Communications Review Growing telecom revenues – what’s next?

A journal for telecom, cable, satellite and Internet executives Volume 16, No. 3

Delivering the mobile wallet The industry’s revenue no longer will grow Creating successful m-health applications because of fixed connectivity. An expanding array of mobile-broadband-based services accessed by an Growing rural telecom revenues ever-rising number of smart devices will fuel the Debating net neutrality – again future. Nobody has all the assets – or answers – to Using your competitive assets sustain success alone. The key is collaboration. Cover image: Man at end of pier, Ringerike, Norway

Communications Review 300 Madison Avenue New York, New York 10017 USA

Editor Colin Brereton

Managing editor Shelly Ramsay

Contributing writers Mohammad Chowdhury Colin Light Rolf Meakin Bart-Jan Sweers Christopher Wasden

Production director Teresa Perlstein

Designer Cinthia Burnett

PwC’s Communications Industry practice delivers a complete range of professional services to telecom, cable, satellite and Internet service providers across the globe. The group provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders.

Drawing on our accumulated experience, we anticipate and meet the challenges of global regulatory change, and help our clients deal with the impact of industry convergence. We continue to add measurable value to our client relationships through our leadership and innovation, which are evident in our evolving services and products.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents accept no liability and disclaim all responsibility for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in the publication or for any decision based on it. Should professional advice be required, you may contact Colin Brereton of PwC by phone at [44] 20 7213 3723.

To request additional copies of this publication, please contact Shelly Ramsay by e-mail at [email protected]. Back issues are available for download at www.pwc.com/communicationsreview.

Communications Review is a trademark of PricewaterhouseCoopers LLP. Contents

6 Message from the editor

Features 8 28 M-commerce: The race to seize the opportunity Net neutrality: After years of hype and anticipation, mobile commerce is ready to take Why solve a problem that doesn’t exist? off. To seize this opportunity, a growing number of mobile operators are Renewed concern over net neutrality comes at a time when mobile looking to pool their resources and user bases to offer a larger and more operators urgently need to revise their price plans and tune their compelling consumer market for m-commerce services. They face strong business models to cope with the decline in revenues from text competition from over-the-top giants and a raft of other Internet players, messaging and voice and to benefit from the surge of mobile-data all seeking to make the most of their online strength in the mobile consumption. The new mobile-data world requires collaboration world. Who will win remains to be seen, but the prize on offer is huge. among content and application providers to deliver new, differentiated, by Colin Light high-value services that customers want. In PwC’s opinion, net neutrality would severely limit everyone’s options. by Bart-Jan Sweers

16 38 An optimistic prognosis for Putting your competitive assets to work mobile health opportunities The consumers coming of age in 2015 will be digital natives – an All healthcare systems are facing the issue of how to provide ubiquitous entire generation of people who never experienced the non-digital access to care and to improve outcomes at the lowest possible cost. No world. Battling for the attention, loyalty and spending power of technology shows greater promise in addressing these needs than does these digital consumers will be protagonists with vastly differing mobile health. Telecom operators must move aggressively to develop business models: traditional fixed and mobile operators, cable healthcare services and solutions with added value, which can lead to providers, satellite broadcasters, search specialists, social networks, high-margin commercial and consumer revenue streams. device companies and more. In looking for the keys to success in this market, PwC conducted research into where communications by Christopher Wasden revenues are heading – and how operators can get there first. by Rolf Meakin 22 Building rural telecoms, one rupee at a time Industry executives in India – where ARPU is between US$1 and $2 – worry less about ARPU and more about usage. They realise that there are limits to what they can do to influence upwards the price of what they sell, and that there’s more they can do to encourage consumption. But what does that mean when looking at rural expansion? Using India as an example from which others might learn, we look at how operators can find opportunities in rural markets despite low ARPU levels. by Mohammad Chowdhury

Communications Review 1 Sommaire

6 Éditorial

Articles 8 28 Le m-commerce : à celui qui saisira l’opportunité Neutralité de l’Internet : pourquoi résoudre Après plusieurs années de battage médiatique, le commerce mobile un problème inexistant? s’apprête à décoller. Afin de saisir cette opportunité, un nombre croissant Les inquiétudes concernant la neutralité du réseau refont surface au d’opérateurs mobiles cherchent à regrouper leurs ressources et leurs moment où il est urgent pour les opérateurs mobiles de revoir leur parcs d’utilisateurs pour offrir un marché grand public plus vaste et plus tarification et d’adapter leur modèle économique pour faire face à attrayant pour les services de commerce mobile. Ils sont confrontés à la baisse des revenus liés à la messagerie textuelle et à la voix et pour une forte concurrence de la part des géants de l’OTT (over-the-top) et tirer profit de la forte augmentation de la consommation de données d’un ensemble d’acteurs de l’Internet. Tous cherchent à tirer au mieux mobiles. Le nouveau monde de données mobiles nécessite une parti de leur puissance en ligne dans le monde mobile. Reste à savoir collaboration entre les fournisseurs de contenu et d’applications qui l’emportera, et l’enjeu est de taille. pour proposer les nouveaux services différenciés à haute valeur par Colin Light ajoutée que les clients recherchent. Selon PwC, la neutralité de l’Internet limiterait fortement les options de chacun. par Bart-Jan Sweers

16 38 Un pronostic optimiste pour les opportunités Utilisation de vos atouts concurrentiels en matière de santé mobile En 2015, les consommateurs parvenant à l’âge adulte seront des Tous les systèmes de soins de santé sont confrontés à la problématique natifs du numérique - une génération entière de personnes n’ayant qui consiste à déterminer comment fournir un accès universel aux soins pas connu le monde sans le numérique. Des protagonistes aux et améliorer les résultats au moindre coût. Aucune autre technologie modèles économiques très différents se battront pour obtenir que la santé mobile ne semble être plus à même de répondre à ces besoins. l’attention et le pouvoir d’achat de ces consommateurs numériques Les opérateurs de télécommunications doivent faire preuve de dynamisme et pour les fidéliser. Il s’agit des opérateurs mobiles traditionnels, pour développer des services de soins de santé et proposer des solutions des câblo-opérateurs, des diffuseurs par satellite, des spécialistes à valeur ajoutée pouvant générer des recettes de grande consommation et en recherche, des réseaux sociaux, des sociétés spécialisées dans commerciales avec des marges élevées. les appareils et d’autres encore. Pour trouver la clé du succès sur ce marché, PwC a étudié les futures sources de revenus des par Christopher Wasden télécommunications - et comment les opérateurs pourront en profiter les premiers. par Rolf Meakin 22 Construction progressive de télécommunications dans les régions rurales Les dirigeants du secteur en Inde - où la recette moyenne par abonné (average revenue per user, ARPU) est estimée entre 1 $ et 2 $ - se soucient plus de l’utilisation que de l’ARPU. Ils réalisent qu’il existe des limites à ce qu’ils peuvent entreprendre pour influencer le prix de leurs produits et services à la hausse et qu’il existe d’autres moyens pour encourager la consommation. Qu’est-ce que cela implique concernant l’expansion dans les régions rurales ? En prenant l’Inde comme exemple - qui sera instructif pour certains - nous nous concentrons sur la façon dont les opérateurs peuvent déceler des opportunités au sein des marchés ruraux malgré les faibles taux de recette moyenne par abonné. par Mohammad Chowdhury

2 Índice

6 Mensaje del editor

Artículos 8 28 Comercio móvil: comienza la carrera para Neutralidad de la red: ¿por qué intentar resolver sacarle el máximo partido un problema que no existe? Tras años de expectación y despliegue mediático, el comercio móvil está La preocupación actual sobre la neutralidad de la red llega en un listo para despegar. Para aprovechar esta oportunidad, un número creciente momento en que los operadores de telefonía móvil necesitan, de de operadores móviles estudia adaptar sus recursos y bases de usuarios y así manera urgente, revisar sus planes de precios y poner a punto sus poder ofrecer un mercado más amplio y atractivo de servicios de comercio modelos de negocio con vistas a hacer frente al descenso en los ingresos móvil. Se enfrentan a la competencia contundente de grandes operadores por mensajería de texto y voz, y beneficiarse del aumento constatado y de una infinidad de otros operadores de Internet, que tratan de sacar el en el consumo móvil de datos. El nuevo mundo del acceso móvil de máximo partido de su fuerza online en el mundo móvil. Está por ver quién datos exige la colaboración entre los proveedores de contenido y de saldrá vencedor, pero el premio a ganar es enorme. aplicaciones, y así entregar servicios nuevos, diferenciados y de gran valor reclamados por los clientes. En la opinión de PwC, la neutralidad por Colin Light de red limitaría de forma radical las opciones de todos. por Bart-Jan Sweers

16 38 Un pronóstico optimista para las oportunidades Los activos competitivos se ponen a trabajar en el ámbito de la salud móvil Los consumidores que adquieran la mayoría de edad en 2015 serán Todos los sistemas de atención sanitaria se enfrentan a la dificultad de nativos digitales: toda una generación de personas que nunca ha cómo ofrecer un acceso permanente a la asistencia sanitaria y mejorar vivido en el mundo no digital. Se intentará conseguir la atención, los resultados al menor coste posible. No existe otra tecnología que la fidelidad y el poder adquisitivo de estos consumidores digitales muestre mayor perspectiva para dar respuesta a estas necesidades que la con modelos de negocio muy diferentes: operadores móviles y fijos tecnología móvil aplicada a la salud. Los operadores de telecomunicaciones tradicionales, proveedores de televisión por cable, compañías de deben actuar con fuerza para desarrollar servicios de atención sanitaria difusión por satélite, especialistas en servicios de búsqueda, redes y soluciones de valor añadido, que puedan generar flujos de ingresos de sociales, compañías de dispositivos y otros. En busca de las claves consumo y márgenes comerciales elevados. de éxito en este mercado, PwC ha realizado un estudio para analizar los futuros ingresos de comunicaciones y cómo los operadores pueden por Christopher Wasden ser los primeros en llegar. por Rolf Meakin 22 La consolidación de operadores de telecomunicación rurales, rupia a rupia Los directivos del sector en la India –país en el que los ingresos medios por usuario se sitúan entre 1 y 2 dólares estadounidenses– se preocupan menos por los ingresos medios por usuario y más por el uso. Son conscientes de que existen límites en cuanto a condicionar al alza el precio de venta, y de que pueden hacer mucho más para fomentar el consumo. Pero, ¿qué significa esto a la hora de afrontar una expansión en el ámbito rural? Tomando a la India como ejemplo a seguir, se analizará cómo los operadores son capaces de encontrar oportunidades en mercados rurales, pese a unos ingresos medios por usuario bajos. por Mohammad Chowdhury

Communications Review 3 Inhaltsverzeichnis

6 Vorwort des Herausgebers

Beiträge 8 28 Mobile Commerce: Der Wettlauf um Möglichkeiten Netzneutralität: Warum ein Problem Nachdem Mobile Commerce lange theoretisch diskutiert und zum lösen, das nicht existiert? nächsten großen Hype ausgerufen wurde, ist mobiles Einkaufen Neue Debatten um die Netzneutralität kommen zu einem Zeitpunkt, zu nun tatsächlich startklar. Um die entstehenden Möglichkeiten zu dem die Mobilfunkbetreiber dringend ihre Tarife überarbeiten und ihre nutzen, versucht eine wachsende Zahl von Mobilfunkbetreibern, Geschäftsmodelle optimieren müssen, um die rückläufigen Einnahmen ihre Ressourcen und Kundendatenbanken zu bündeln, um den aus SMS und Telefondiensten zu bewältigen und von steigender mobiler Verbrauchern mehr überzeugende M-Commerce-Dienstleistungen Datennutzung zu profitieren. Die neue mobile Onlinewelt erfordert die anzubieten. Sie sind mit einer starken Konkurrenz von Over-the-top- Zusammenarbeit zwischen Content- und Anwendungsanbietern, Riesen und einer Reihe von anderen Spielern auf dem Internet-Markt um neue, differenzierte und hochwertige Dienstleistungen, die von konfrontiert, die alle versuchen, aus ihren Online-Stärken das Beste in Kunden nachgefragt werden, zu liefern. Nach PwC-Meinung würde der mobilen Welt zu machen. Wer gewinnt, bleibt abzuwarten, es die Netzneutralität die Handlungsoptionen aller Marktteilnehmer steht aber viel auf dem Spiel. wesentlich einschränken. von Colin Light von Bart-Jan Sweers

16 38 Gute Aussichten für mobile Lassen Sie Ihre Wettbewerbsvorteile arbeiten Gesundheitsanwendungen Verbraucher, die im Jahr 2015 volljährig werden, sind digital natives Alle Gesundheitssysteme stehen vor der Herausforderung, - eine ganze Generation von Menschen, die nie eine nicht-digitale einen zuverlässigen Zugang zur Gesundheitsversorgung zu Welt erlebt haben. Der Kampf um die Aufmerksamkeit, Loyalität und bieten und gleichzeitig die Ergebnisse bei möglichst geringen Kaufkraft dieser digitalen Verbraucher wird von Akteuren mit höchst Kosten zu verbessern. Keine Technologie weckt größere unterschiedlichen Geschäftsmodellen geführt: traditionellen Festnetz- Hoffnungen auf die Bewältigung dieser Anforderungen als mobile und Mobilfunkbetreibern, Kabel-Providern, Satelliten-Sendern, Gesundheitsanwendungen. Telekommunikationsunternehmen Suchmaschinenspezialisten, sozialen Netzwerken, Geräteherstellern und müssen jetzt aktiv handeln, um Gesundheits-Dienstleistungen und mehr. Auf der Suche nach dem Schlüssel zum Erfolg in diesem neuen -Lösungen mit Mehrwert auf den Markt zu bringen. Denn diese Markt untersucht PwC, wo die aussichtsreichsten Einnahmequellen können sich zu Einnahmequellen mit guten Umsatzrenditen sowohl im Telekommunikationssektor liegen - und wie Betreiber diese zuerst im Geschäftskunden- als auch im Privatkundenbereich entwickeln. erreichen können. von Christopher Wasden von Rolf Meakin

22 Entwicklung ländlicher Telekommunikationsunternehmen: eine Rupie pro Monat Führungskräfte der Telekommunikationsbranche in Indien - wo der ARPU zwischen 1 und 2 US-Dollar liegt – machen sich weniger Sorgen um die Preise, sondern mehr um die Nachfrage. Sie erkennen, dass es deutliche Preisobergrenzen für ihre Produkte gibt und dass sie stärker auf Nachfrage- und Nutzungsförderung setzten sollen. Aber was heißt das für die ländliche Expansion? Mit Indien als Beispiel, von dem andere lernen könnten, untersuchen wir, wie Telekommunikationsbetreiber in ländlichen Märkten trotz niedriger ARPUs Geschäftsmöglichkeiten finden können. von Mohammad Chowdhury

4 目录

6 主编寄语

文章摘要 8 28 移动商务：抓住机遇跑马圈地 网络中立：庸人自扰的问题

历经数年广告轰炸与热切期盼，移动商务终于准备起飞。为抓住此次机 当移动运营商急切地改变自身定价策略和商业模式，以应对语音与短 遇，越来越多的电信运营商通过集中内部资源并整合用户群，力图为移 信收入的下降并试图从移动数据用量爆发式增长中谋利时，对于网络 动商务服务(m-commerce services)提供更广泛的、更具竞争力的客户基 中立原则的关注卷土重来。新的移动数据世界要求内容提供商与服务 础。强有力的竞争不仅源自于其他电信巨头，也来源于互联网服务提供 提供商通力协作，为客户客户提供前沿的、新颖的与高价值的服务。 商，这些公司都在积极寻求移动商务世界的霸主地位。鹿死谁手我们拭 在普华永道看来，网络中立反而会极大地限制大家的选择。 目以待，但胜利果实无疑相当诱人。 ( 译者注：网络中立原则是指网络上的任何数据包，无论其内容、去 作者 : Colin Light 处或来源，应该一律平等地传输。) 作者 : Bart-Jan Sweers

16 38 移动医疗：前途似锦 确保你的竞争资产物尽其用

所有的医疗服务体系都面临同样难题：如何以最低的成本提供普遍的医 2015年，数字原住民 — 指完全没有经历过传统的、非数字化生活的 疗服务并不断提高服务质量？移动医疗在众多技术中脱颖而出，为这一 80/90后一代人 — 将成为主流消费人群。对于传统的固定/移动运营 问题的解决带来了光明的前景。电信运营商必须行动起来，攻城掠地， 商、有线电视运营商、卫星广播、搜索引擎、社交网络、设备公司等 积极发展高附加值的移动医疗服务和解决方案，才有望最终获得丰厚的 而言，如何争夺他们的眼球、忠诚和钱包份额将成为最大的挑战。为 收入和利润。 寻找成功的密钥，普华围绕着电信行业收入趋势以及运营商如何取得 先发优势这些主题，开展了大量研究工作。 作者 : Christopher Wasden 作者 : Rolf Meakin

22 印度村通工程，薄利多销

尽管印度电信用户的ARPU（每用户平均收入）介于一到两美元之间，但 电信行业的高管们当前却更加关注提升电信业务使用量而非ARPU。根源 在于运营商已经意识到未来抬高售价的运作空间将越来越小，然而提升 业务用量及使用率的机会却广泛的多。在印度城市化进程持续快速发展 的大环境下，这又意味着怎样的商机？电信运营商如何在低APRU的乡镇 通信市场中寻找机会，印度提供了一个绝佳的样本供他人效仿。 作者 : Mohammad Chowdhury

Communications Review 5 Message from the editor

Welcome to the latest edition of Against this background, the theme Communications Review, published we’ve chosen for this edition is both as we prepare to begin what promises timely and relevant: “Growing telecom to be a watershed year. According revenues – what’s next?” We tour the to industry estimates, 2012 will be new and emerging frontiers of industry the year when household broadband revenues, across services, geographies revenues, globally, finally overtake and regulatory considerations. Then, household voice revenues. Perhaps drawing on our recent industry research more important in 2012, the number into the future of operators’ revenue of 4G LTE mobile spectrum auctions, streams, we examine where operators pilots and rollouts around the world should focus their existing assets to get will accelerate. And the industry’s the most from the digital consumer. revenue no longer will grow because of fixed connectivity, but through an Most industry executives agree that in expanding array of mobile-broadband- mobile lie the greatest opportunities. based services accessed by an ever- Our first article, appropriately, goes rising number of smart devices. straight to one of mobile’s most exciting and highest-potential areas: As we all know, rapidly growing mobile payment and wallet services. mobile revenues don’t necessarily In “M-commerce: The race to seize the translate directly into rapidly growing opportunity,” Colin Light examines revenue for mobile operators. Over- the growing upsurge in initiatives and the-top players such as Google and offerings that are trying to turn the Apple have proved highly adept at smartphone into a fully functioning, annexing what might be described secure mobile wallet for mobile- as more than their fair share of commerce transactions. As Colin consumers’ wallets, in areas such as highlights, operators are collaborating mobile advertising and applications. both within and beyond the industry Without operators’ networks, these in an effort to secure the resulting revenues never would be generated. revenues. But the over-the-top giants But the challenge is to make sure that also are targeting this huge opportunity the way revenues are divided reflects aggressively. Their less collaborative the true underlying value of high- manner sets the stage for a major bandwidth connectivity. competitive battle from which the only sure winner is the consumer.

Our second article moves on to another fast-emerging focus for mobile collaboration and services. In “An optimistic prognosis for mobile health opportunities,” author Christopher Wasden sizes up m-health’s unrivalled

6 Message from the editor potential to help healthcare systems In our fourth piece, we revisit the In reading each article in this provide ubiquitous access to care and issue of network neutrality – one of edition, I found one recurring better health outcomes at minimal cost. the most contentious items on the theme: collaboration. In the digital As with mobile commerce, collaboration regulatory agenda in many territories. world that’s now taking shape, between participants in the value chain With the increasing focus on mobile nobody has all the answers or all plays a pivotal role in the solution. data as the future engine for industry the capabilities needed to sustain Healthcare is transitioning rapidly from growth, net neutrality is back in the success. Only by sharing ideas a hierarchical system of independent spotlight. In “Net neutrality: Why solve and insights can the whole digital segments that deliver care into a model a problem that doesn’t exist?” Bart-Jan ecosystem achieve the best possible that’s more collaborative, transparent Sweers responds to its re-emergence outcome for customers. In the spirit and inclusive of patients. As Chris points by explaining why net neutrality is still of collaboration, we are as eager as out, because operators can connect a fundamentally flawed concept more ever to hear your views and comments, the clinical with the personal – inform likely to stifle growth than foster it. whether on the issues raised in this and increase access among healthcare He closes with a powerful statement edition of Communications Review or practitioners, systems and the patients about the Web’s potential to create on topics to cover in future editions. themselves – they can open up major even greater benefits for people in the So please feel free to send any revenue opportunities. future – and points out that careless, comments you may have to me at even if well-meaning, legislation or [email protected], or Next, our third article – “Building rural regulation risks sacrificing much of to call me on [44] 20 7213 3723. telecoms, one rupee at a time” – shifts that potential. the focus away from emerging service areas to examine a challenge that Our final article pulls together the operators and governments in many threads from the previous pieces to developing, and some developed, examine what will be critical to success countries are facing: rural expansion. As in the communications industry of the an example of how operators worldwide future. In “Putting your competitive can drive growth in rural areas, author assets to work,” Rolf Meakin begins Colin Brereton Mohammad Chowdhury discusses how by analysing how and why the next Partner companies in India are beginning to generation of consumers will differ Global Communications Leader expand their rural user base profitably, from today’s. He then investigates what PwC despite low average revenue per user. operators will need to do differently Success will come from giving users to get their interest and their business. what they need – services that are Rolf’s analysis draws on PwC’s recent micro-local and in their first language quantitative research into revenue – and by developing service models fit trends in five national communications for a varied user base. As Mohammad markets in Western Europe. Rolf points out, India’s rural model is concludes, inescapably, that operators expanding the mobile revolution to can either accept that value is moving remote and often low-income segments away from traditional connectivity and of the population. Many countries and towards new value-added services – or operators worldwide will aspire to do collaborate to fight the trend. the same.

Communications Review 7 M-commerce: The race to seize the opportunity

After many years of hype and anticipation, mobile commerce is ready to take off. The next step is to turn the smartphone into a mobile wallet for m-commerce transactions. To seize this opportunity, a growing number of mobile operators are now looking to pool their resources and user bases to offer a larger and more compelling consumer market for m-commerce services. They face strong competition from over-the-top giants, including Google, Apple, Facebook and a raft of other Internet players, all seeking to make the most of their online strength in the mobile world. These players have already cornered the lion’s share of revenues from the growth of mobile advertising and applications, and – unlike operators – are unencumbered by the constraints of geographic user bases. Who will win remains to be seen, but what’s already clear is that the prize on offer is huge.

By Colin Light Colin Light is a director in PwC’s Technology, Media and Telecoms Consulting practice. For more information, contact Colin by phone at [44] 20 7213 4478 or by email at [email protected].

8 M-commerce: The race to seize the opportunity Four-man team launching bobsled, Utah Olympic Park, USA Four-man

As the environment for mobile-handset- The creation of ISIS underlines Operators worldwide based transactions continues to evolve, the growing acceptance by mobile gearing up for m-commerce a wide array of players are targeting operators around the world that the massive opportunities m-commerce collaboration no longer is just desirable This same determination is increasingly services offer, from advertising to but actually is required to fight off evident globally, in both developed mobile wallets. In November 2010, the threat of disintermediation by the and developing markets. In June 2011, mobile operators escalated their effort non-telco competitors. To date, the three UK mobile networks – Everything to occupy this space when three US likes of Google and Apple have been Everywhere (itself a joint venture under operators – AT&T Mobility, T-Mobile winning the competition for revenues the brands Orange and T-Mobile), USA and Verizon Wireless – announced from mobile applications and mobile Telefónica UK and Vodafone UK – their joint venture, ISIS. media. The launch of ISIS shows announced a new mobile marketing operators’ determination to keep the and payments joint venture. If the Operating under the tagline ‘Mobile… same from happening in the potentially European competition authorities Meet Phone’, ISIS aims to make its much bigger marketplace for mobile- approve the collaboration, the partners mobile commerce network available to commerce services. plan to create a single m-commerce merchants, banks, payment networks ecosystem for UK advertisers, retailers and mobile carriers – and thereby and banks. They also would use near- “fundamentally transform how people field communication (NFC) to provide shop, pay and save”. The joint venture consumers with a secure mobile- took a major step forward in July 2011 payments wallet. when it announced a partnership between ISIS, Visa, MasterCard, Discover and American Express.

Communications Review 9 Since then, Vodafone, Telefónica Meanwhile, in a glimpse of the All entrants are aware that m-commerce O2 Germany and T-Mobile revealed future, countries that lead in overall is about much more than simply plans to launch an NFC-sticker- mobile Internet usage – Japan and payment tools. For example, the based mobile-payment solution South Korea – already have massively ability to target advertising on mobile in Germany in early 2012. These adopted mobile payments. According will be critical – and companies like commercial collaborative initiatives to comScore, more than 75% of Japan’s Google fully understand the power of join a technical NFC collaboration mobile subscribers used their handsets advertising and reach when combined that Orange, Telefónica Movistar to access Internet applications or to with the personalised nature of mobile. and Vodafone announced in Spain download content in 2010, and nearly Google Analytics has become the default in March 2011. 10% of Japan’s mobile audience made for Google advertisers, but players such a purchase with their mobile wallet in as Sky (with its SkyIQ), Facebook and The momentum behind operators’ December 2010. others are entering data analytics to m-commerce offerings is also building enhance their offerings with comparable in other parts of the world. In October A concept whose targeting capabilities. 2011, Etisalat announced plans to time has come launch an NFC-based mobile payment All these competitors and collaborators system in the United Arab Emirates by In targeting the m-commerce are pursuing a potential market that the end of the year, in collaboration opportunity, all operators know the has been a focus of intense innovation with MasterCard. And the M-PESA scale of the competition they’re up for well over a decade. In the 1990s, mobile money transfer service that against, especially following Google’s NatWest Bank developed a smartcard Safaricom launched in Kenya in 2007 announcement of its NFC-based Google electronic cash system called Mondex, now has more than 14m customers Wallet smartphone application in which underwent trials in the UK, and about 28,000 agent outlets May 2011. Apple is widely expected the US, Canada and other countries across Kenya. It’s also available in to follow Google into mobile wallets before being bought by MasterCard other countries, including Tanzania, within the next few months, joining International. In the early 2000s, Afghanistan and South Africa, and several other players. Over the coming T-Mobile, Orange and Vodafone a pilot is under way in India. Many year, PayPal is set to roll out PayPal founded a consortium called SimPay similar schemes are under way Wallet so that consumers can use their in the UK to create an interoperable throughout Africa and South-East phones to pay from multiple PayPal solution for paying by mobile devices Asia, as operators try to reach the accounts, store gift cards and receipts, across all networks. Although it was ‘unbanked’ mobile subscriber base. and capitalise on special offers. PayPal closed in 2005, the founders continue Wallet will not be restricted to NFC- work on a project called ‘Payforit’. enabled phones. And Facebook already had created, in March 2011, the official It’s clear that m-commerce is coming subsidiary Facebook Payments to of age – and that the latest offerings handle payments with the Facebook have every chance of succeeding Credits virtual currency system. where their predecessors failed. This is because the elements are now in place to support the mass adoption and use of these services. Vodafone’s lifestyle vision One important element is how near- field communication is becoming Vodafone’s UK Chief Executive Officer Guy Laurence recently set out his increasingly widely accepted as a company’s vision for the future of m-commerce. “Currently people take their global standard for mobile data mobile, wallet and keys when they leave home,” he said. “In the near future, people exchange and transactions. will start leaving their wallet at home; and in the mid term, their keys may also be integrated into their mobile as near-field communication (NFC) allows the mobile to act as a digital access card.”

10 M-commerce: The race to seize the opportunity Another factor is the rapid adoption 2010. And global mobile advertising In our view, the optimal way for of smartphones and other smart – including paid search – is set to rise operators to tackle this opportunity is devices (see Figure 1). Overall, PwC rapidly, from US$2.8bn in 2010 to through collaborating industry-wide forecasts that smartphone penetration US$8.7bn in 2015. That would be a with peers and competitors to bring the will reach 17% of the global mobile 24.9% compound annual increase. In benefits of scale, standardisation and subscriber base by 2014, ranging from comparison, wired Internet advertising seamless access to consumers across 55% in developed countries to 10% in is projected to have a compound annual their combined subscriber base. Scale is developing countries. Research also growth rate of just 12.4%. everything in advertising and payments shows consistently that, worldwide, – and the global, over-the-top players smartphone penetration tends to be Making the case for have a head start. Cohesion, cooperation higher among people in the wealthier m-commerce – and and integration will be crucial for demographic groups and among the collaboration operators to achieve adoption on the younger groups, who make up the future scale they need, while remaining free consumer base for mobile commerce. So, the opportunity is huge. to compete fiercely in how they deliver Can operators seize it? PwC thinks these products to their own customers. More important than device penetration the answer is yes. Given the current is the dramatically increasing use of and projected growth rates for mobile handsets to access the Internet. m-commerce services, and operators’ PwC estimates that global spending on established (and mostly trusted) Internet access over mobile devices will billable relationships with their rise to US$154.5bn in 2015, an 11.5% customers, PwC believes that operators compound annual increase from 2011. around the world are quite right to Other PwC research shows that 39% of be targeting m-commerce and mobile mobile Internet subscribers globally will wallets proactively and aggressively. be connecting to the Internet through smartphones by 2014, up from 13% in

Figure 1: The growth in global sales of smart devices, projected to 2015

1,400

1,200

1,000

800

600 Millions

400

200

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Smartphone Tablet E-reader

Source: PwC Global Entertainment and Media Outlook: 2011–2015, PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates.

Communications Review 11 There are sound defensive and offensive increasing the costs of providing In PwC’s view, operators now have reasons for targeting m-commerce greater bandwidth – to the extent that a narrow window of opportunity services in this way. On the defensive in some customer segments, the cost of to take the lead in encouraging side, operators know that the over- supplying mobile bandwidth may now businesses and consumers to cross the-top players are looking to secure exceed the associated revenues for the the threshold and participate customer relationships and revenues in operators. The imperative for operators wholeheartedly in m-commerce. m-commerce as successfully as they did is not about making tactical changes Failure to do this almost inevitably in applications and mobile media. The and selling more mobile data or SMS, will allow the over-the-top providers international standards for some aspects but about expanding into entirely new to take the initiative, the customer of mobile commerce (such as NFC) adjacent revenue areas and models. relationships and the revenues. already exist, but standards have yet to Mobile commerce fits the bill perfectly. emerge in many areas, such as mobile By collaborating to pool their advertising campaigns. So businesses A major behavioural shift subscriber bases, the mobile operators and brands will be all the more attracted within a marketplace can enable the The size of the revenue opportunity by the ability to reach all mobile major m-commerce business users is apparent in the pace of change in customers in a marketplace in a scalable to reach the aggregated customer consumers’ behaviour. As well as using manner through a single contact point. base across all the mobile networks smartphones for browsing the Internet, involved. They also can harness the Even more important, knowing their people are now exploiting the potential benefits of cost and scale that the own customer bases in detail puts of mobile to help them choose their single, standardised ecosystem operators in a strong position to create purchases and capitalise on special affords. At the same time, each a single ecosystem that brings together offers. This echoes the early evolution operator can continue to develop advertising, coupons/vouchers, of electronic commerce, which first its own competing products and payments, loyalty and ticketing. enabled computer users to ‘surf’ for services tailored to its own customers, This strength largely comes down products to evaluate before buying based on the infrastructure and to relationships: personalised and them in physical retail stores, and then services that the collaborative entity targeted advertising is fundamentally progressed to buying directly online. provides and maintains. about creating a trusted relationship M-commerce is now following a similar with brands or merchants; financial – and probably much quicker – path This approach allows propositions payments is about having a trusted and to mass-market adoption. and offers to be targeted to a vast pool secure relationship with the bank; and of willing individuals in a relevant, Despite consumers’ growing use of the ecosystem is about having a trusted personalised way. As more and mobile-based discount services that relationship among all parties and the more businesses join the ecosystem, send coupons and vouchers directly to mobile customers. No other player is consumers will be able to leave their mobile devices, businesses still lack better placed to know and deliver to physical wallets at home and replace a compelling, end-to-end proposition. these customers than are their mobile them with secure, NFC-based payment Retailers complain that the current network providers. services. Crucially, supporting the smartphone-based discount and voucher entire ecosystem will be an inherent On the offensive side, a strong services tend to focus on price rather system of near-real-time feedback on positioning in m-commerce will help than value, and often fail to deliver consumers’ spending and transactions operators secure new revenue streams merchants their hoped-for longer-term – an attribute that even today’s major in a closely adjacent market as their value. They believe a more cohesive, loyalty schemes lack. traditional core communications advertising-led approach is needed, with revenues come under intensifying coupons/vouchers being only one of pressure. The smartphone-driven many tools that brands and retailers can explosion in mobile data traffic is use to reach customers over mobile.

12 M-commerce: The race to seize the opportunity A new service model element in the media mix for meet the kinds of strict security campaigns, alongside TV, print, measures that banks, merchants In PwC’s view, mobile operators are radio and so on. But even when that and card issuers require today. strongly positioned to pull together and happens, the collaborative model Consumers get to enjoy the benefit coordinate a new service model and will offer the same benefits of the of a consistent user experience ecosystem of this type, by uniting three single point of contact, and the at the till plus additional fraud interrelated services. same attractiveness of the aggregate prevention and security measures mobile-user base across networks. that can’t compare to carrying As Figure 2 illustrates, these their physical wallet. services are: 2. A new, secure, standardised and 1. A new mobile advertising convenient environment for online Can Google, Apple and others marketplace. This will give brands and mobile wallet services. As well replicate these services? Clearly, and advertising or media agencies as various payment cards (both debit the answer is yes. But there is an the ability to target consumer- and credit), the electronic/mobile advantage in being both device and focused campaigns direct to mobile. wallet will be able to contain all operator agnostic while also having Of the many examples of mobile the other cards and functions that deep insight into the customer’s advertising ventures around the consumers carry in their physical history as a mobile user. world, few have the scale and reach wallets, including loyalty schemes, 3. A back-office data analytics to specifically target the mass mobile vouchers, discount offers and environment and capability. This customer base in any given country. travel tickets. will give brands and agencies

anonymous insights into transactions Just as brands and agencies can The advantages here are not only and behaviours across the operators’ book and manage TV ad campaigns scale and consistency, but also that aggregate customer base. As a on a portfolio basis across various people can take their wallets with result, companies will be able to channels, they will be able to take them to new operators, as they do target specific behavioural and the same approach with mobile as today with their phone numbers demographic segments in specific part of their wider digital campaigns. when switching networks. A more locations at specific times, and to Some ad agencies may try to retain important asset to operators is make the most effective loyalty, the overall campaign management secure access to the SIM card, voucher and redemption offers. role by treating the operator-led which makes sure payments, loyalty These activities will be carefully m-commerce ecosystem as another schemes, vouchers and so on all managed to stay within the relevant data protection and privacy laws.

As always, operators must tread a fine line. History shows that the media, politicians and consumers Figure 2: Three interrelated services in the new operator-led around the world can react adversely m-commerce ecosystem to any ‘big brother’ approach, and that service companies from BT to Banks, card issuers, Facebook have suffered from this Major Mobile Online and merchants and loyalty consumer advertising mobile wallet schemes; plus ticketing, aversion at one stage or another. brands marketplace services transport, building access Striking the balance of remaining services, etc. relevant to the person without intrusively gathering data is critical.

Data analytics

Source: PwC analysis.

Communications Review 13 While these three elements are likely to Benefitting consumers mobile operators in Europe already be consistent across markets, the precise have applied for e-money licences. For model for the ecosystem will vary with For consumers, what makes the example, O2 in the UK confirmed in local conditions. It will need to reflect collaborative, operator-led ecosystem February 2011 that it intended to apply the fact that any collaborative strategy we’ve described a success will be the to the Financial Services Authority for should benefit three main groups of consistent, relevant and compelling an e-money licence. businesses: first, the operators using the experience it gives them. Figure 3 service; second, the (overlapping) group illustrates how a fictional brand creates Besides making payments at the of operators who are the shareholders that success through a coordinated, checkout, other services available in a in the service; and third, the customers, virtuous circle of improving experience, mobile wallet bring advantages. Storing including advertisers and various types targeting and campaign effectiveness. digital tickets for services like transport of card issuers – payment, transport, and concerts will prevent ticket touting Further major benefits for consumers loyalty and so on. and fraud, and will improve the include improved security when they efficiency, automation and targeting A common assumption has been leave their physical wallets – and all of discounts and off-peak offers. And that operators would try to generate the cards they currently hold – at home there are huge opportunities in offering revenue from transactions by taking and no longer carry cash. The ability to access services, ranging from office a slice of the transaction value. hold stored value in the mobile wallet premises and homes to motor vehicles. Because that approach results in the gives more flexibility and choice both to operators competing against the most consumers and to operators, who can The access market is highly fragmented important potential customers, a allow subscribers to use their mobile and lacking in standards. A consistent, more collaborative model is needed. wallet to pay for anything from call easily managed NFC-based access Operators should generate their charges to birthday presents. By using service on mobile handsets would transaction revenues by giving card first-party branding of such services, be attractive and cost-effective to provision services to card issuers, operators potentially can cement their customers from a host of industries – effectively creating a mirror image customers’ identification with and although, clearly, building scale and in the mobile virtual environment loyalty to their brand. a consistent approach will take time. of the commercial structure used in Indeed, just as some banks have the physical world. In exchange for The ability to make person-to-person ventured into the mobile market – as this ‘mobilisation’ of the physical payments over the network also has mobile virtual network operators – cards, the venture is able to charge major potential. We usually think of to create loyalty and use the mobile either for access or for leasing access that service as the successful M-PESA in channel more effectively, so we to the venture’s secure SIM and Kenya and other emerging economies. expect to see an increasing number service infrastructure. But consumers in developed markets of mobile operators venturing into also will be ready to make person-to- the financial services markets. Some person transfers, both in cash and in other forms of value. For example, someone who can’t make it to a bar Figure 3: How Brand X can use the ecosystem to or restaurant to meet friends not only deliver a compelling customer experience will be able to contact them to say sorry, but also can send a branded The collaborative service is voucher for free drinks or a meal. Brand X wants to reach engaged to profile and target Sue and her friends with all willing consumers like Sue target brand offers. and deliver ad campaigns to their mobiles.

JV aggregates all Sue consumers and provides Target consumers Brand X with details of receive discount the campaign’s success. coupons for Brand X.

Sue redeems coupons and buys goods by tapping phone at the shop’s till.

Source: PwC analysis.

14 M-commerce: The race to seize the opportunity For once, the digital divide between rich Secondly, there are commercial and Embarking on the journey and poor, and between developing and competition issues with collaborations developed economies, poses no barrier – although, arguably, they pale More and more consumers are to offering similar services to each. How when compared to the effects of the embracing coupons, transport, they’re offered may differ, though. dominant operating system and/or advertising and other services on their handset players such as Apple, Google smart handsets. That’s opening a clear All markets have local and global and Microsoft-Nokia embedding their opportunity for mobile operators to take brands trying to reach individual wallet and advertising services into the the lead in unifying today’s fragmented consumers (with mobile potentially device out-of-the-box. Nevertheless, mobile marketing and payments market, being a more-effective tool in competition authorities will need to be by collaborating to create a single developing markets than in other satisfied that operators’ collaboration new m-commerce ecosystem. If they channels); and the non-governmental remains in the consumer’s best interests. can team up successfully to do this, organisations and industry bodies such More important, the operators need to then their potential to give consumers as the GSMA have long highlighted develop a commercial model that works convenient, compelling experiences the potential of mobile money for the for them, given likely imbalances in – and to develop new revenues for traditionally ‘unbanked’. With low-cost market share. themselves – is enormous. smartphones increasingly set to reach the emerging economies, delivering That said, delays on competition Success would mean new, collaborative scale through collaboration could or commercial grounds could keep ecosystems strengthening the growth of enable the operators to stimulate both operators from creating a new, scaled this embryonic market. Simultaneously, economic growth (through more open ecosystem and could keep consumers the ecosystems would offer genuine market trading) and revenues outside from enjoying the resulting benefits. size and scale, allow consumers to their core communication offerings. A further effect could be to hand get new and innovative services the m-commerce and mobile-wallet such as mobile wallets and let other Moving quickly to meet the markets to the same over-the-top consumer-facing businesses target relevant offers and deals to a large yet challenges ahead players who already dominate mobile applications and media. highly segmentable audience of mobile While operators have a huge potential subscribers. And they would do it all to lead the m-commerce revolution Thirdly, operators face the challenge by means of a single platform for sales, through industry collaboration, they of making sure NFC-enabled terminals delivery and payment. still need to overcome three significant get into retail outlets quickly. In barriers if they are to succeed. many cases, card issuers are largely With commercial collaborative making this happen, but are doing initiatives such as ISIS in the US and the The biggest threat is the scale, so potentially in competition with three-way collaborations in the UK and speed and proven market muscle the operator-led ventures. Visa now Germany, plus technical ones such as of the over-the-top service providers offers cardholders the option of using the NFC-based collaboration announced such as Google and Apple. They’ve a microSD memory card with existing in Spain in March 2011, operators have already demonstrated those qualities smartphones and paying for goods embarked on the journey to achieve in seizing the majority of revenues in with NFC by using its downloadable these goals. From here on, speed is key. the mobile applications and advertising PayWave application. Other NFC- Time will tell whether the operators will markets, and they’re looking to emulate based mobile-wallet offerings include reach their intended destination first – their success in all other aspects of MasterCard’s PayPass and American or whether the over-the-top providers m-commerce. To prevent them from Express’s ExpressPay. A number will beat them to it once again. doing so, operators first need to move of banks in developed markets are quickly to get their offerings and adopting such systems for their standards established and out into customers, and that’s encouraging the marketplace before the over-the- retailers to adopt NFC terminals. top players’ competing offerings gain critical mass.

Communications Review 15 An optimistic prognosis for mobile health opportunities

All healthcare systems are facing the issue of how to provide ubiquitous access to care and to improve outcomes at the lowest possible cost. No technology shows greater promise in addressing these needs than does mobile health. Telecommunications companies must radically transform the way they think about their services and move aggressively to develop healthcare services and solutions with added value. By connecting the clinical with the personal – informing and increasing access between healthcare practitioners, systems and patients – they can create high-margin commercial and consumer revenue streams.

By Christopher Wasden Christopher Wasden is a managing director in PwC’s Health Industries practice. For more information, contact Chris by phone at [1] 646 471 6090 or by email at christopher.wasden@ us.pwc.com. The author wishes to thank David Levy for his contributions to the article.

16 An optimistic prognosis for mobile health opportunities Female runner reaching the crest of a hilly road through the forest through of a hilly road the crest Female runner reaching

Healthcare is rapidly transitioning What’s making this transition happen will be even greater than those in the from a siloed, hierarchical system is connecting patients, providers and US, as mobile technologies represent of delivering care to one that’s more product companies through one of the the only means of delivering care collaborative and transparent and that most personal technologies we will ever to most of the people in the world. involves patients. This shift is a leading own – the mobile phone. This personal Such emerging markets as China, force in the rapid growth of the means of connecting is transforming India and Brazil, which have limited mobile health market. Technological the way to collect vital signs, monitor physical healthcare infrastructures advances and the expansion of patients’ adherence to treatment plans, and a shortage of providers, are high-speed wireless networks are share information, manage our health looking to mobile health technologies giving consumers access, tools and and wellness and fundamentally change to expand access to care more cost- information. And the advances are our behaviours to become healthier and efficiently. Monitoring patients changing the way consumers interact happier people. remotely with innovative devices with the healthcare system, manage and sensors, coupled with web- or their health and make decisions about At the nexus of connections is the text-based physician evaluations and their care and treatment. telecommunications industry, creating consultations, has the potential to the devices, infrastructure, services expand the reach of clinical care. Remote monitoring devices and mobile and solutions to power this revolution health applications enable consumers in care. Is it any surprise that hundreds to access their medical records online of mobile health applications are and monitor such personal vital signs A large market awaits emerging every week, or that investors as blood pressure, pulse, blood glucose are pumping millions of dollars PwC’s Health Research Institute levels and weight. Innovations in into companies to support such estimates that in the United States, the mobile health technology are also of applications? Despite this potential, annual consumer market for remote great interest to physicians as they success in the mobile health market and mobile healthcare-monitoring try to improve health outcomes, is not predetermined – significant devices, services and solutions will reduce costs, meet meaningful-use uncertainties remain. exceed US$7.7bn within the next five requirements and engage patients years. The international possibilities about health information.

Communications Review 17 In the US, for example, the Federal Companies looking to enter the mobile Most medical devices and related Drug Administration (FDA) is health market must have products products – lacking interoperability or working to regulate wireless medical that consist of more than the ability plug-and-play functionality with other devices, and reimbursement is still simply to measure and transmit data. products – are where cell phones were a uncharted territory for many payers In today’s results-oriented healthcare decade or so ago. PwC recently assessed (insurance providers, governments and environment, mobile health products more than 140 of the most successful individuals). The pressures created by must deliver maximum value. This and popular health and wellness developers, patients and providers have value can be articulated through applications to see how they scored on led the FDA to create more clear-cut principles that support developing the six principles. The disappointing standards and regulations for approval, products that are: results (see Figures 1 and 2) showed although much still needs to be done. why only 26% of applications are used • integrated into the personal lifestyle California’s Governor Jerry Brown just only once, 74% are used fewer than ten of consumers and the service-care signed into law new healthcare reforms times and only a third of consumers are continuum with multiple devices that enable providers to get paid willing to pay anything for them. and metrics more easily for offering mobile health services, an important step that will • interoperable with other Making the leap to the expanded access lead the way for other state reforms applications, devices, software and usability that the six principles in this area. and personal health records collectively describe is crucial for developing mobile health products in • intelligent and able to make sense In other countries, we’re beginning the long term and for the success of the of data, create meaning from to see similar reforms, enough to companies that develop them. information and provide real-time conclude that the competition to support that patients can act on to access mobile health markets globally Integrated. Mobile health products modify their behaviour will be fierce. should be designed to be integrated • socialised to sustain behavioural into the care continuum through Despite the undefined variables, change through a community effect multiple devices and metrics. companies can assess themselves and interpersonal engagement Integration is the plumbing of mobile and calculate their value to position health – it enables information to be • outcome-oriented and able themselves more competitively. To moved from place to place. It isn’t only, to document, measure and create successful devices, applications, or even mostly, about the technology. validate outcomes, both to confirm services and solutions for the mobile It’s about clinical process and workflow. performance and results and to pass healthcare market, companies must For many practitioners, adjusting the muster with payers and regulators focus on improving the healthcare clinical process and workflow is the experience for both doctors and • engaging to provide motivational biggest hurdle to adopting mobile patients, but also on lowering costs to support that causes frequent use. health technologies, bigger even than the system as a whole and making care the capital expenditure involved. more accessible. For telcos to succeed, Comparatively few medical devices or they must create value propositions that other products offered today reflect For patients, integration refers to address these three needs: better quality all six of these core principles; many assimilating the product behaviourally of care, greater access, lower costs. devices fulfil only one or two. Many and socially so that use, compliance medical devices still function primarily and monitoring are as seamless, simple Six principles for success as proprietary, single-purpose products. and specific as possible. Integrating An analogy is the basic cell phone. In the these products into the existing systems Research by PwC indicates that late 1990s, the cell phone could do one of practitioners, payers or employers companies with products that reflect thing only and couldn’t work in concert can improve not only access but also six broad principles will have the with personal digital assistants (PDAs) use and effectiveness. best chances of succeeding. Very few or other devices. Since then, cell phones applications or devices meet that have metamorphosed into multipurpose threshold. That’s the case today in devices that are replacing many single- spite of mobile health being among use products such as calculators, the fastest-growing areas of mobile cameras and conventional PDAs. technology, with more than 10,000 medical, healthcare and fitness-related applications available for use on smartphones and other devices.

18 An optimistic prognosis for mobile health opportunities Interoperable. Interoperability Hundreds of mobile health applications are includes full functionality with both electronic health records and emerging every week and pressures created by conventional paper-based systems. In developers, patients and providers have led to more contrast to integration, interoperability entails setting standards and means clear-cut standards and regulations for approval. that one system can communicate and interact with another. For instance, in the United States, a number of Although such arrangements can be Telecommunications companies applications have been, or will be, exclusive initially, perhaps as part of have been successful in integrating incorporated into the electronic- pilot programmes, ultimately access their networked technologies into health-records systems of either major should not be confined to any single transportation and logistical value providers, such as hospital systems, or network or platform. Devices should chains and services. They need to apply payers, including insurance companies. be capable of being integrated with that same approach to integrating the networks and devices of other healthcare solutions into the workflow mobile carriers and service providers. of patients and clinicians. Expanded access will be crucial for patients, providers and payers to accept the devices.

Figure 1: Mobile health applications evaluated for meeting the principles for success

80 70 63 60 50 40 40 29 30 20 8 Number of applications 10 1 3 2 0 0 1 2 3 4 5 6 Number of principles met

PwC reviewed 146 mobile health applications for use by consumers and professionals. Surprisingly, less than one-third of those applications met more than two of the six principles that we’ve identified as critical for success in this market.

Figure 2: The principles for success that mobile health applications most often meet

80 70 66 60 50 40 30 24 19 20 13 16 15

Number of applications 10 0 Integration Interoperability Intelligence Socialisation Outcomes Engaging

Principles

Among the mobile health applications PwC reviewed, most met the principle of being easily integrated into consumers’ lifestyles, but lagged in achieving the other success principles.

Communications Review 19 A service-oriented focus – adding For telcos to succeed, they must create value things like call-centre support – is in many respects a subset of intelligence propositions that address these three needs: and also is crucial for mobile health products. Although many products better quality of care, greater access, lower costs. have a service component, they can be significantly more effective and appealing if they give both practitioners and patients the tools and applications they can use to provide more targeted care and treatment. Such relationships not only would Those kinds of recommendations are expand the reach of new applications important because many applications One major challenge with intelligence but also could let application developers don’t identify what should be done that many organisations haven’t yet see how practitioners have been differently based on the data that a figured out how to manage or mitigate assimilating these products into their patient generates. In fact, for many has to do with risk. Who takes the daily workflows. That’s a crucial common conditions, the average clinical risk associated with intelligence consideration, because disrupting the clinical provider could wait months that changes patients’ behaviour? routines of a practice is such a barrier. to add a second medication when the What if something goes wrong and This relationship also gives developers first is not working, even though it the intelligence results in the patient data to help identify ways of improving could take weeks to know whether the becoming sick or injured or leads to their products. initial medication is effective. That’s death? Neither telecommunications because the clinician lacks the real- companies, handset manufacturers, Telcos already provide seamlessly time data to know that the patient systems integrators nor insurance interoperable networks for their core is complying and the medication companies want to take this risk. wireless and wired line services. is working. Breaking through such Providers (those who normally manage They need to figure out how to do clinical inertia can generate much this risk) aren’t comfortable taking the same in the highly fragmented more effective results. chances with patients who might use and disjointed healthcare ecosystem. an application but aren’t under their Some organisations, including AT&T, Intelligence also provides a form of direct care. are actively working with standard- omniscience. At doctor’s office visits, for setting bodies like the Continua Health example, many indicators are not close So, there’s a paradox. To be successful, Alliance, a cross-industry, not-for- to what would be normal for a patient, these applications need the data to be profit organisation that sets standards because patients typically comply better intelligent, but most parties that can for mobile healthcare to establish with treatment plans during the time provide intelligent data are hesitant. plug-and-play interoperability. before they see their doctor. As a result, the doctor doesn’t get a realistic view Socialised. The socialising of medical Intelligent. Perhaps more than any of the patient’s condition. devices should generate a community of the other principles, intelligence effect of employing information to is the indispensable feature of any Access to data in real time supplies sustain changed behaviour. This process mobile-health platform. For patients a more comprehensive overview of a happens when patients engage with a or practitioners to find a platform patient’s status. More information alone community of supporters who help them useful, it should not simply collect and is not necessarily better information. modify their behaviour and achieve store data; the data need to be easy to The sheer volume of data that real- health and wellness. When practitioners exploit and use in actual care. Devices time access could make available – receive the necessary information, they should analyse the data generated say, a screen with 50,000 data points can recommend relevant subjects, such and provide support in real time and – could overwhelm rather than help as visibility into vital signs and patients’ recommendations on how medication practitioners. The data need to be adherence, lifestyle modifications and or behaviour should change. interpreted, with recommendations appropriate medications. for the patient, such as modifying behaviour somehow.

20 An optimistic prognosis for mobile health opportunities Social applications also enable patients Focusing on outcomes and clear Conclusion: to include family members or friends metrics from the start also can help a Be ready to cross lines in their health and wellness activities, company’s products gain regulatory which creates a supportive network. approval, which, in some markets, is Integrated into mobile and web- Equally important, applications also required to gain the acceptance based applications, the six principles let users set automated reminders of payers and practitioners. discussed in this article create a and interventions based on the data framework that companies can use received. A patient and a family member In the US, for example, the movement when developing products to better may be sent an alert for the patient to towards ACOs (Accountable Care connect healthcare providers and take a medication immediately or take Organisations) requires providers to patients who are managing illnesses other measures to control a condition, collect, monitor and report outcomes. and chronic conditions. thereby averting a crisis. But that daunting task means collecting information from thousands of devices, But for long-term success, it’s nearly as Outcome-oriented. Mobile health applications and people. Telcos play important for mobile health products technologies must be outcome- an important role here in providing to be scalable as it is for them to fulfil oriented. They must provide the data health cloud mobile health solutions these six principles. Many patients and information needed to analyse that perform these functions to make are afflicted not only with a primary and validate the performance and sure their customers have the data condition or illness but also with other results of a given value proposition to get paid. problems. As a result, mobile health – both from health outcomes in platforms can be used in managing the numerator and from economic Engaging. Too often, health and other chronic conditions, such as those outcomes in the denominator of the medical applications focus on patients’ with cardiovascular, respiratory, equation. Such an approach proves failings, weaknesses or sicknesses. diabetic or oncological factors. that real value is being delivered. For They also tend to be efficient and example, each device or application streamlined, but boring to a fault The market for such scalability is would indicate how compliant patients (they’re sometimes designed without significant. According to the Kaiser were to their medication regime, how a strong sense for aesthetics). Not seen Foundation, nearly half of adult many pounds they lost, how well they as fun, they don’t motivate patients to Americans and 7% of children suffer were able to manage their stress levels, use them consistently. As we saw with from a chronic condition. These chronic how many cardiac events were predicted the evolution of video games, the first conditions result in care that has been and prevented and so forth. five principles mentioned above are the estimated to consume as much as three- table stakes, the minimum, to have a quarters of the US healthcare budget. Achieving this goal is a matter not successful gaming application. But if The appeal of products that can cross simply of committing to implement it isn’t engaging – if it doesn’t have lines is clear, whether to practitioners technology, but also of taking a clinical this final principle – it will never be from a functional standpoint, to payers perspective on technologies to identify a hit. The same is true for mobile from the viewpoint of cost control medical and nonmedical indicators, health applications. or to patients from the perspective such as treatment costs avoided. These of convenience and results. goals should be consistent with what This is by far the most difficult principle the relevant parties want, whether to incorporate. Unlike a mobile game, As average revenues per user are they are healthcare providers, payers, which provides instant gratification declining in most telecom markets, patients or employers. and rapid progress, health and wellness telcos need to find ways to give their can take a long time to improve. People customers more value by offering new By relating products directly and lose weight over weeks and months, solutions. Mobile health represents a closely to such desired results, they not seconds and minutes. Improving way to increase the average revenue can be developed in reverse (from health is a marathon, not a sprint. Most per user between 50% and 200% by the outcome) rather than forward, developers of mobile health applications offering healthcare solutions related to or, taking a given technology and haven’t figured out how to generate managing diseases, aging independently identifying possible uses for it. By engagement in an area that takes such and staying well. taking an outcome-oriented focus, disciplined and sustained effort to a company can differentiate itself. show improvement. All these factors are creating an opportunity for mobile health technology and service providers to be a part of a dynamic and potentially sizable market.

Communications Review 21 Building rural telecoms, one rupee at a time

Telecom industry analysts are obsessed with a four- letter word: ARPU. The great and the good are forever pontificating over how to arrest the decline of average revenue per user. In India’s mobile telecoms sector – with ARPU at US$2, on average, or at US$1, for new users1 – the numbers could hardly get smaller. Industry executives in India worry less about ARPU and more about usage. They realise that there are limits to what they can do to influence upwards the price of what they sell, and that there’s more they can do to encourage consumption. But what does that mean when looking at rural expansion? We believe more can be done to nurture a profitable rural telecom business, firstly, from within the industry’s current business model and, secondly, through new business models. Here, using India as an example from which others might learn, we look at how operators can find opportunities in rural markets.

By Mohammad Chowdhury Mohammad Chowdhury is an executive director and the Telecoms Industry Leader for PwC India. For more information, contact Mohammad by phone at [91] 22 6669 1560 or by email at [email protected].

22 Building rural telecoms, one rupee at a time Birupa River, Orissa State, India. Fishermen in the Birupa River cast a net to catch fish Birupa River,

Viewing the business opportunity in servicing cost for a rural user is around When it comes to rural India, particular through the lenses of price 25% higher than for an urban one. there certainly are some and usage is making rural customers Coupled with lower ARPU, at US$1.70 significant challenges: in India look less and less appealing. for rural versus US$2.10 for urban, • 74% literacy rate. The lack Rural users – according to common these numbers indicate adverse of literacy dilutes campaign perceptions – are likely to spend less economics (see Figure 2). effectiveness in many media. money, not be interested in data services, receive more incoming calls Contrary to perception, though, • Only 15% English literacy. than they make outgoing calls and outgoing minutes of use between urban The low preference for English cost more than urban users to acquire, and rural users are roughly the same. limits the adoption of most services, connect and serve. So rural users appear to be generating since they’re not available in as much revenue from outgoing calls as other languages. In line with such perceptions are urban users do. But rural users appear • Linguistic fragmentation. India the insights we gained from one to take more incoming calls than their has no national language. Hindi of the major Indian operators: the urban counterparts do. So if mobile and English both are relatively subscriber acquisition cost for a rural termination rates drop any further widely spoken, but 30 other customer in a remote area can be as in India, that may negatively impact languages are each spoken by much as 50% higher than for an urban rural profitability. more than a million citizens2. acquisition, due to higher distribution payouts; and on average the monthly According to a survey undertaken by • Lack of infrastructure. All-weather one of the operators in India in 2010, roads and electricity connections 65% of rural users don’t know what a aren’t yet a common feature of many 1 Quarterly Indicators Report, June 2011, Telecom Regulatory Authority of India. data service is. But of those who know, Indian villages, and the outlook for as many as two-thirds regularly use one. improvement remains bleak. India 2 Government of India Census 2001, NGO and expert estimates for English literacy rate. spends only 8% of its gross domestic 3 Secretariat for Infrastructure, India, 2011: product on infrastructure, compared “Investment in Infrastructure during the Eleventh to 9% in China3. Five Year Plan”; United Nations University, 2009: “Economic Reforms and Infrastructure Spending: Evidence from China and India.”

Communications Review 23 Figure 1: Examples of ARPU levels around the world

$70 63.9 65 60 55 50.7 50 45 40

35 30.9 30

ARPU (US$) 25 20 13.9 15 9.6 9.3 10 5 2.1 0 Japan USA Europe Brazil China Russia India

Source: “Indian mobile services sector – Struggling to maintain sustainable growth”, 2011, PwC.

Figure 2: Historical overview of mobile key performance indicators in India, 2005-2011

In August 2011, several major operators increased the local $0.05 per-minute tariff rate by 20%

0.04

0.03 0.023 0.021 0.019 0.02 0.015 6.962 0.012 0.010 0.011 7 0.01 6.077 6 5.019 Average revenue per minute (US$) revenue Average 0.00 5 2005 2006 2007 2008 2009 2010 2011 4.231 Year 4 2.769

ARPU (US$) 3 2.019 1.885 2

500 1 465 2005 2006 2007 2008 2009 2010 2011 448 444 Year 450

388 392 400 369 344

MoU (minutes) 350

300 2005 2006 2007 2008 2009 2010 2011 Year

Source: Quarterly Indicators Report, June 2011, Telecom Regulatory Authority of India.

24 Building rural telecoms, one rupee at a time Yet the rural opportunity cannot only 36% of low-ARPU users are aware Rural segments are as varied as urban be ignored and potentially is very of non-voice and non-SMS services ones are: they’re not only a generally significant. About 60% of the Indian being available as well as know how poorer base but also more multilingual population still lives in rural areas to use them. As mentioned above, and more spatially dispersed, and they and contributes approximately 20% of considering such low awareness, 20% have differing social and professional the gross domestic product. In rural adoption looks pretty good. needs and communication patterns. areas, 27m households today count as According to the National Census of middle class, with annual income in So the first problem is awareness, 2001, 90% of the population of Kerala the range of US$1,000 to $4,000. With not usage. While some operators is literate, but in Bihar, only 44%; and the low-tier user base – those who use understand this, none has yet 48% of the population of Orissa is basic voice and text-capable phones developed a solution for increasing below the poverty line, yet in Punjab, – being relatively large, a modest 5% awareness of data services. only 6%4. increase in low-tier adoption and usage could generate as much value as a 20% The first challenge to doing so is the Another misconception that arises increase in adoption by smartphone problem of the free rider: “If I spend is that rural Indian consumers won’t users would. millions of rupees educating the base, become active content buyers. Recently then what if half the customers leave a leading TV channel recorded that in Although some of what operators and use the services offered by another the state of Andhra Pradesh, as much as perceive about the profitability of operator?” Understandably, marketing 25% of interactive TV responses came rural users is grounded in truth, the officers in mobile operators see that from rural areas. That figure indicates reticence to do more in rural areas as a risk. Distribution channels may that non-urban consumers already is more about operator constraints hold the answer since they generally form a sizable segment of engaged, than lack of opportunity. More can cut across operators at the rural level. interactive audiences. With ARPU below be done to nurture a profitable rural They could start offering people US$2 a month, mobile services remain telecoms business, firstly, from within who pop into their shops education well within individuals’ affordability. the industry’s current business model in data services – for a fee that they And those services look even more and, secondly, through new business would charge the operators – to be affordable when household budgets are models. Operators will need to take administered by a third party and considered, given that rural households three steps, discussed below: charged back in a fair way. Millions have some 2.2 earners each. could benefit as well as the operators. • Understand the breadth of the Compared to urban users, rural users customer base in rural areas better. If such a multi-operator mechanism – partly because of their remoteness • Address users’ needs for services to were to prove too difficult to set – commonly depend more on mobile be micro-local and in their language up, though, the Department of communications to stay connected of comfort. Telecommunications could draw and have a greater need for channels on the Universal Service Obligation to deliver them all manner of services • Develop service models fit for a Fund to fill in for this ‘market failure’. and goods. Operators have terabytes varied user base. It’s likely that more public/private of customer-usage data that could partnerships will have to play a role Better understand the help them untangle the rural mass in championing Internet access in into usefully understood and targeted breadth of the customer rural areas. segments. Yet they remain unable to base in rural areas use this information flexibly enough One example is the possibility of Usage is the major marketing focus in to generate distinctions between making more use of the postal service. India, but in rural areas, adoption is different customers with similar In India, the postal service already in fact the bigger problem. Consider spending profiles. gives access to mobile services. But the data services: while the majority of paradigm of that partnership could smartphone users in urban areas access be shifted if post offices and delivery a data service from their handsets workers could be trained and deployed at least once a month, for sub-US$3 as a mobile sales force to encourage spenders using basic phones the figure users to adopt new types of services. is closer to 20%. According to a survey done by one of the operators in 2010,

4 Planning Commission, 2001, http://agricoop.nic.in/ Statatglance2004/EcoIndicator.pdf.

Communications Review 25 Localisation has to be precise. A study Rural users commonly depend more on mobile by the Indian Institute for Social and Economic Change found that in the communications to stay connected and have a state of Karnataka, during the same month wheat prices can vary by a factor greater need for channels to deliver them all of 5x in markets separated by not more manner of services and goods. than a few hundred miles.

Some operators in emerging markets around the world are translating local service requirements That isn’t simply a failure to know one’s The good news is that the Indian into revenue streams that have customer. The inability results from mass user market may not need encouraging prospects: the complexity of harnessing legacy 200,000 applications, which the iOS information technology systems across and Android platforms can boast. • Chandamama (Uncle Moon) is a various circles that can’t generate Perhaps more like five to ten ‘hero children’s magazine that began uniform, analysable customer data. services’ with content that can be publication in July 1947, just one Most multi-circle operators of scale in micro-localised and translated and that month before Indian Independence. India have grown through a mixture address specific, understood needs. The magazine has started its own of acquisition and organic expansion. Rather than trying to run developer application with a US$1 monthly To date, harmonising systems has stimulation programmes, operators can subscription. Currently available in proven all the more difficult because gather more insight about local areas, nine languages, the application has of the growth pattern. Now that the work out exactly what people want and reached 3,000 subscribers in the major players have achieved circle-level offer a small number of services on a first few months since its release. expansion, consolidation has to take trial basis in a circle or two. To avoid • Kisan Raja (Farmer King) is a greater priority. having to pick the winners, let the best GSM-based irrigation controller services pick themselves. In India, the that sells for about US$100 in the Address users’ needs operator that searches diligently for southern states of India. It allows for services to be micro- hero services may well find a handful farmers to check and control their local and in their language of services that do have the potential irrigation pumps from their houses to win over millions of users. of comfort by using either a landline or a mobile phone. Extensive guidance on an Trying to attract developers to create The vast majority of services available interactive voice response system applications for use in rural India today are in English only, and only a in local languages is helping to hasn’t worked and, given the current very few can claim to be truly localised. extend the reach of Kisan Raja revenue-sharing arrangements, is Many services claim to be more local into various regions. unlikely to work. According to the than they are, which disappoints users • In Cairo, Egypt, a live traffic-alert latest Internet Moblie Association and leads to high dropout rates. Within service has become very popular. of India report on mobile value- a few years, technology will address Commuters generate the content added services, 75% of developers the language problem when we get daily, using their handsets to type are motivated to write applications voice-based search in any language. I’ll the traffic news as they travel to for a large market penetration. That be able to ask my phone in Bengali for and from work. The content is explains their preference for creating the theatre where I can see a certain in Arabic, and the information is applications for the iOS and Android film tonight, and it will give me the highly localised. platforms, to be used across multiple results from Google. If localisation has geographies. Convincing developers been harnessed by then, the film will • Janala is a language-tutoring to write for multilingual local users, be showing at my local theatre and not service that an operator in whose usage is unproven and whose 30km away in another part of my city, as Bangladesh offers to people handsets have multiple operating is often the case with current offerings. interested in learning English on systems, is no easy sell. their mobile phones. It’s targeted at those who can’t afford college or other classroom tutoring, and adoption has been high.

26 Building rural telecoms, one rupee at a time organisations in India have true Partnerships are needed at the local level to enable depth of local reach, there are plenty with real scale at the state level, for better services and further-reaching distribution example, in Gujarat. and sales. From the experiences of other industries in India that are well aware of the extreme price sensitivity of the rural market, we find lessons that might be helpful to mobile service providers. When it comes to sales, service Develop service models fit • Brand more in local languages and providers can eliminate the need for a varied user base localised themes, for example, by to set up rural retail points. Instead, creating a sub-brand of an existing they can gain inroads into rural markets With such a variety of market segments one or even an altogether new one by identifying a select group of village to serve, India’s mobile operators are residents and supporting them through heroic in achieving what they do in • Offer handsets that are customised appropriate training. rural areas – through operations that to the village users’ preferences, such were designed to support growth in the as more phones with torch lights and loudspeakers for playing music Hindustan Unilever, the Indian arm of metropolitan areas. Those areas now FMCG major Unilever, employed a team boast 140%+ levels of penetration, • Offer a concentrated set of micro- of women to sell its products, including and operators have stretched the localised services, and collaborate soaps and detergents. The initiative operating model too far. It’s time to with other operators to offer was successful, making sales in remote think of better, more detailed ways common platforms, toolkits and areas without high capital expenditure. of acquiring, retaining and serving programmes so as to create a larger In Egypt, one of the leading mobile customers in the rural market. market opportunity for developers. service providers used direct rural selling as part of an initiative. The Just as in the late 1980s and 1990s the When VillageCo is established, the company’s immediately recognisable airline industry spawned a successful, CEO should demand a high-growth, corporate branding helped this service no-frills segment to cater specifically to no-frills business that delivers 35%+ provider set up a hub-and-spoke model the business and leisure travel of lower- margins. The company should breathe for distributing cards and recharges. income groups5, we believe the mobile new air into reaching the mass base in industry should develop a tiered service rural areas, where penetration is still To overcome electricity shortages, model. The industry might create, as less than 40%. Uninor, a 2008 entrant in India’s an example, ‘VillageCo’ – a business mobile market, collaborated with The designed to: The mobile operator’s own resources Energy and Resources Institute in and systems will go only so far. More • Deploy networks more cheaply, training women to run solar lanterns partnerships at the local level are possibly by using off-grid and charging stations. The off-grid needed to enable better services and network solutions solution encouraged people to use further-reaching distribution and sales. mobile services in areas with either • Differentiate service levels and New collaboration models are needed as no or an interrupted power supply. To components to pre- and post-paid well, and the possibilities are significant. date, more than 200,000 people have users, depending on the user type received services in 650 villages in 16 and spending (similar to airlines’ In regions where existing distribution of India’s states. frequent flyer categories), and channels have limited reach, new thereby reduce service redundancies local channels could go further. In Over the next few years we expect to and cut the average cost to serve Bangladesh, BRAC, the world’s largest see the refinement of the telecoms non-governmental organisation (by • Spend less, specifically on operating model at the rural level. The beneficiaries covered), is embracing sophisticated customer service and rural model will truly expand the reach mobile in providing healthcare. care, possibly by offering more care of the mobile revolution into remote, BRAC’s workers are having the effect through retail outlets and orienting and often low-income, segments of the of creating mobile diffusion in places staff to both solve problems and population – and will dispel current that retail couldn’t reach economically. up-sell at the same time notions by doing so profitably. While few national non-governmental

5 Between 1996 and 2005, in the UK-EU while full service air traffic grew from 42m passengers to 47m, ‘no frills’ traffic grew from 3m to 51m. The proportion of all business travellers who were from lower to middle income groups rose from 36% to 47%. Source: UK CAA, report CAP 770, November 2006.

Communications Review 27 Net neutrality: Why solve a problem that doesn’t exist?

Network neutrality has once again become a hotly debated topic. In Europe, it’s re-emerging in the context of the mobile Internet, in particular. In the US, the debate continues with the Federal Communications Commission’s release of its Final Rules on Preserving a Free and Open Internet. Renewed concern over net neutrality comes at a time when mobile operators urgently need to revise their price plans and tune their business models to cope with the decline in revenues from text messaging and voice and to benefit from the surge of mobile-data consumption. The new mobile- data world requires collaboration among content and application providers to deliver new, differentiated, high- value services that customers want. In PwC’s opinion, net neutrality would severely limit everyone’s options.

By Bart-Jan Sweers Bart-Jan Sweers is a senior advisor in PwC’s telecom practice in the Netherlands. For more information, contact Bart-Jan by phone at [31] (0) 88 792 68 28 or by email at [email protected]. The author wishes to thank Willem Schouten, Mark Kuijper, Alastair Macpherson, Erik Brouwer and Marieke Baarslag for their contributions to the article.

28 Net neutrality: Why solve a problem that doesn’t exist? Landscape in front of mountains, Tibet Landscape in front

The network neutrality debate Europe now is actively debating In the United States, the Federal traditionally has been about fixed net neutrality, triggered partly by Communications Commission Internet access. The discussion began mobile operators’ reactions to the (FCC) released its Final Rules on in the 1990s, with not much action strains they perceive in both networks Preserving a Free and Open Internet taken by regulators worldwide. The and business models. In a recent in September 2011. These rules forbid European Commission has been resolution (November 2011), the blocking of services and place some reluctant to introduce regulatory European Parliament advocated a clear restrictions on price and quality guidelines, instead placing emphasis more interventionist approach. This differentiation. But on the latter on access regulation and transparency resolution was preceded in the summer point, the FCC proposes regulating to harbour existing competition. The of 2011 by the decision of the Dutch mobile Internet more lightly than existing European Directives, though, Parliament to incorporate net neutrality fixed Internet, dropping the non- already give some guidance on matters in its Telecom Act, which prohibits discrimination clause. related to net neutrality. The directives, operators from differentiating their for example, obligate regulators to pricing based on the content or service With the tremendous growth of mobile promote the ability of end users to that’s being accessed. That decision Internet access over the last couple access information or run applications made the Netherlands the second years, the focus of the debate has of their choice. country in the world (after Chile) to shifted, as illustrated by the Dutch enact net neutrality regulation, and case (see sidebar on page 35). may trigger similar developments in other countries.

Communications Review 29 Mobile operators in advanced markets It’s not so much a difference in the Arguments against are confronted by a surge in data traffic, competitiveness of these two segments net neutrality which requires large investments in but, rather, the result of intrinsic networks. At the same time, over-the- differences in respective network To affect the outcome of the top applications, like WhatsApp and economics. As a result: regulatory debate on net neutrality, Skype, are cannibalising voice and text mobile operators will have to speak • Fixed operators are less likely messaging revenues, and that requires the language. Too often, operators raise to infringe on the net neutrality operators to adapt their business arguments that, from the perspective principle, as they have less incentive models. Net neutrality legislation would of a policy maker or regulator, just to do so. This explains why there restrict the operators’ options severely, do not carry any weight. We heard have been so few cases in practice. so they should take notice and try to one operator plead that its smaller influence any regulatory debate on • Mobile operators are more likely economies of scale imply that it’s this matter. to try to differentiate their services. entitled to higher termination rates That may be a reflection of the than its competitors are (not a valid Some differences between fixed and underlying network economics, argument, though, because in principle mobile access networks are relevant and not so much the result of anti- its size is within the operator’s own in the context of the net neutrality competitive behaviour. control). Another operator claimed that debate (see Figure 1). Due to these its high-frequency spectrum justified differences, the ability to differentiate The FCC seems to acknowledge the higher termination rates (while the on volume and quality of service difference between fixed and mobile regulator rightly argued that this factor is even more important for mobile Internet access – its proposed net already had been accounted for by operators than it is for fixed operators. neutrality restrictions are less the fact that all spectrum was sold at stringent for mobile operators. market prices).

Figure 1: Differences between fixed and mobile networks affecting the net neutrality debate Fixed operators Mobile operators Consequence Revenue model Internet access services are Internet access is bundled with The revenues of mobile operators are still often bundled with voice and a voice and SMS service. driven largely by voice usage. For fixed operators, revenues are driven largely by TV service. Internet tariffs typically are the number of subscribers. As a result, Internet tariffs depend primarily based on volume bundles. mobile operators’ revenues are sensitive on the connection speed. to cannibalisation by over-the-top applications like WhatsApp and Skype.

Network High operating leverage: the Low operating leverage: This difference in the underlying network economics cost structure consists of a the cost structure consists of economics is mirrored in the respective high share of fixed costs and a low share of fixed costs and revenue models. Also, the relative scarcity a low share of variable costs, a high share of variable costs, of capacity in mobile networks makes leading to low marginal costs leading to higher marginal differentiating on quality of service more of traffic. costs of traffic. important. Ultimately, the difference in the underlying network economics justifies the higher incentive for mobile operators to discriminate on price and quality.

Market structure The degree of network Typically 3 to 4 networks Generally speaking, competition is competition varies, typically compete, complemented by somewhat stronger in mobile Internet between 2 (network duopoly retail competition from mobile access than in fixed Internet access. in the US) and 4 or more (by virtual network operators. means of regulated access in the EU, and fibre in Japan and Korea).

State of The market for fixed Internet The market for mobile Internet The dynamics in mobile Internet make development access is saturated, and access is emerging, and future developments difficult to predict. the content and application the content and application Regulatory intervention is particularly ecosystem is relatively mature. ecosystem remains in flux. risky in such a dynamic area.

30 Net neutrality: Why solve a problem that doesn’t exist? The key for mobile operators is to Having just two cases in ten years isn’t so that it maximises profit. Using be well aware of the goal(s) of the bad. Apparently, operators feel they vertical action or integration doesn’t regulator and to seek out arguments have more to lose than to gain from necessarily harm consumers’ interest that are in line with those goals. Usually, violating net neutrality. That attitude – after all, it doesn’t affect competition this implies demonstrating that the isn’t entirely surprising. Experience between competing value chains, but operators’ position benefits economic with walled gardens, like AOL in the only redistributes profits among the welfare, both in the short term and US or i-mode outside of Japan, has various parties in the chain. In fact, in the long term. Let’s consider some taught them that customers prefer open better vertical coordination may offer arguments against net neutrality that Internet access. Being intermediaries efficiency benefits1. Such arguments meet these criteria. between customers on the one hand have led anti-trust authorities to focus and content and application providers generally on horizontal integration 1. The problem is overstated on the other hand, operators need to instead of vertical integration. Given the regulators’ interest in net attract as many parties as possible on 2. The impact on neutrality and the intensity of the both sides. An alternative view might economic welfare debate, one would think that operators be that the threat of regulation was frequently are guilty of misconduct. enough for them not to introduce Economic theory teaches us that In fact, since fixed broadband Internet discriminatory measures. In either case, price differentiation based on emerged at the end of the 1990s, ex-ante regulation seems premature. differences in willingness to pay is there have been remarkably few such optimal from a social welfare point It has to be said that concern may occurrences. For example, the FCC of view. Price differentiation makes seem valid when it comes to mobile mentions only two issues that have sure that resources are allocated VoIP. But compare a mobile operator occurred in the US fixed telecoms efficiently. In the context of Internet charging extra for mobile VoIP to, market: one in which a cable operator access, there are two broad forms for example, a supermarket selling interfered with traffic from a peer-to- of differentiated pricing: other brands’ products as well as its peer video service, and another in which own home brand. Such a supermarket 1. Differentiating prices across an operator blocked a competing voice apparently doesn’t see any benefit in offered content and applications, over Internet Protocol (VoIP) service. not selling the other brands. Instead, it i.e. charging end users depending sets the prices of both brands’ products on the content or application they’re accessing 2. Charging content and application providers, i.e. price differentiation What is net neutrality? across both sides of this essentially two-sided market2 Net neutrality has no single, precise definition. Generally, net neutrality is described as the principle that Internet service providers shouldn’t place any restrictions on, or discriminate between, consumers’ access to content, sites, platforms and applications connected to the Internet. The principle means that irrespective of their needs, their willingness to pay or the impact on other users, network operators and Internet service providers must treat all content and applications equally. A technology sometimes mentioned in this context is Deep Packet Inspection, which allows Internet access providers to analyse the content of IP packets (as opposed to only their address). Then they can price more accurately or more discriminately, improve network management or analyse data traffic for the benefit of innovation and development.

1 Note that mobile VoIP providers basically exploit arbitrage opportunities that result from pricing differentials between standard data and voice services. The fact that operators themselves don’t use the technique suggests that it’s less efficient.

2 An operator mediates between end users, on the one hand, and content and application providers on the other hand.

Communications Review 31 In the first possibility, it’s important Again, the optimal pricing structure lead to underinvestment in network to realise that on a price-per-bit depends on the relative price development. Operators aren’t likely basis, customers value a voice service sensitivity, in this case between to offer the service even if content and significantly more than they value both sides of the market. The optimal application providers demand such a a video stream (see Figure 2). Net pricing would be to charge high prices service. The results: operators miss out neutrality would limit the options to the market side that’s less sensitive, on an additional source of revenue; for operators to incorporate such while taking into account how less content and application providers can’t differences in their pricing of Internet demand on that side may affect the provide a service that customers would content and applications. Prohibiting demand on the other side. Prohibiting have valued; and customers don’t get price differentiation would imply that operators from setting an optimal the benefit of these lost services. one assumes that the welfare optimal pricing structure across both market price difference is zero. But there’s sides compromises economic welfare. Proponents of net neutrality argue no justification for that. Without such that without protection, the balance justification, a prudent regulator would 3.Net neutrality would of power will shift to large operators, refrain from interfering. discourage investing at the cost of all those small Internet and innovating companies. Bottom-up innovation, they Net neutrality also would constitute a argue, will be harmed. But they seem Apart from direct effects on economic restriction on establishing an optimal to base their argument on some sort of welfare (what economists would call price structure across the two-sided David versus Goliath sentiment. In fact, static efficiency), net neutrality also markets that operators are acting the market capitalisation of the three could have long-term consequences in. Two-sided markets are quite largest operators and the three largest on investments and on innovation common. Their pricing structures differ Internet companies gives us a very (dynamic efficiency). remarkably. For example, eBay charges different picture (see Figure 3). only the sellers, not the buyers. Cable Net neutrality would dissuade operators These values suggest that (often local) operators charge their customers but from investing and innovating, because Internet access providers are unlikely typically pay for content (i.e. charge a it ignores the fact that not all bits are to dominate the ecosystem. In fact, the negative price). Newspapers receive equal in terms of costs. Some services opposite could be true. Many content payments from readers as well as need a high quality of service, e.g. by and application providers have an advertisers. Postal companies charge requiring bits to be delivered within tens international reach and don’t depend on the senders, who can choose (and pay of milliseconds. Mobile applications a single operator to generate economies for) first- and second-class mail. These can be very costly because of requiring of scope, so they can be the dominant differences are explained by different constant network signalling, even when party. That’s very clear in the Apple price sensitivities in these markets, and not actively used. Prohibiting operators ecosystem, where Apple is known to between the sides of the markets. from charging at least the costs of the have significant market power over associated quality of service would mobile operators.

Figure 2: Willingness to pay (indicative), based on typical pricing in advanced markets Service Typical price (US$/bit) Text messaging $1.00 Mobile voice $0.10 Mobile Internet $0.01 Fixed Internet $0.001

32 Net neutrality: Why solve a problem that doesn’t exist? 4. Effective competition can take What’s more, technological management policies. For example, a care of net neutrality issues developments still happen at a rapid VoIP application provider that appeals pace. Nielsen’s law, the bandwidth to the net neutrality principle to argue Even if imposing net neutrality were equivalent of Moore’s law, predicts for access to an operator’s customer base the right measure to address concerns that 50% annual growth of Internet is, in fact, similar to a mobile virtual about the market power of operators, access speeds will continue. Such network operator seeking access to an regulators simply couldn’t skip the an environment isn’t conducive to operator’s network. In the European question that should precede any maintaining market power, even Union, there has been considerable intervention. The question, of course, if there could be just a duopoly. discussion about whether or not to is: does significant market power really Developments in the Netherlands regulate the market for access and call exist? If not, then customers who are serve as an illustration. At the end of origination to facilitate mobile virtual dissatisfied with the Internet access the 1990s, the cable companies led the network operators. Mostly, regulation they’re offered can switch operators. market for broadband access. With the couldn’t be justified because market That threat is then sufficient to avoid introduction of ADSL, the incumbent power couldn’t be demonstrated. net neutrality issues. operator, KPN, soon gained ground If, for some reason, an EU regulator Let’s consider the competitive and took market share. In the last were to re-consider regulating this situation. There are usually several couple years, with the introduction market, it would have to demonstrate fixed (copper-, cable- and fibre-based) of Docsis 3.0, cable operators have a lack of effective competition by operators and mobile operators. been gaining market share again. They proving that: 1) there are high barriers Competition at the infrastructure level expect to feel the heat of emerging to entry; 2) there is no dynamic often is complemented by competition fibre network operators soon. towards effective competition; and at the retail level. In Europe, providers During all those years, higher 3) competition law is insufficient to using unbundled access on fixed bandwidths have been offered at ever deal with the issue. This step seems networks and mobile virtual network lower prices. The highly fluctuating to be skipped in the net neutrality operators on mobile networks are market shares and rapid decline in debate. And even if market power quite common. Customers face few prices hardly illustrate a market in which is demonstrated, the most common barriers in changing operators, providers have power over consumers. remedy is to provide cost-based access. as the relatively high churn levels Net neutrality proponents go a demonstrate, particularly in mobile Even if there are any issues, they should step further by proposing access telecoms. To some extent, 4G mobile be dealt with by means of general at zero price. networks will compete with fixed competition law to regulate network Internet access. That will blur the access, by facilitating new entry and by boundaries between these two markets requiring operators to be transparent and increase competition further. about their pricing and network

Figure 3. Market values of largest telecom operators vs. largest Internet companies

400 354

300

209 200 169 131 131 104 100 Market value (US$ billions)

0 Apple Microsoft Google AT&T Vodafone Verizon

Internet companies Operators

Note: China Mobile has been excluded, as the net neutrality discussion is unlikely to be relevant to China. Source: FT Global 500, September 2011.

Communications Review 33 Many content and application providers have an international reach and don’t depend on a single operator to generate economies of scope, so they can be the dominant party.

5. The challenge of regulating an The analysis that net neutrality Introducing regulation on the basis evolving market proponents often use to back up their of ambiguous, theoretical results also position usually lacks quantitative means that the regulator is likely to In general, regulatory measures always support. Often relying on unrealistic be highly influenced by lobbying, the come with regulatory risk. Regulatory or unsubstantiated assumptions, their political process and the strength of measures may be based on incorrect analysis can yield ambiguous, highly interest groups that seek to influence analysis or assumptions, or they may be theoretical results. So regulators are regulation to their advantage. The based on mistaken expectations about unlikely to be better than the market mere fact that net neutrality is a future developments. in setting the optimal price (which more prominent issue in the US should be zero according to net than in Europe illustrates this point. neutrality proponents). Ambiguous results, then, should be reason for a regulator to refrain from new regulation.

Net neutrality legislation in Chile Regulatory risk is particularly high in new, very dynamic markets like those for The National Congress of Chile amended its telecommunications mobile Internet services. Regulation that law in June 2010 to preserve net neutrality. Its law now forces may seem suited today may very well Internet service providers to: stifle future innovations. Net neutrality “...ensure access to all types of content, services or applications available could, for example, hinder innovation on the network and offer a service that does not distinguish content, in the area of remote medicine, which is applications or services, based on the source of it or their property.” likely to require a high level of quality- of-service differentiation. Other areas The law also states: that are likely to be affected include “No [ISP] can block, interfere with, discriminate, hinder, nor restrict the right online gaming, video conferencing and of any Internet user to use, send, receive or offer any content, application, or alarm signalling. Even VoIP, if networks legitimate service through the Internet, as well as any activity or legitimate are flooded with increasing traffic from use conducted through the Internet.” high-definition video services, may require quality-of-service differentiation. The government of Chile published this law in the official gazette in March 2011, which implied that from then, Internet service providers had 120 days to comply and adjust their services. The Chilean telecom authority, Subtel, wasted no time – in July 2011, it started inspecting the provided Internet services to verify compliance with the amended telecommunications law.

34 Net neutrality: Why solve a problem that doesn’t exist? Net neutrality legislation in the Netherlands In the summer of 2011, the Dutch Parliament voted in favour of including a net neutrality clause in the new Telecoms Act. Although this decision still has to be confirmed by the Senate, it’s quite likely that the Netherlands will be the first European economy to introduce net neutrality legislation. Passing legislation would be in contravention of the current policy of the European Commission, which has taken a less interventionist position so far and is completing a study on a more definite position. Not surprisingly, the responsible European Commissioner, Neelie Kroes, has rebuked the Dutch for not awaiting the outcome of this study. The proposed Dutch act states that operators: “are not to impede or delay Internet services or applications, unless this is done: 1. to avoid the consequences of congestion (while treating similar traffic in similar ways) 2. for the benefit of the integrity and security of network and service 3. to limit the transmission of unrequested communication to the end user, on his/her request 4. to satisfy a legal injunction or lawful requirement. Providers of Internet access services do not make tariffs for Internet access services dependent on the services and applications which are offered or used via these Internet access services.” The original Telecoms Act proposed by the Dutch Ministry of Economic Affairs didn’t contain such a strict net neutrality clause. The Parliament initiated the requesting and ultimately the adopting of this clause, which seemed to have been triggered by some mobile operators announcing plans to introduce new price plans that either would require consumers to pay extra for services like VoIP, or would require content providers to pay for the delivery of their traffic to consumers. A casual remark by one of the operators at an investor meeting about its use of Deep Packet Inspection made matters worse. In hindsight, the mobile operators seem to have underestimated the political sensitivity of these issues. Consumer protection, privacy concerns and freedom of speech arguments quickly convoluted the discussion in Parliament. Within a matter of weeks, the discussion ended with the adoption of the net neutrality clause (quoted above), and with an investigation by the telecom regulator OPTA and the data protection authority CBP into possible breach of privacy legislation. The developments then forced operators to revise their pricing strategies. Instead of the price/service differentiation they had planned, they raised prices for mobile-data access across the board. They coupled voice/SMS bundles with data bundles to avoid losing their traditional revenue base by requiring heavy data users to also pay for a large voice/SMS bundle. Parliament – clearly unsatisfied with the outcome – has triggered a political discussion on reserving more room for new entrants in the 2012 spectrum auction. Moreover, on 6 December 2011, the Netherlands Competition Authority visited the Dutch mobile operators in an investigation into possible cartel practices on pricing for mobile Internet services. These developments following the proposed amendment of the Telecoms Act should be noted by other law makers considering imposing net neutrality.

Communications Review 35 It is expected that the mobile Internet will soon have more users spending more time online than the fixed Internet does.

And those are just the known Apart from regulatory risk, the legal Conclusion applications. Others haven’t been security of mobile operators that have invented yet, but probably never will purchased spectrum licences may be at All stakeholders in the net neutrality be if net neutrality is adopted and, stake. After all, imposing net neutrality debate need to be aware that the consequently, quality-of-service support can be seen as a significant change Internet adheres to normal economic is limited. After all, the recent Internet to the licence conditions of spectrum rules. In the long run, imposing net history suggests a still emerging, highly that’s already been auctioned. This neutrality is not in the interest of dynamic industry. The end of the results in a significant loss of value for any stakeholder. Internet boom (2001) suggested that the operators, as can be derived from Operators should get ready to engage the infant era had ended, but in fact the results of the 2008 digital dividend their policy makers and regulators some of the largest innovations, such (700MHz) auction in the US. Part of by developing convincing arguments as Facebook and the Apple ecosystem, that spectrum was auctioned with a against net neutrality legislation. With didn’t even exist at the time. The general net neutrality clause, part without. most regulators aiming to enhance expectation is that soon the mobile The outcome of the auction was that economic welfare, arguments should Internet will have more users spending the amount paid for the spectrum with be formulated with that perspective more time online than the fixed Internet imposed net neutrality was US$0.76 in mind. At the same time, operators does. Almost certainly, five or ten per MHz/pop, while for the unrestricted need to be aware that rational years from now, new applications and spectrum it was US$1.89 per MHz/pop, arguments are unlikely to be sufficient. companies that are yet unheard of will a 60% increase in value. In parliamentary discussions, sensible rise to dominance. The outcome of the US auction suggests economic arguments often are It’s good practice in regulations that collectively the operators who won abandoned for unrelated issues such to follow the anti-precautionary spectrum in Germany’s auction in 2010 as freedom of speech or a unilateral principle: if the consequences of will lose approximately US$3.3bn in focus on consumers’ interests. So, ex-ante regulatory intervention are value if net neutrality is imposed on operators should consider how their insufficiently known, better to leave them. A change of licence conditions commercial actions might affect related it to the market than to intervene. with such impact should have been regulatory discussions. Also, involving Regulators should be careful trying to made before the auction. stakeholders in (price-) strategy anticipate developments and regulate formulation makes sense. Generally, an unknown future, in particular if having your public relations strategy regulation would be based on rather in order is essential to avoid losing subjective and qualitative analysis. out in politicised discussions.

36 Net neutrality: Why solve a problem that doesn’t exist? Content and application providers need to be aware that in the end, they and operators are mutually dependent. All parties have a shared interest in a collaborative approach to deliver new, differentiated, high-value services that customers want. Both operators and content/application providers benefit from a symbiotic relationship.

Regulators should be careful not to breach the anti-precautionary principle – don’t regulate unless the need to do so is clearly demonstrated. Relying on qualitative analysis presented by large Internet companies with clear stakes definitely will produce lopsided new regulation. Regulators also should be aware that net neutrality may prove to be the wrong solution for a problem and senior man on sofa Woman that doesn’t exist anyway. Rather than contemplating whether or not to impose net neutrality, regulators should, if anything, question whether there is sufficient competition (or threat of new entry) in the market.

The legitimate regulatory objective of retaining an open, best-efforts Internet for all shouldn’t be extended into restricting new, evolving, innovative business models that could enrich the future and possibilities for the Internet. We don’t know what future evolutions of the Web will bring, but we can be certain that only a fraction of its potential has yet been tapped. Careless, albeit well meaning, legislation or regulation risks sacrificing much of that potential. The pivotal role the Internet plays in the development of new industries and in the productivity of existing industries makes the stakes high indeed.

Communications Review 37 Putting your competitive assets to work

The consumers coming of age in 2015 will be digital natives – an entire generation of people who never experienced the non-digital world. They’ll use non-voice messaging more than they make calls, and will employ social networks for everything from managing their social lives to making buying decisions to finding and watching video content, all at the same time and through a device they choose. They’ll also expect the companies they deal with to handle all their customer service requirements online, quickly and seamlessly. Battling for the attention, loyalty and spending power of these digital consumers will be protagonists with vastly differing business models. The contestants will include traditional fixed and mobile operators, cable providers, satellite broadcasters, search specialists, social networks, device companies and more. As these diverse contestants gear up, what factors will be critical to their success? To find out, PwC has conducted research into where communications revenues are heading – and how operators can get there first.

By Rolf Meakin Rolf Meakin is a partner in PwC’s Technology, Media and Telecoms Consulting practice. For more information, contact Rolf by phone at [44] 20 721 31707 or by email at [email protected].

38 Putting your competitive assets to work Group of free-fall skydivers of free-fall Group

It’s widely accepted that the consumers For communications operators An analysis by proxy reaching adulthood over the next worldwide, this new generation’s few years will exhibit behaviours and arrival among the ranks of adult To help operators answer these expectations very different from those consumers in mature markets brings a questions and more, PwC conducted of their predecessors. To an extent, this host of questions. Will the proliferation a quantitative research study of five sort of divide has been true of every of digital devices and consumption national communications markets in generation: the children of the 1960s enable operators to generate higher Western Europe, as a representative had a radically different outlook from returns from their assets, or will their proxy for mature markets worldwide. those who grew up in the 1950s, who contribution become commoditised and Collectively, the markets we focused on in turn differed from those who lived increasingly irrelevant in the eyes of the – Germany, France, the UK, Spain and through World War II. The big difference next generation? Is diversifying into new Italy – account for about 85% of total this time is the explosion in connected revenue streams, such as payments and communications industry revenues in digital technologies since the turn of the advertising, a prerequisite for operators Western Europe. twenty-first century – a revolution that to survive and succeed – or a distraction In each of these countries, we set out has transformed consumer behaviour from their core business that they’ll to investigate three aspects of the more radically, and on a more mass- pursue at their peril? marketplace. Firstly, where does the market and global scale, than has any value lie in serving consumers in today’s previous wave of technology innovation. digital market? Secondly, in what direction is value migrating within that market? Thirdly – the ‘so what’ in our study – what are the implications of those market dynamics specifically for communications operators?

Communications Review 39 In a study like this, the first step is to If we factor in the relative growth rates viable option is to pursue those higher- define the scope and the shape of the of the various segments over the next growth segments. Diverse forces – price market we’re looking at. We divided it few years, the picture for the future competition, the impact of regulation, into five main blocks of value – namely, becomes somewhat less reassuring for the impact of encroachment by other fixed telecoms, mobile telecoms, operators (see Figure 2). The overall types of players – are combining to television, mobile value-added services communications market is projected drive down prices in the traditional and online content. These blocks are to grow at a compound annual fixed and mobile communications defined in more detail in the sidebar growth rate (CAGR) of about 4% – market. That means the only choice on this page. approximately double the expected is to look elsewhere for growth. rate of growth of the Western European The case for targeting new economy as a whole. The fixed and The second, equally important, growth opportunities mobile communications element is implication for operators is that, now almost flat, and is set to grow at only more than ever, retaining the existing How does spending on digital 1% over the four years to 2015, with customer base and maximising its communications currently break down fixed revenues actually declining. This value is absolutely crucial. To keep among the value blocks, or segments? near-stagnation contrasts starkly with customers, operators need to achieve As Figure 1 shows, of Western Europe’s growth projections in the mid-teens the excellence and optimise the total communications revenues of for the, admittedly much smaller, experience customers are looking for. €251bn in 2010, by far the largest mobile value-added services and In both areas, the communications slices are those of mobile telecom online segments. industry as a whole has often been services, at €119bn, and of fixed accused of falling short. telecoms, at €60bn. Communications In PwC’s view, these diverging growth providers may find it reassuring that trajectories have two implications for Disparate pockets of their ‘traditional’ core business of mobile operators. The first is that to growth weighed against fixed and mobile communications still find revenue growth that exceeds the competitive assets account for 70% of the total value base 1% CAGR projected for traditional across all these market segments. communications services, the only When we examine the two highest- growth areas, mobile value-added services (VAS) and online services, where will we find the growth within them focused? As Figure 3 shows, each of these value segments aggregates a collection of disparate service Five blocks of value types, and each has its own distinct growth dynamics. PwC’s research focused on five distinct segments of the communications market in each country: 1. Fixed telecoms, including fixed voice, access and broadband 2. Mobile telecoms, including voice, data connectivity, SMS and legacy content such as ringtones 3. Television, including net advertising revenue on spot advertising plus all types of subscription TV, but excluding public funding 4. Mobile value-added services, including applications, advertising, marketing, payments and transactions 5. Online content, including advertising and applications

40 Putting your competitive assets to work Figure 1: Value of Western European digital communications market, 2010 (€bn)

€251bn

Fixed telecoms, €60bn

Mobile telecoms, €119bn

Television, €44bn

Online content Mobile apps, advertising apps, advertising, marketing, €18bn €10bn

Source: PwC’s analysis. Excludes public funding of television.

Figure 2: Growth of value of the Western European communications market, 2010-2015 (€bn)

350 297 CAGR(%) 300 +16.0 251 +14.0 250 +4.5 200

150 +1.5 Euros (billion) Euros 100

50 -0.5 0 2010 2015 Fixed telecoms Mobile telecoms Television Online Mobile VAS

Source: PwC’s analysis. Excludes public funding of television.

Figure 3: Rates of growth of digital communications market segments, 2010-2015 (% of CAGR)

73.6% Mobile payments 40.0% Mobile advertising and couponing Mobile VAS 40.0% Mobile apps 10.0% Vertical apps 8.4% Customer data marketing

31.1% Digital media

Internet 13.1% Online gaming

10.19% Online advertising

Source: PwC’s analysis.

Communications Review 41 Mobile VAS has an overall CAGR Against this background, do operators competitive assets we identified for the of 16%. Spearheading that growth have a real opportunity to participate purposes of this study are defined in is mobile payments, growing at an in the growth within these segments, the sidebar on the facing page. explosive 73.6% compounded annually. or are they trapped within the more Next come mobile advertising and traditional areas of the communications Communications providers aren’t really couponing and mobile applications, market? To answer those questions, we playing in the fast-growing segments with an impressive 40% CAGR. Vertical mapped the growth rates of the various depicted in the figure. So the question applications and customer data segments of mobile VAS and online we have to ask is, can they use their marketing follow. services markets against the potential existing competitive assets to exploit for operators to build their position in each segment’s revenue potential? Or In online services, digital media, those markets by making the most of must operators build or acquire new including music downloads and their existing competitive assets. assets to do so? e-books, will lead the growth with a CAGR of 31.1%. Online gaming follows, Figure 4 shows the results of our The further to the right a segment is and then online advertising of all types, analysis to 2015: the projected growth located in Figure 4, the greater the including display, search and classified. rate (the y-axis) of the high-growth opportunity for operators to go after it segments we’ve been discussing and using their competitive assets. Those Not surprisingly, these impressive our estimate of the billions of euros of segments to the right of the vertical growth rates are attracting intense market value (the bubbles) of those in the quadrant – mobile advertising/ interest from investors. When we look segments. Our analysis shows online couponing, mobile payments, customer closely at the business models operating advertising to be the largest growth data marketing and vertical apps – are within the segments, though, we see area in 2015. Despite its rapid growth, the segments we believe operators a high degree of fragmentation and this segment will still be a relatively have the greatest opportunity to diversification, and operators not modest size in 2015 compared to the capture using their existing assets. In tending to hold a particularly strong traditional revenues of fixed and contrast are areas such as digital media position in any of them. For example, mobile telecommunications. downloads, online gaming, mobile take mobile applications – an area into applications and online advertising. which mobile operators might have been The figure also shows our assessment Operators currently have a much more expected to make inroads. The lion’s of the relative degree of fit between tenuous position from which to pursue share of the revenues are actually being operators’ existing competitive assets those segments and probably would claimed by the application developers and their ability to address each have to buy or build new assets to do and the owners of the stores, not the segment (the x-axis). The three main so effectively. communications providers.

Figure 4: Operators’ potential to compete in Western Europe’s Internet and mobile growth segments, 2010-2015 (€bn)

80

€1.6bn 70 Mobile Size of bubble payments indicates market size in 2015 60

50 €1.4bn Mobile apps 40 €3.8bn Mobile 7.2bn € advertising/ 30 Digital media couponing €24.8bn CAGR (%) 2010-2015 Online advertising 20 €4.7bn Vertical apps

€2.6bn 10 €8.4bn Online gaming Customer data marketing 0 Low High Leverage of telco competitive assets

Source: PwC’s analysis. Excludes public funding of television.

42 Putting your competitive assets to work Four steps to create a The third step would be for operators to communications sector. Included will virtuous circle of growth use near-field communications (NFC) to be some skills that typically don’t exist participate in the payments value chain, today within most operators, such as Building on these findings, we believe which potentially could enable them advertising sales people and financial- in a potential ‘virtuous circle’ of growth to capture detailed information about payment-technology specialists. for operators that would enable them to transactions. This information would capitalise on the three segments on the specify not just the location and the Secondly, the industry will need right-hand side of Figure 4. value of transactions, but also their type. common standards in key service areas. Common standards can enable To initiate the circle – the first step – Finally, to complete the circle, operators the required scale and can ease operators would create the ability to would need to take the fourth step of collaborating with adjacent industries offer retailers and advertisers access reintegrating the wealth of captured on retailing and advertising platforms. to virtually 100% of the population by information into their existing customer A critical area here will be common agreeing to pool the inventory of their databases. They would need to be able systems, protocols and standards for respective customer bases. Clearly, to slice and dice the data – obviously, NFC payments. such an agreement would require staying within the constraints of privacy peer negotiation, collaboration and regulations – and turn it into an asset Thirdly, operators will need to develop give-and-take, but we believe it would they could market and sell. new operating and charging models benefit all players in the industry. that strike the right balance between The capability to develop collaborating with each other at the The second step in creating the virtuous new capabilities business-to-business (B2B) level, and circle would be to commercialise competing at the business-to-consumer and monetise this universal access We believe operators can achieve the (B2C) level. Achieving the balance by exploiting the access jointly with four steps, although – firstly – they’ll will mean designing organisations retailers and advertisers. They could have to develop some additional and putting in place governance and employ services such as couponing and capabilities. Perhaps most important career paths that enable and encourage other types of commercial collaboration. will be new skills and different types companies to participate in the B2B of people, probably acquired from organisations, while their shareholders adjacent industries outside the are competing at the B2C level. On the commercial side, charging models will have to be put in place to encourage the maximum take-up of the B2B services and to stimulate the growth of mobile Operators’ competitive assets: payments and mobile advertising – the network and beyond while yielding an appropriate economic return to shareholders. Our analysis identifies three competitive assets that communications operators can use to go after high-growth service segments: Fourthly, operators will need the ability to manage and influence the complex, 1. The addiction consumers have to their mobile phone. The mobile collaborative ecosystems and networks handset is now firmly established as the device that a majority of the that deliver services in the adjacent population has with them all the time. This asset may be a concept industries they’re working with. rather than a figure on the balance sheet, but it’s unique to operators in that operators are at least enabling these devices, if not designing them as well. 2. Network functionality. Operators have the ability to know where people are, particularly because of their mobile networks. This asset means they can exploit that information along with other types of potential network functions, such as security and persona management. 3. Customers’ demographic information. Operators can combine information about customers and their locations with customers’ demographic information. This asset enables them to customise, personalise and target relevant services and experiences.

Communications Review 43 Collaborate to innovate? Taking a leaf from Apple’s book When we presented this study at PwC’s 2011 Global Communications Forum, it triggered a lively debate about operators’ ability to innovate, both within their own organisations and on a collaborative basis with others. The consensus was that operators, in general, have a culture that often fails to encourage both forms of innovation, thereby hampering their ability to gain revenues from new service areas.

A question that arose was whether operators’ should make their organisational environments more conducive to internal innovation, or whether developing greater organisational agility to exploit other people’s innovation would prove more effective. In this context, operators may be able to learn from Apple. Rather than attempting to commission and build all the applications in its App Store, Apple simply opened up an environment for others to do that.

Might there be an equivalent area in networks and systems that operators could open up collaboratively for other people’s invention and innovation?

As Apple’s experience emphasises, collaboration works best when all participants bring their core competence to the party. Historically, in collaborations between operators and non-operators, the operator typically has been the significantly bigger partner – and, often, the operator’s functionally orientated organisation has hampered progress. The resulting need to involve internal areas such as network, information technology and finance with the external innovator has created rigidity and delays.

Instead, operators potentially could foster innovation and collaboration by creating a new commercial interface. That is, empower some employees to put themselves in the shoes of the smaller innovative collaborator and act as an interface, enabling the smaller player to work with the big one.

44 Putting your competitive assets to work Operators need to innovate and collaborate more quickly and effectively than they’ve been able to in the past.

Looking across all these capability The final frontier: Such questions are for the future. requirements, we see a clear need for the operator’s For now, our study highlights several operators to innovate and collaborate challenge of scale key considerations and imperatives more quickly and effectively than for operators going forward. We’ve A final point our study raised is the they’ve been able to in the past. What shown how quickly value is migrating question of how important scale will be may be required is a cultural change to and to which new service areas. To in enabling operators to capitalise on increase the extent to which innovating achieve anything greater than very the new high-growth segments. with third parties is encouraged and slow growth, operators will need to rewarded. As the accompanying panel target these new areas. While some On the issue of scale, an irony lies in on page 44 points out, operators may of the target segments fit operators’ the competitive dynamics operators first need to learn some valuable competitive assets to a good degree, the now find themselves facing. Only two lessons from other businesses. fact is that operators also will need to or three decades ago, communications develop some new capabilities if they’re The announcement in June 2011 by providers in most countries were to pursue new segments effectively. three leading UK mobile networks – incumbents with a monopoly position. Then they went through various Everything Everywhere, Telefónica UK The message is clear. In the global rounds of restructuring, deregulating, and Vodafone UK – of a proposed mobile communications market, the next liberalising and re-regulating to create marketing and payments joint venture generation of consumers will help a competitive market. Today, operators pointed clearly to the future. This accelerate the migration of value are contesting new growth areas with collaborative alliance aims to create a away from traditional connectivity players that have massive equity, such ‘one-stop shop’ for mobile commerce, and towards new value-added services. as Google and Facebook. Operators are helping advertisers, retailers and banks Operators can either accept their fate, effectively positioned as the upstart reach consumers through their mobiles, or collaborate to fight back. We think challengers to these recently-arrived and to give consumers a secure, NFC- they can find ways to choose the but well-entrenched incumbents. enabled mobile payments wallet. latter option. Forming the joint venture broke ground. Given this situation, do the current And it implicitly recognises the need for market structures and dynamics collaboration – both between operators provide a necessary or even a viable and with other players – if the industry basis for competition? For example, is to claim its rightful share of value it may be possible for operators to from the growing service segments. collaborate at the B2B level within a particular territory. But can they do that on a transnational basis, in the same way their monolithic, online players have shown they can do so easily in their particular markets? Or is a different approach required, such as letting the network flourish and taking part in it without attempting to aggregate or scale up the operations?

Communications Review 45 The following publications, authored by partners at PwC, provide thought-provoking and informative discussions of interest to various segments of the industry. To obtain PDF files or hard copies of the publications, please visit the websites listed below. Technology Forecast: Transforming collaboration with Social Tools Business is inherently social, which is why collaboration and communications that scale are so fundamental. So why aren’t enterprises making more effective use of social networking tools internally? Because most employees are already overwhelmed by distracting, irrelevant and numerous requests to communicate. This issue focuses on how to eliminate communication chaos, building social technology into enterprise workflow and examining the CIO’s role in social enterprise design strategy and execution. To read or download the PDF file, please visit www.pwc.com/techforecast.

Global State of Information Security Survey® 2012 According to the results of the 2012 Global State of Information Security Survey, the majority of executives across industries and markets worldwide are confident in the effectiveness of their organisation’s information security practices. Why are executives confident, and where have organisations made progress in addressing information security over the past year? What are the signs of vulnerability and weakness in security-related capabilities? And which priorities and opportunities should executives address now in order to prepare for the cyber threats ahead? To read or download the PDF file, please visit www.pwc.com/giss2012.

The new digital economy: how it will transform business Based on both quantitative and qualitative global research conducted by Oxford Economics and sponsored by PwC, AT&T, Cisco, Citi and SAP, this white paper identifies and delves into the six seismic shifts that are transforming the global playing field and outlines how they will affect companies in all industries. These shifts are: • The coming of age of the global digital economy • Industries undergoing digital transformation • The digital divide reversing – moving from West to East • The emerging-market customer taking centre stage • Business shifting into hyperdrive – the pace of change • Firms reorganising to fully embrace the digital economy

What should CEOs be doing to ensure their firms remain competitive in this disruptive environment? A set of imperatives and recommended actions are offered in the report. To read or download the PDF file, please visit www.pwc.com/technology.

46 Printed at an FSC-certified printing facility using soy inks on 25% post-consumer-waste, elemental-chlorine-free recycled paper. Benefits to the environment: 25.81 trees preserved for the future; 10,965 gallons of wastewater flow saved; 74.54 pounds of waterborne waste not created; 1,213 pounds of solid waste not generated; 18,284,350 BTUs of energy not consumed; 2,389 pounds of greenhouse gases prevented.

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