainability significant imbalance of power within the organization with resources being Change the criterion around Fostering which the organization is The firm needs to repeat the diverted away to a few powerful communication structure process repeatedly every few business units and tomorrow’s and Foster informal networks to years potential star units being made to cooperation make up for the limits of the starve for resources. In such cases, it formal structure is necessary to change the dimension or key criteria on the basis of which The firm needs to accept a Building Expose employees to new constant state of mild disruption resources are allocated. The powerful agility aspects of their tasks and challenge the existing way vested interest groups are unlikely of working continuously to allow such changes without a fight and therefore, TME companies may need to make multiple changes The firm should be prepared to Change the dimension or Breaking up disenfranchise and lose certain simultaneously to shake themselves key criteria based on which people who might have been power groups resources are allocated up. This can entail disenfranchising good performers in the past and even losing some people who might have been good performers in Source: Freek Vermeulen, Phanish Puranam, and Ranjay Gulati the past.

Figure 5 summarizes the discussion reorganizations, restructurings, and on how to change. retrenchments, a painful process for everybody involved. Worse, they In conclusion, even if a company might not be effective at all because Regular does not have outward symptoms of the right time to change may have ill-health, it might have developed passed. In contrast, making the internal unhealthy structures and right changes at the right time will changes“ help patterns as a result of not effecting typically help firms to not only organizational changes for a long implement less radical changes but time. These ill-effects can adversely also stay relevant in the marketplace form new impact the nimbleness of the TME due to the timeliness of the change. organization to grab emerging Therefore, companies should make it employee opportunities or respond quickly a habit to administer internal health to the changes in the external self-checks regularly. environment, thereby threatening networks, future growth and profitability. Freek Vermeulen is an associate Therefore, companies must know professor of Strategic & International disrupt rigidity when and how to change. Management at the London Business School. His work concerns the TME companies should conduct intersection of strategy, leadership, of thinking periodic check-ups of their internal and execution. It has been published health in order to take preventive extensively in the most reputed academic and routines, remedies, i.e. organizational change, journals, and in outlets such as the at the right time. These changes Financial Times, Harvard Business help form new employee networks, Review, Sloan Management Review, and and shake up disrupt rigidity of thinking and the Wall Street Journal. His forthcoming routines, and shake up the stronghold book (Pearson, October 2010) is entitled the stronghold of entrenched interests. Ignoring “Business Exposed: The naked truth internal health and not taking pre- about what really goes on in the world of emptive measures can lead to massive business”. He is based in London. n of entrenched interests ”

71 lite

BYTES As the TME industry starts showing indications of revival we put forward some vignettes and trends depicting the lighter side of our Telecom, Media and Entertainment industry

Mobile: • Did anybody ever complain about long girl-talks? The Pew Research Center reported 75% of teens between the ages of twelve and seventeen now own cell phones and of those who do, girls typically send or receive eighty text messages per day versus the boys’, thirty per day. Source: Reuters, Third of U.S. teens with phones text 100 times a day, April 2010 • Unsure about customs laws? There’s an app for that. In an attempt to make going through customs easier, Dutch authorities have embraced smartphone technology, developing an application that tells travelers what they are not allowed to take with them. Source: Reuters, Unsure about customs laws? There’s an app for that, May 2010 • According to a UK survey, 54% of the women quizzed said they would prefer to date a man who owns an iPhone. 37% mentioned that owning an iPhone makes a man seem more reliable. Source: TotalTele, Unsure Ugly? iPhone is the app for that, April 2010 • UK consumers’ tendency to stash away the old phone after buying a new one is apparently locking away huge amounts of money. Research indicated that there is roughly £ 2.1 billion lying dormant in people’s drawers in the form of old handsets. Source: TotalTele, Billion-pound handset horde, May 2010 • According to a survey of UK commuters’ worst bugbears, people who talk loudly over the phone are second only to smelly people. However in spite of that more than half admitted listening to other people’s conversation and enjoying reading other’s text messages. Source: TotalTele, Smelly people, phone users top worst commuter league, May 2010 Internet: • 20% of American divorce petitions in 2009 contained references to the Facebook website. Source: The Sun, Divorces blamed on Facebook, May 2010 • According to research at the University of Leeds, people who spend long hours Internet browsing are more likely to show symptoms of depression. However, it is not clear what comes first—are depressed people drawn to the Internet or does the Internet cause depression? Source: University of Leeds, Excessive internet use is linked to depression, February 2010 • Here is something for tweeters too eager to disclose their location. Website PleaseRobMe.com uses geo-locational networking tools like Foursquare to generate a list of empty homes whose occupants are away. The intention was to make people aware of the dangerous side-effects of location sharing. Source: The Consumerist, PleaseRobMe.com Lets The World Know No One’s Home, February, 2010 • Twitter users need to be more cautious with their tweets after a man was convicted in the UK for “joking” about blowing up an airport. This was apparently the first successful UK criminal prosecution for a tweet. Source: Financial Times, Fine over Twitter airport ‘joke’, May, 2010 • Lost your camera? Try “Facebooking” it. A tourist who picked up a lost camera found its owner by setting up a dedicated Facebook group for it. What started as an experiment in “six degrees of separation”—hoping to find the user in six links—ended up with the group membership exceeding 250,000. Source: TotalTele, Lost and Facebooked, November 2009

72 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 • Sayak Basu • Bobby Ngai Special thanks to: Anirban Nandi, Tushar Rao, Kaushal Vaidya, Kevin Tayebaly and Varun Saxena Design: Stéphane Tchirieff

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73 By 2020, there will be 50 “billion connected devices

—Jan Wäreby, Senior Vice President and Head of Business Unit Multimedia,” Ericsson