Network Outsourcing Mobile Voice Strategy Mobile Voice The Monetization Conundrum Global Account Management volume 4: winter|spring.08 Capgemini’s telecom, media & entertainment journal telecom, Capgemini’s

Capgemini’s telecom, media & entertainment journal volume 4: winter|spring.08 ” to the next level of to the next

consumer understanding

THE MUSIC INDUSTRY NEEDS NEEDS INDUSTRY THE MUSIC PATRICK VIEN, CHAIRMAN AND CEO OF WARNER MUSIC INTERNATIONAL VIEN, CHAIRMAN AND CEO OF WARNER PATRICK

TO MOVE “ CONTENTS industry insights

6 Mobile Voice in Western Europe: Back to Basics for Growth Strategy 14 Lessons from the Indian Mobile Market 20 Network Outsourcing: Industry Norm or Passing Fad? 28 Music Labels: Striking the Right Chord for Stimulating Revenues 36 Mobile and Broadband Services in Japan and South Korea

management insights

44 The Monetization Conundrum: Lessons for Traditional Media for Generating Online Revenues 52 Mobile Payments: Are you Ready for the Early Majority?

58 Global Account Management Frameworks light bites

66 Addictions, Myths, and Cultural Differences editorial

Welcome to the Winter/Spring edition of Insights.

The tipping point has been passed and convergence is truly here. The Internet is becoming a new distribution channel for traditional content. Device development, the proliferation of broadband and the growth of disruptive technologies are enabling players to enter new adjacent markets. Convergence is proving to be a zero-sum game though, with value being distributed across the value chain, creating winners and losers. Key to the future success of industry players will be their ability to deliver innovative services, adaptable business models and rich customer experiences.

We start our Industry Insights section with a review of strategies for growing mobile voice in Western Europe. Indeed, while many mobile operators have been focusing on growing advanced data revenues, voice has been stagnating in Europe. Our second article highlights lessons from Indian mobile operators on how to remain profitable in low-ARPU markets before we follow with an analysis of potential network outsourcing cost-savings. We then assess the future of music against a backdrop of rapidly growing digital sales which are failing to sufficiently offset declining physical revenues, and in our final article we investigate trends in the uptake of advanced data and broadband services in South Korea and Japan, the most advanced wireless markets in the world.

In Management Insights we explore the emerging monetization conundrum resulting from strong consumer media and telecom usage growth outstripping consumer expenditure, and suggest strategies for closing this monetization gap. We go on to assess opportunities for mobile operators to grow service revenues with mobile payments initiatives. We close the journal by proposing a global account management framework that multinational telecom, media and Internet players can leverage to grow revenues and customer satisfaction within key accounts.

I hope you find this edition of Insights interesting and thought-provoking. If you have any comments or would like to discuss any of the issues raised further, then please get in touch.

Didier Bonnet Managing Director Telecom, Media & Entertainment

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36 THERE IS ADDITIONAL SCOPE TO GROW VOICE USAGE Mobile Voice in Western Europe: through optimization of Back to Basics for Growth Strategy “ pricing levels by Jerome Buvat, Tushar Rao and Alex Kitson

Abstract: Western European mobile voice revenues have been stagnating due to saturating markets and price declines. By the end Figure 1: Growth in Mobile Voice Revenues and Voice Price per Minute, (Y-o-Y%), Europe of 2006, mobile voice revenues were growing at just 1% year-on-year compared with 7% two years earlier. Many operators have reacted by aggressively promoting advanced mobile data services, however consumers have responded mutedly and any data growth has failed to offset the decline in voice revenue growth. Voice accounts for over three quarters of mobile operator revenues in Western ” Europe, and as such operators will need to develop focused voice strategies in order to stimulate overall revenue growth. We believe there is still further scope to grow voice revenues as European usage lags many other developed economies and a number of early success stories suggest that pricing can be successfully used to boost usage levels. We recommend that European mobile operators reinvigorate voice usage with simplified, flat-rate and large-minute bundle pricing plans. Players should also consider launching tariff plans targeted at specific user-groups with different voice consumption patterns. Operators should be careful to assess the profitability impact of these initiatives though, and where necessary take mitigating steps to counter the potential margin impact. the US is nearly eight times higher Judicious pricing of text messaging services such as SMS, IM and email is essential, as availability of such services at very low prices than Western Europe, and ARPUs in can cannibalize voice usage. Finally, it will be important for players to capitalise on voice growth opportunities offered by prevailing the US, South Korea and Japan are all market conditions in different geographies. In markets with a very high percentage of pre-paid customers, encouraging contracts over 40% higher than European levels can help operators to grow consumer spend and usage of voice. Similarly markets with very high mobility premiums offer an (see Figure 2). Part of the answer lies opportunity to accelerate fixed-mobile substitution through specialised tariff plans. in the fact that geographies such as South Korea and the US have Mobile voice revenues are stagnating to remain the key revenue source for implemented simplified pricing and

in Europe. Saturated markets and mobile operators. Indeed, voice large-minute bundles far ahead of Source: Capgemini TME Strategy Lab analysis. The Mobile World database; Exane BNP Paribas, “Telecom Operators”, price declines due to the entry of new accounts for over 75% of all mobile some European operators. March 2007. competition in the form of MVNOs operator revenues in Western Europe, have resulted in a slowdown in the and as such operators need to develop Moreover, the mobile price elasticity European mobile voice sector. By strategies to reinvigorate voice of demand for most geographies Figure 2: Monthly Mobile Minutes of Usage (MoU) and ARPU (€), Selected early 2007, mobile penetration had revenue growth. across Western Europe has been Geographies, 2006 exceeded 100% in virtually all persistently hovering between 1.0 and Western European markets, with Capgemini’s TME Strategy Lab 1.2 between 2005 and 2006, markets such as Italy reaching hyper- presents here an analysis of key voice suggesting there is additional scope to saturation at 136%. Voice prices per pricing strategies that European grow mobile voice usage through minute have also been falling by as operators can adopt in order to optimisation of pricing levels. much as 13% year-on-year in mid- sustain their voice businesses in the 2006. As a result, mobile voice medium term, evaluates key Early Successes Suggest that it is revenues grew by just 1% year-on- downsides associated with these Possible to Grow Usage Through year at the end of 2006 compared strategies, and outlines steps that can Pricing with 7% two years earlier (see Figure be taken to mitigate any risks. Several European operators have 1). Operators have responded by proved that usage and ARPUs can be attempting to grow mobile ARPUs There is Still Potential to Grow grown dramatically through pricing, predominately through promoting Voice Usage in Europe despite the market-wide slowdown. advanced services such as multi-media Europe Lags Many Other Developed Vodafone UK for example, launched messaging, mobile data applications Economies in Terms of Mobile new tariff plans in the second half of and content but consumer uptake has Voice Usage 2006 with an emphasis on bundles been lower than expected. Compared with economies such as and simplified tariffs. the US, Japan and South Korea, voice Source: Capgemini TME Strategy Lab analysis. IDATE, ‘Mobile’ 2007; Company Reports and Websites; IDATE, ‘Fixed However, despite this slowdown, usage in Western Europe is relatively For contract customers, in addition to Mobile Convergence’, 2007; IDATE, ‘Digiworld’, 2007; CTIA, ‘Wireless Industry Survey’, 2006. basic voice communication continues low. For example, monthly usage in launching new tariffs with more

6 7 Large-minute bundles are highly attractive bundles, Vodafone offered Figure 3: Vodafone UK Monthly Minutes of Usage (MoU) per Subscriber and Voice discounted line rentals for up to 6 ARPU Growth (% Y-o-Y) months of an 18 month term, off-peak effective at stimulating usage and calling with 95% price discounting, “ BUT THEY PLACE DOWNWARD and unlimited calls to friends and revenues family for a designated fee. For prepay customers, Vodafone also launched ...... PRESSURE ON PROFITABILITY simplified tariffs with standard pricing for on-net and off-net calling in (See Figure 4). Indeed, some US addition to unlimited weekend calls Figure 5: Estimated Percentage Point (%pt) Impact on Operators EBITDA Margin as operators report monthly usage of up 3 and texts for customers spending a a Result of Offering Large-Minute Bundles to 1,000 minutes per subscriber. minimum amount per week. ” Offering large voice minute bundles at As a result of these pricing initiatives, lower costs, with simplified Vodafone was able to strongly grow per-minute tariffs can boost voice monthly usage in addition to usage. Many European operators stabilizing the rate of ARPU decline, started offering large-minute bundles demonstrating that simplified and from 2005. In the UK, 3 targeted high carefully bundled plans can help value customers with large ‘any uplift usage (see Figure 3). Source: Capgemini TME Strategy Lab analysis. Company Analyst Reports; Bear Stearns, “Vodafone Group Plc”, May 2007; network, any time’ contract bundles The Mobile World Database. to encourage higher voice In the following section, we consumption. With its 3G network recommend a number of strategies allowing voice traffic to be carried at a European mobile operators can Figure 4: Monthly Minutes of Usage (MoU) per Subscriber, US and Western Europe lower cost per minute compared with deploy to grow voice usage and 2G networks, 3UK was able to offer revenues, drawing on operator customers very large bundles at successes from around the developed affordable rates. As an example, it world, in addition to highlighting offered 750 anytime minutes for €43 Source: Capgemini TME Strategy Lab analysis. risks associated with these strategies per month in 2005, up to 50% lower and potential mitigating actions. than prevailing voice call tariffs from competitors. are highly effective at stimulating operator costs. The scale of margin Strategies for Growing Mobile usage and revenues but they place impact depends on the operator’s Voice As a result of offering greater minute downward pressure on profitability as position in the market though. While Mobile voice pricing in Western allocations at affordable prices, 3UK revenues are derived from a constant operators with smaller market shares Europe is complex and there is scope was able to attract high-value monthly fee while costs remain face greater erosion of profitability due to grow voice usage by simplifying the subscribers to take its bundles, variable depending on the usage to higher off-net call share, larger pricing of mobile voice services. helping it to grow voice ARPUs by pattern. This margin impact is operators are less sensitive. Existing market conditions in various 46% between 2005 and 2006. particularly acute if customers Western European geographies also increase their off-net calling, thereby Capgemini’s TME Strategy Lab offer unique opportunities for Source: Capgemini TME Strategy Lab analysis. Company Websites; FCC Archives; Telecoms Policy Research Conference Presentation, “The Transformation of the Telecommunication Industry”, October 2004; Ovum, “Voice – A vision of the future’, “Any network” large-minute bundles driving a proportionate increase in analysis shows that if as a result of cultivating usage. March 2006. adopting large-minute bundles customers were, on average, to Offering flat-rates, large-minute Grow Usage with Simplified Pricing usage. US operators also launched 1 increase their monthly usage by 50%, bundles and simplified pricing can Plans and Large-Minute Bundles unlimited local fixed-line calls from a market-leading operator3 would greatly boost voice usage, but there is Operators in Europe should consider 2001 which has resulted in users To mitigate the experience a 5 percentage point also an inherent margin erosion risk offering large-minute bundles at lower getting used to making more voice EBITDA margin loss. Challengers, to consider. Operators can potentially costs, with simplified per-call charges calls, boosting MoU levels. margin impact of large due to a higher proportion of off-net mitigate the risk by designing bundles to boost voice usage. calling would be exposed to an even that encourage usage of high margin Following the launch of simplified voice“ bundles, OPERATORS greater 9 percentage point EBITDA data and voice services in order to The experience of operators in the US tariffs and unlimited offerings from 2 margin erosion, and the more overall offset the margin impact, as well as has demonstrated that pricing with no AT&T Wireless and Cingular , NEED TO DESIGN PACKAGES THAT usage grows beyond this level, the pricing messaging services so as not to differential charges for long-distance monthly usage more than trebled more acute the impact would become cannibalise voice usage. In the rest of calls, or for calls to off-net between the turn of the millennium STIMULATE USAGE OF HIGH (see Figure 5). As an example, both this section, we explore a number of destinations, can be used to encourage and the end of 2006, against a Bouygues and Vodafone UK saw opportunities for further growing exceptionally high levels of voice baseline of modest European growth MARGIN ADVANCED SERVICES voice usage.

1 Note: “Unlimited” pricing refers to customers being able to make unlimited calls either for an additional monthly fee, or as part of the calling plan. Unlimited plans can apply to all calls, or can be 3 Note: “Market Leaders” are defined as operators with market share of 25% or over. limited to specific call types or times of day. For example, in 2001 Cingular in the US launched a calling plan offering unlimited local and long distance calls, while in 2006 Vodafone UK offered unlimited calls only at weekends. 2 Note: AT&T Wireless subsequently merged with Cingular. 8 9 ” such as directory calling services and market for example, where operators Figure 6: Data Consumption and Revenue per Megabyte, Selected Mobile Services, Figure 8: Mobile Service Revenue Growth for Selected Operators (% Y-o-Y), UK, 2007 voice enabled web applications. on average price a single SMS at over Germany Premium calling services can typically 40% the voice price per minute. command higher per-call rates. Vodafone for example, charges The systemic decline of voice ARPUs anywhere between six to twelve times in Japan has been so strong that more than a normal voice call for growing data ARPUs have been unable premium calling services. Such to offset an overall ARPU decline. services can create additional high- Indeed, between the end of 2004 and margin on-net calling opportunities the end of 2006, NTT DoCoMo and for operators. KDDIs overall ARPUs contracted by 8% and 9% respectively compared Price Messaging Services with an average European decline of Appropriately to Avoid Voice 4% during the same period. Cannibalization Operators must not consider voice Conversely to Japanese operators and pricing in isolation. It is essential to also its own South Korean give equal attention to the pricing of competitors, LG Telecom purposely messaging services, as imbalanced focused on growing voice revenues Source: Capgemini TME Strategy Lab analysis. voice and messaging pricing can rather than messaging and data. Source: Capgemini TME Strategy Lab analysis. Company Websites; Investor and Analyst Presentations; Exane BNP cannibalize voice usage and damage While LG Telecom received 3G Paribas, “Telecom Operators”, February 2007; Enders Analysis, “European Mobile Market Analysis”, July 2007. revenues in the long term. licenses in 2001, it chose not to EBITDA declines of around 6% such as wallpaper and ringtone deploy 3G and continued to focus on between 2005 and 2006, attributed downloads (see Figure 6), can be an Japanese mobile operators for voice, in particular offering customers year olds sending one SMS for every Attractive pricing of basic mobile mainly to the impact of recently- extremely effective means of example, have historically priced large-minute bundles and market- voice call made.4 voice services helped e-Plus drive launched bundles and growing accelerating the recovery of bundle messaging services at significantly leading prices. As a result, LG usage levels. Between e-Plus interconnect costs. margin losses, as well as promoting lower levels than voice calls, resulting Telecom was able to grow its voice Consider Launching Offerings launching its MVNOs in mid-2005 advanced services. 3UK for example, in a steady fall in voice usage (see ARPUs by 12% between the beginning Focused on Individual Segments and the end of 2006, usage grew from To mitigate the margin impact of large bundles voice and SMS with advanced Figure 7). Indeed, Japan is one of few of 2006 and mid-2007, helping to Operators should consider taking a 78 to 123 minutes per user per voice bundles, operators can promote messaging and data services including large developed economies in the bridge the revenue gap with segment-specific approach to pricing month. E-Plus also grew its market packages that stimulate usage of high €7.3 of inclusive downloads per world where mobile voice usage is competitor KTF despite lagging far as launching targeted MVNOs can share from 13% to 15% in the same margin advanced services. Focusing month to encourage experimentation actually declining in absolute terms. behind in data ARPUs. help operators capture market share time period, and in the first half of on encouraging usage of advanced with new services. NTT DoCoMo prices a short email at and grow usage. 2007 gained the second most net data services that consumers are just 7% the value of the voice price Operators will risk cannibalization of additions, 1.4 million, only behind willing to pay a premium for and yet Operators should promote bundles per minute, compared to the UK voice by providing flexible voice and In Germany, KPNs e-Plus launched the market leader T-Mobile. As a involve relatively low delivery costs, which include premium voice services text bundles, with text prices at three MVNO brands, each with result of launching its price-leading significantly lower rates compared market-leading pricing aimed at MVNO’s, e-Plus was also able to grow Figure 7: Japanese Operator Service Pricing and Monthly Voice Usage with voice. Such tariff plans create specific usage segments. For example, service revenues by 8% year-on-year opportunities for users to choose the its “Base” brand offered heavy voice at the beginning of 2007 while its lowest-cost communication method, users large and unlimited voice competitors reeled from negative and as a result can accustomize users bundles, while its “Simyo” brand revenue growth (See Figure 8), in to text messaging in the long run. offered users no-frills and SIM-only addition to growing its EBITDA Propositions such as T-Mobile UKs pre-paid plans. Its “Al Yildiz” brand margin from 22% in 2005 to nearly “Flext” offers users flexibility to offered Turkish immigrants discounted 40% by the middle of 2007. consume credit across voice calls and calls to Turkey and no additional SMS, with per-SMS charges at half the charges while roaming in Turkey. price of a voice call. This can result in customers increasingly substituting voice with SMS, especially if the price difference between voice and SMS was IMBALANCED VOICE AND to increase further. This is especially important for young consumers who MESSAGING PRICING can already text significantly more that they talk. In the UK in 2006 for cannibalize voice usage example, mobile subscribers aged 18-24 sent three SMS for every one “and damage revenues voice call made, compared with 40-49 Source: Capgemini TME Strategy Lab analysis. The Mobile World Database; Annual Reports; Company Websites.

4 Source: Ofcom, “Communications Report”, 2006. 10 11 ” In addition, e-Plus marketed its low- Figure 9: Contract Customers as Percentage of Total Mobile Customers in Selected and Sweden with respective mobility affordable bundles that include voice cost Simyo and Al Yildiz propositions Geographies in Europe premiums of around 210%, 200% minutes, premium calling services and as SIM-only offers, enabling e-Plus to and 180% at the end of 20068 advanced data services to strike the dramatically reduce its SARC5 compared with a European average of right balance between driving usage expenditure through eliminating 110%, should consider offering and maintaining profitability. It will be handset subsidy and distribution targeted fixed-mobile substitution or critical to identify opportunities to costs. Indeed, between 2004 and “homezone” tariffs, emulating the drive usage across user groups with 2006 e-Plus was able to reduce its example of German operators who distinct patterns of consumption and blended SARC across all of its brands successfully captured a share of create customized tariff plans aimed at from €160 to just €85. consumers’ fixed-voice usage in a each individual segment. Finally, market where mobility premiums operators should benchmark Leverage Specific Market remain very high. parameters such as mobility premium, Conditions to Grow Usage minutes of usage and prepaid mix in Finally, operators should take O2 Germany’s “Genion” service for their respective geographies with best- advantage of existing market example, offers call charges similar to in-class levels, and develop plans that conditions in different geographies to Source: Merrill Lynch, “European Wireless Matrix”, March 2007. fixed-line tariffs when the user is can cultivate voice usage by further cultivate voice usage. within their homezone and has improving some of these parameters. garnered over 4 million subscribers Improve Subscriber Mix by subscribers should also focus on 70% from 1.8 to 1.2 during 2006, since it launched in 1999. In 2005, Jerome Buvat is the Global Head of the Encouraging Contracts improving the contract mix, in light of compared with the European average Vodafone Germany also launched a TME Strategy Lab. He recently led a Operators in markets such as the UK, low prepay usage levels and the recent which actually increased by 5% from similar offering and has experienced variety of studies including an analysis of where contract subscriptions account “Bersani Decree”, a regulatory 1.8 to 1.9 during the same period. As 54% usage uplift and 10% ARPU fixed-mobile convergence services and the for only 34% of the total mobile directive ruling that operators may no a result, the Spanish contract mix growth among its homezone development of home gateways. He subscriptions compared to the longer charge a fixed fee for every pre- grew from 48% during 2005 to 55% subscribers mainly due to accelerated closely follows the media market as well European average of 44% (see Figure pay recharge. This was historically a by mid-2007, compared with a fixed-mobile substitution9. as the emergence of alternative 9), should focus on improving the significant source of revenues for European average of just 39% in mid- technologies and business models. Jerome subscriber mix by encouraging Italian mobile operators, and 2007. Spanish operators were In conclusion, focused strategies to is often called on to speak at industry prepaid customers to migrate to migrating customers to contract will subsequently able to grow voice usage grow voice revenues are critical and conferences/events on these and other contract, through reducing the allow operators to charge rentals that and revenues strongly compared with mobile operators cannot afford to lose telecom- and media-related topics. Prior contract/prepay price ratio6 for can make up for this revenue erosion. other European counterparts (see sight of basic voice as they seek to to joining the Lab, Jerome led a variety of example. In the UK, the Figure 10). grow mobile data services such as strategy projects in the telecom and contract/prepay price ratio has Spanish operators for example, have multimedia content and advanced media sector, focusing particularly on the actually increased from 1.8 to 2.0 seen considerable success improving Stimulate Fixed-Mobile Substitution by messaging. Some players have already mobile and broadband segments. He is 7 during 2006. the contract mix , despite having Reducing Mobility Premiums demonstrated the effectiveness of based in London. 116% mobile penetration, the second Mobile-only operators in countries simplified pricing and innovative Operators in Italy, where contract highest in Europe. Operators reduced where the mobility premium remains bundling to provide the much Tushar Rao is a senior consultant in the Alex Kitson is a senior consultant in customers account for just 10% of the contract/pre-pay price ratio by high, such as Switzerland, Norway, required impetus to voice. For most TME Strategy Lab. His recent work Capgemini’s TME practice. His current operators, this will require an includes an evaluation of fiber work includes analysing Internet TV evaluation of their existing pricing deployments in Europe, online strategies strategies, assessing the European mobile Figure 10: Voice Usage and Revenue Growth, Spain, 2005-2006 strategies and an assessment of the for communications operators, and the Internet market, and research into the opportunities offered by their development of fixed-mobile convergence monetization of emerging consumer respective markets to stimulate voice offerings. He has also authored a paper behaviours. His recent consulting usage and reinvigorate revenue on the innovation challenge facing engagements include marketing strategy growth. Operators should launch telecom operators. His current work for a device manufacturer and retention focuses on assessment of Internet TV and strategy for a mobile operator. He is its implications for pay TV providers. based in London. Prior to joining the Lab, Tushar worked with a leading Indian operator, where he was responsible for developing managed data services for enterprises. He is based in Mumbai.

Source: Capgemini TME Strategy Lab analysis. Operator Quarterly Financial Results; The Mobile World Database; Exane BNP Paribas, “Telecom Operators”, February 2007; Credit Suisse, “European Mobile”, May 2007.

5 Subscriber Acquisition and Retention Costs. 6 Contract / prepay ratio compares average monthly spend (including call charges, tariffs and other fees) for consumers on contract plans to prepay, 8 Analysis Articles, “Tracking the Mobility Premium”, July 2007. 9 Source: Vodafone Investor presentations. giving a ratio of how much higher / lower spending on control plans is compared with prepay. 7 Contract mix refers to the proportion of mobile customers in a geography subscribing to a contract plan rather than prepay. An “improvement” refers to an increase in the proportion of customers on contract plans.

12 13 A NUMBER OF INDIAN MOBILE OPERATORS HAVE “OUTSOURCED the development and Lessons from the Indian Mobile Market: maintenance of their network and IT How Operators can Sustain Margins in a Low ARPU Market systems to large global players by Romain Delavenne and Kaushal Vaidya

Abstract: Despite having significantly lower ARPUs than European and US operators, Indian mobile players exhibit similar or higher In this study, the Capgemini TME Figure 1: Mobile Subscribers in India, in Millions EBITDA margins compared with their western peers. Indian operators have managed to boost mobile penetration and usage without Strategy Lab examines the drivers behind the high profitability of Indian ” sacrificing margins by employing a number of cost-optimization levers such as network and IT outsourcing, encouraging customers to use self-service and maintaining low subscriber acquisition and retention costs. Indian operators also offer low-denomination, mobile networks in a low ARPU high-margin recharge vouchers and “lifetime validity” schemes to attract low income pre-paid subscribers and increase overall environment. We also identify key mobile adoption and usage. Further, large Indian operators have set up national backbones to avoid paying carriage charges for long lessons that mobile operators in other geographies can use to boost their distance traffic and they also encourage subscribers to make more on-net calls through attractive pricing. These initiatives have profitability. boosted the EBITDA margins of large Indian mobile operators to around 40%, respectable in any geography. Operators in emerging markets can try to replicate the Indian model to drive profitable growth, whereas operators in developed markets can adopt some of Initiatives of Indian Mobile the cost-optimization initiatives of Indian mobile operators to reduce CAPEX and OPEX, and enhance margins. Operators to Boost Profitability Margins of mobile players in India The Indian mobile market is one of Due to efforts made by Indian mobile have been boosted by their ability to the fastest growing markets in the operators to drive adoption and usage stimulate adoption without sacrificing world, with an average of more than 6 of mobile services, India has very low profitability. Indian mobile operators million subscribers added per month per minute call charges (around 2 have also taken a number of initiatives since June 2006 and an astonishing cents for outgoing calls) and ARPUs3 to reduce costs including outsourcing 8.3 million mobile subscribers added (around €7). Despite such low values of network and IT operations, Source: Capgemini TME Strategy Lab analysis. Telecom Regulatory Authority of India (TRAI). in August 2007.1 Moreover, only for revenue drivers, major Indian leveraging economies of scale, sharing around 18% of India’s population of mobile operators such as Bharti Airtel of infrastructure, encouraging over 1.1 billion were mobile and Reliance exhibit high EBITDA4 customer self-support and controlling subscribers in August 2007 (see margins of around 40%.5 subscriber acquisition costs. Figure 1).2 This clearly indicates that Figure 2: ARPUs (€) and EBITDA margins (%) of Selected Indian, European and US there is huge growth potential and Their profitability is on par, or even Stimulating Adoption by Offering Mobile Operators operators are trying to increase mobile better, than some of their European Cost-effective Pre-paid Schemes penetration by offering mobile and US peers with much higher ARPUs In India, more than 85% of 7 services at prices affordable to low (see Figure 2).6 Close scrutiny can help subscribers use pre-paid services due income segments and rolling out their identify factors driving the success of to their desire to control their average network to rural areas that currently Indian operators. monthly spends. Additionally, do not have mobile coverage. operators have introduced “life-time validity8” pre-paid subscriptions at INR 500 (€8.7) and low value recharges at prices as low as INR 10 Despite lower ARPUs (€0.17) to stimulate adoption and usage among the large number of low than European and US income earning population. Lifetime validity packages help to lock-in a “ customer and offer a possible uplift of operators, INDIAN MOBILE ARPUs when their mobile usage increases. These initiatives have been PLAYERS EXHIBIT SIMILAR very effective as suggested by the growth in subscriber additions. Source: Capgemini TME Strategy Lab analysis. Company Annual and Quarterly Reports. CSFB, “European Telecoms 2007”, OR HIGHER EBITDA MARGINS 2007. Baird Equity Research Reports on AT&T, Sprint and Alltel.

1 Capgemini TME Strategy Lab analysis. Telecom Regulatory Authority of India Monthly Reports on Mobile Subscriber Growth in 7 Telecom Regulatory Authority of India (TRAI), “The Indian Telecom Services Performance Indicators January – March 2007”, July 2007. 8 “Lifetime validity” are pre-paid schemes that allow India. 2 Capgemini TME Strategy Lab analysis. Telecom Regulatory Authority of India Monthly Reports on Mobile Subscriber subscribers to receive free incoming calls for the entire duration of the license period of telecom operators (typically spanning 15 to 20 years), by paying an upfront fee which was earlier INR c1000 Growth in India. 3 Average Revenue Per User. 4 Earnings Before Interest, Taxes, Depreciation and Amortization. 5 Annual (€17) and is now INR c500 (€8.7). However, customers have to recharge their subscriptions every six months using at least the lowest denomination available in the market, typically INR c10. and Quarterly Reports of Bharti Airtel and Reliance Communications. 6 The average EBITDA margin of European mobile denomination available in the market, typically INR c10. operators is around 36% (Source: CSFB, “European Telecom 2007”, March 2007). ” 14 15 9 Further, by placing large-sized Figure 3: Impact of Micro Pre-paid Recharges on EBITDA margin per Subscriber Pre-paid schemes have helped Indian mobile operators not only add network deployment and maintenance subscribers but also boost profitability orders with equipment vendors as the small value recharges have been themselves, Indian operators are able priced to offer greater margins than to leverage the purchase volume to higher value pre-paid recharges (see influence market prices downwards. Figure 3). This, coupled with network outsourcing deals, lowers their capital A major reason for the higher margins expenditures and also the on micro pre-paid recharges is that maintenance required, which is the effective outgoing call rate per typically payable as a percentage of minute can be higher by around 80% the total capex incurred. Further, the Indian telecom regulator 85%) as they generate lower customer 10 to around 140% compared with TRAI15 may soon allow the sharing of support costs, low billing and According to Capgemini TME Strategy ordinary pre-paid recharges, due to active infrastructure16 among collection costs, no revenue leakages 11 higher administrative expenses Lab estimates, network outsourcing operators. Since the running costs of or bad debts, and higher margins per charged by operators. Since can help operators reduce their OPEX active infrastructure are around 1.5 call. interconnect costs per call are the by around 15% and outsourcing of IT times those of passive infrastructure, same for normal and micro-prepaid, services can reduce IT expenditure by the sharing of active infrastructure is Indian mobile operators encourage 12 this significantly increases margins on around 30%. expected to further reduce the OPEX their pre-paid subscribers to use self- outgoing calls. Moreover, operators costs of mobile operators significantly. service routines, directly accessible via typically design micro-prepaid as Sharing of Passive Infrastructure the customer’s mobile handset, for Source: Capgemini TME Strategy Lab analysis. Morgan Stanley, “India Telecommunications 2007”, January 2007. consisting of outgoing talk-time only Indian mobile operators have also €1 = 56.764 INR [Pre-paid figures total 101% due to rounding up] Maintaining Lean Operations transactions such as periodic and therefore, interconnect expenses started sharing passive infrastructure Indian mobile operators have focused recharges, balance and validity payable for incoming calls are not such as physical sites, towers, on maintaining a lean operating enquiries. For instance, a subscriber attributed to micro pre-paid buildings, shelters, air-conditioning model to keep their costs low. In can dial a short-code to receive a free recharges. The savings on equipment, diesel electric generators India, most mobile operators have SMS containing the balance amount. and battery backup with each other. Figure 4: List of Bharti Airtel’s Outsourcing Partners interconnect costs pushes up the only a few company owned outlets in Additionally, Indian mobile operators margins on micro pre-paid recharges This reduces the CAPEX and OPEX each city for showcasing and selling also allow their pre-paid customers to significantly. Additionally, micro expenditures for an individual their products and services. renew their subscription by making recharges can be arranged by SMS operator as they get divided among Nonetheless, operators have built payments online, through bank ATMs which is more cost effective than multiple players. It is estimated that large distribution chains spanning the (Automated Teller Machines) or voucher-based or e-voucher-based about 25% of the more than 100,000 length and breadth of India by through simple SMS instructions after coupons, which also reduces cellular towers in India are currently leveraging a large number of third- they have linked their bank accounts 13 distribution costs. being shared. Cost benefits from party distribution outlets including with the mobile subscriptions. passive infrastructure sharing small “mom-and-pop” retail stores to Outsourcing of Network and IT agreements are estimated to be up to sell SIM-cards and recharges. For Other operators also offer similar self- Functions around 30% of capital and operational instance, Reliance, has only around service facilities, which not only 14 A number of Indian mobile operators expenditures. 1,650 company owned and operated increase customer convenience but have outsourced the development and stores across 700 cities in India, but also help in reducing calls made to maintenance of their network and IT Additionally, large operators such as has over 300,000 retail outlets selling customer contact centers as well as Bharti Airtel, Reliance, Idea Cellular systems to large global players such as pre-paid recharges.17 Similarly, Bharti the sales commission and distribution Ericsson, Nokia Siemens, Alcatel- and Tata Teleservices have either Airtel has around 1,000 company- costs associated with selling pre-paid Sources: Capgemini TME Strategy Lab analysis. Bharti Airtel’s Annual Report FY2007. Digital Life, “Indian telecoms firm carved out or are planning to carve outsources abroad”, 3 July 2007. Indian Express, “Bharti Airtel places record $2 billion order with Ericsson”, 19 July 2007. Lucent, Motorola and IBM. Bharti owned shops and 1,500 franchise recharge vouchers. The Economic Times, “Nokia bags 900 mn dlr Airtel network deal”, 4 July 2007. Dataquest, “Bharti’s Outsourcing out their tower businesses into Innovation”, September 2005. The Times of India, “Telecom outsourcing gathers momentum”, 24 April 2007. The Economic Airtel pioneered the concept of large stores, but over 400,000 retail Times, “Bharti, Ericsson set to ink $1.5 bn deal”, 10 July 2007. Rediff.com, “Bharti, Ericsson in $400m network outsourcing independent tower companies and deal”, 10 February 2004. scale network and IT outsourcing deals distribution outlets.18 This helps Keeping Low Subscriber (see Figure 4) and now many Indian share passive infrastructure with other reduce CAPEX and OPEX, without Acquisition and Retention Costs operators, including Vodafone Essar operators. This would be a “win-win” compromising distribution reach. Subscriber acquisition and retention and Idea Cellular, have followed suit. situation as larger players with large costs (SARC) comprise handset passive assets would benefit from Encouraging Customer Self-service subsidies, channel commissions as additional revenues and smaller Further, Indian operators have also well as marketing and promotional players would benefit from reduced benefited through a high proportion expenses. In developed markets, expansion costs for nationwide coverage. of pre-paid subscribers (greater than handset subsidies can comprise as

9 Comparisons are based on the more popular pre-paid and micro pre-paid offers. 10 Morgan Stanley, “India Telecommunications 2007”, January 2007. 11 Capgemini TME Strategy Lab, “Network Outsourcing”, October 2007. 12 Hindustan Times, “Accenture, EDS eye Rel Comm’s $500 mn contract”, 6 August 2007. 13 Telecom Regulatory Authority of India (TRAI), “Infrastructure Sharing in Telecom Networks – Indian Perspective”, 2007. 14 Capgemini TME Strategy Lab analysis. The Economic Times, “Cellcos to share infrastructure, network”, 12 April 2007. 15 TRAI: Telecom Regulatory Authority of India. 16 Note: Active infrastructure includes antenna systems, cables, filters, spectrum and transmission system. 17 Reliance Communications, “Annual Report FY2007”, 2007. 18 Bharti Airtel, “Annual Report FY2007”, 2007.

16 17 Indian mobile operators have Romain Delavenne is the Director of A LEAN Capgemini’s Telecom, Media and focused on maintaining Entertainment Consulting Services practice in the Middle East region. He “OPERATING MODEL TO KEEP THEIR has extensive experience in offering strategic advice to fixed-line and mobile operators in Europe and Middle East. His COSTS LOW recent work in the strategy space deals with triple-play, fixed-mobile convergence, WiMAX and FTTH. He has also been involved in developing strategies for mobile operators in low ARPU markets. Prior to joining much as one-third of subscriber eliminated. This has, in turn, also Operators in emerging markets can Capgemini, Romain was the Marketing acquisition costs. However, Indian helped CDMA-based” operators to similarly adopt these practices to drive Director of a Pan-European Operator. He mobile operators have tried to reduce their SARC. large-scale adoption of mobile services is based in Dubai. eliminate handset subsidies altogether and also keep their OPEX and CAPEX and succeeded in keeping SARCs low. Encouraging On-net Traffic Through on a tight leash. Kaushal Vaidya is a senior consultant Vertical Integration and Attractive in the TME Strategy Lab. His recent Indian GSM-based operators,19 which Tariff Plans On the other hand, operators in work includes analyzing the drivers of account for around 75% of mobile Players such as Bharti Airtel and Western Europe and the US created private equity investments in the subscribers, do not offer handsets Reliance not only have large market high cost models in line with their European TME space, studying the with their services. GSM mobile shares but also have vertically- high ARPUs and margins. However, emergence of fixed-mobile convergence consumers purchase mobile phones integrated operations that allow them competition and declining prices are and evaluating strategies to stimulate separately in both pre-paid and to carry long-distance traffic over their likely to place pressure on these voice usage for telecom operators. Prior contract segments. Therefore, the own national networks. Moreover, operators to optimize their costs and to joining the Lab, Kaushal worked as a SARCs of GSM-based operators do they also have equity stakes in under- work towards developing India-like management consultant with the not include handset subsidies, leading sea cables that carry international cost models. In fact, some operators consulting arm of India’s premier to substantial OPEX savings. traffic. As a result, larger operators do have already made steps in this business house. In the telecom sector, he not have to pay carriage charges for direction. For instance, Vodafone has has advised some of India’s leading fixed- On the other hand, Indian CDMA- long-distance calls. recently announced network sharing line, mobile and wholesale operators on based operators such as Reliance and agreements in Spain and the UK to issues regarding business planning and Tata Teleservices earlier used to offer Further, large operators also reduce the long-term cost of network valuation. He is based in Mumbai. mobile connections bundled with encourage subscribers to make on-net ownership.24 Further, Vodafone has handsets, with a subsidy of €5.5-6.8 long distance calls by offering cheap also announced plans to outsource its per handset.20 The subsidy was call rates. For instance, Reliance’s IT application development and necessary to offset the price “1INDIA” schemes for contract and maintenance activities with a target of differential between GSM and CDMA high value pre-paid subscribers offer achieving cost savings of around 25% handsets.21 However, these operators local and long distance calls at only over four years.25 Other operators in Indian mobile have now leveraged their economies INR 0.40 (€0.01) per minute, Europe and the US can similarly take of scale and started sourcing large representing savings of around 60% the lessons from Indian operators and volumes of made-to-order, low-cost over other tariff plans. This drives up employ levers such as network and IT operators have tried handsets from China and Taiwan their on-net calls, which coupled with outsourcing, infrastructure sharing, using contract manufacturing.22 For their vertically integrated operations, lean operations and reduce subscriber “ instance, Reliance currently offers reduces their interconnect costs and acquisition and retention costs to to eliminate handset monochrome handsets for as low as thereby increases their margins. enhance their margins. INR 777 (€13.50) and color handsets for INR 844 (€14.70).23 These phones In conclusion, Indian mobile subsidies altogether have helped CDMA-based operators operators have planned to achieve to drive penetration and have also low-cost operations, in terms of AND SUCCEEDED IN helped to reduce handset subsidies to infrastructure and services, right from the extent that they are now almost the outset due to low market ARPUs. KEEPING LOW SARC

19 Note: Most major operators in India use GSM technology to offer mobile services. The key GSM-based Indian mobile operators include Bharti, Vodafone Essar (earlier Hutchison Essar), Idea Cellular and BSNL. The key CDMA-based operators are Reliance and Tata Teleservices. GSM-based and CDMA-based players have around 75% and 25% market share respectively. 20 HSBC, “Reliance Communication”, May 2007. 21 HSBC, “Reliance Communication”, May 2007. 22 SaharaSamay.com, “Reliance launches handset @ Rs 777”, 2 May 2007. Indiatimes News Network, “Reliance handsets @ Rs 777”, 2 May 2007. 23 Company Website. 24 Vodafone FY2007 Annual Report. 25 Vodafone FY2007 Annual Report. 18 ”19 Traditionally, most operators have Figure 1: Key Activities Outsourced Across Network Segments and Functions been wary of outsourcing network- related functions as they considered them as core to their business. However, network outsourcing has been gaining momentum globally in the last two to three years, especially in Europe and the Asia-Pacific region. Network Outsourcing: Industry Norm or Passing Fad? The number of deals4 globally, by Renjish Kumar & Rahul Prabhakar increased by more than 200% between 2004 to 2006 with Europe and Asia-Pacific accounting for two- Abstract: Declining revenue growth and rising network operational expenditure are exerting pressure on European operators’ margins. thirds of all network outsourcing Outsourcing all or part of network-related operations is emerging as a strategic option to reduce costs and free up vital resources. deals. In the following section, we Mobile operators in Asia and Europe are increasingly going down this path. The number of network outsourcing deals globally has look at the type of operators which gone up from 10 in 2004, to 33 in 2006. The scope, as well as duration of managed services deals is also on the rise, driven by smaller have been outsourcing their network operators and new entrants in mobile markets in Europe. Capgemini TME Strategy Lab analysis shows that operators can save up to as well as the functions and network 17% on their network-related expenditure, translating into a 5% improvement in EBITDA margins for incumbent mobile operators and segments that have been outsourced. up to 20% for smaller operators. However, operators will have to consider associated risks, which range from employee resistance to loss of operational control over network assets. We recommend that fixed operators in Europe, who have not adopted network Source: Capgemini TME Strategy Lab analysis. outsourcing yet, should take a “wait-and-see” approach due to the high complexity of legacy assets involved. Incumbent mobile Who is Outsourcing and to operators should adopt a phased approach starting with outsourcing non-tactical functions such as inventory management within What Extent? access network segments, to critical functions such as network optimization. New entrants and challengers in fixed and mobile Mobile players have taken a lead over fixed-line operators in adopting Figure 2: Breakdown of Network Outsourcing Deals by Operator, 2001-2007 markets are recommended to consider outsourcing aggressively to achieve cost and scale benefits. In addition to choosing the right network outsourcing (see Figure 2). deal structure, arranging comprehensive service-level agreements and maintaining an in-house team to closely monitor network One of the key reasons is that parameters will be essential to manage service provider-related risks. fixed-line operator legacy networks consist of diverse equipment from multiple vendors that create highly complex networks. As such, outsourcing can be a Herculean task. The market conditions in Europe are Network outsourcing is also being as value-added service providers by Another important reason is that exerting tremendous pressure on encouraged by equipment vendors offering network outsourcing services. many fixed-line operators come under operator profitability. Market keen on developing new revenue the purview of governments, which saturation coupled with rising streams in light of slowing capital In this report, Capgemini’s TME sometimes view outsourcing as competition is impacting revenue expenditure by operators. European Strategy Lab analyzes the key drivers negative. These “political” risks have growth. For instance, Western fixed and mobile operators’ and barriers to the adoption of caused some fixed-line operators to European operators have recorded expenditure on network infrastructure network outsourcing and presents an abandon their outsourcing plans only a 2% increase in revenue growth has been declining since 2002. Mobile analysis of financial benefits as well as altogether. For instance, Cesky in H1 2006 compared with 6.6% in operators’ CAPEX experienced a risks associated with network Telecom5 (sold to Telefonica) had to 2004.1 At the same time, overall CAGR of -7% between 2002 and outsourcing. Finally, we also provide abort its network outsourcing plans operational expenditure (OPEX) has 2006, while for fixed operators, the recommendations on which operators that involved laying off 3,000 been increasing by over 5% year-on- CAGR was -2% during the same should outsource and to what extent, employees due to government year since 20042 for these operators. period. as well as suggest strategies to mitigate pressure. However, some fixed players Source: Capgemini TME Strategy Lab analysis. Company Websites; Factiva. IDATE; “Network Outsourcing Strategies Rising network operating costs have and Outlook”, 2007. risks. have taken tentative steps, an example impacted the bottom line significantly. In addition, commoditization of the being BT Global Services which As a result, the growth in EBITDA network infrastructure business has Network outsourcing is the transfer announced a deal for equipment margins has dipped from 4.5% to led to increasing pressure on of an operator’s network-related maintenance and inventory -0.1% between 2004 and 2006.3 equipment vendors’ operating functions to an external party. These management with Alcatel-Lucent.6 Network outsourcing is emerging on margins. For instance, before their functions (see Figure 1) encompass Deutsche Telekom also recently operators’ roadmaps as a strategic mergers with Siemens and Lucent plan, optimize, build, operate and announced a six-year deal with solution to cut costs and shore up respectively, both Nokia and Alcatel maintain functions of operators’ Ericsson involving management of profitability. It involves the transfer of experienced over 3% reduction in access, transmission and core network transmission. network-related functions from an their operating margins from 2004 to network segments. operator to a service provider, which 2006. Equipment vendors are offers savings through economies of scale. therefore trying to position themselves

1 Credit Suisse, “European Telecom”, September 2006. 2 Deutsche Telecom, “Telecom Equipment Ericsson”, 2006. 3 Credit Suisse, “European Telecom”, September 2006. 4 IDATE, “Network Outsourcing Strategies”, 2007. 5 Lucent, “Evolution of Network Outsourcing”, 2004. 6 IDATE, “Network Outsourcing Strategies and Outlook”, July 2007.

20 21 European incumbents are outsourcing It is not just an increase in the services space as well (See Figure 4). Figure 3: Snapshot of Select Network Outsourcing Deals, Europe, 1999-2007 their networks mainly outside their number of deals that is occuring. Ericsson dominates the GSM wireless primary markets through their Operators are also extending the space, while Nokia Siemens has subsidiaries. For instance, Vodafone scope and duration of their network expertise in both fixed and mobile has outsourced its access network outsourcing contracts. One such segments. Alcatel-Lucent has managed operations in Turkey and Germany example is Vodafone7 Netherlands, to secure some important deals, and both access and core networks in which outsourced its access segment notably E-Plus in Germany and Netherlands and Australia. Deutsche to Ericsson in March 2006 (see Figure Austria’s One. Telecom has also outsourced access 3) and signed another contract to network operations for its fixed-line include core and transmission With regard to the engagement model, operations in Croatia. However, some functions in 2007. Brazil Telecom8 most operators prefer to work with a tier-one operators have started to outsourced its fixed network single service provider. Over 90% of adopt network outsourcing in their operations in 2002 for 3 years and operators have chosen this option. domestic markets. In the Netherlands extended the contract for 5 years in This approach is mostly followed by for instance, the market leader KPN 2004-05. Our analysis suggests that challengers as they receive competitive has followed mobile challengers in the proportion of deals with a period pricing and this relationship enables outsourcing its network management of 3 years and above has increased easy network integration and functions to improve margins. In 2007, from 33% in 2004 to 75% in 2006, management. However, some large KPN signed a 5-year deal with Ericsson and around 42% of global deals operators fear locking themselves into for managing its access network. signed in 2006 included both access a contract with a single provider. and core network segments. This has Bharti Airtel for example, has pursued Lower-tier operators, especially resulted in an increase in the average a multi-service provider approach to mobile players, are trailblazers in deal size9 of 20-25% in the last 2 years. spread risks. Also, operators have embracing network outsourcing. Our shown more confidence in existing analysis indicates that nearly 60% of In emerging markets such as India, vendors. For instance, over 95% of all deals were signed by lower-tier large as well as small operators have operators have awarded network Source: Capgemini TME Strategy Lab analysis. Company Annual Reports; IDATE, “Network Outsourcing Strategies and Outlook”, 2007. mobile players, also called been outsourcing both access and core outsourcing contracts to their existing “challengers,” between 2004 and network segments to achieve high equipment suppliers. Financial Benefits 8% of total network OPEX, while 2006. Mobile challengers such as scalability and flexibility in operation Outsourcing service providers often operators outsourcing transmission Vodafone Netherlands and E-Plus volumes and resources. For example, Analysis of Network state that operators can expect to and core can expect savings of 3% Figure 4: Number of Deals for Top Global Germany have embraced network Bharti Airtel, the leading Indian Outsourcing Benefits and Risks reduce the OPEX cost of selected and 6% respectively. Indeed, nearly Network Outsourcers, 2004 -2007 outsourcing as they face severe mobile operator, outsourced Network outsourcing brings several activities by 20-25%.10 Most operators half of total network operational competitive pressures from market expansion and maintenance activities financial and strategic benefits to we interviewed confirmed a similar budget is spent in managing and leaders. New players such as 3UK of its cellular network in 2004. operators. Financial benefits revolve degree of cost savings on activities maintaining the access segment, adopted a network outsourcing around reducing network operational they have outsourced. which when outsourced, offers strategy to focus on their target Who are the Main Outsourcing expenditure, improving CAPEX significant savings. customers and grow their market Service Providers? utilization and improving the bottom Our analysis shows that a mobile share. There are also some fixed-line Ericsson and Nokia Siemens have line. Strategic benefits include operator is likely to experience Operators also experience significant challengers, such as Netia in Poland, leveraged their existing relationships increasing customer satisfaction savings of around 15-17% in network increases in their EBITDA margins who have decided to outsource with operators and wide geographical through better fault management. OPEX, or almost 5% of overall due to lowered operational costs. Mobile their network. footprint of installed network base to OPEX11 (see Figure 5). Note that this challengers, i.e. lower tier operators in a

become leaders in the outsourcing Our analysis focuses on financial projected figure can be achieved given market, can experience an increase benefits and potential risks from within the very first year of signing an of 18-20% in EBITDA margin while network outsourcing based on outsourcing deal, in a typical scenario leading mobile operators can experience Operators are “ primary research with mobile where the mobile operator has an increase of 4-5%12. Mobile challengers operators in Europe and Asia, as well outsourced all functions across access, typically incur higher OPEX as a as extensive secondary research. The transmission and core segments (i.e. percentage of their revenues and exending the scope and Source: Capgemini TME Strategy Lab analysis. IDATE, diverse and non-standard nature of full network outsourcing). Access consequently work on lower EBITDA “Network Outsourcing: Strategies and Outlook”, July 2007. Note: The 10 deals from Huawei that have been fixed-line network assets as well as the outsourcing offers the maximum margins. Thus, they are able to derive included here are only build and transfer deals. duration OF THEIR NETWORK small number of outsourcing deals in savings amongst all segments. For proportionately higher savings from “ this segment makes it difficult to instance, an operator which network outsourcing, resulting in higher OUTSOURCING CONTRACTS generalize financial benefits across fixed outsources only the access network improvement in their EBITDA margins operators. As a result, we have confined segment can expect to save around than incumbents. our analysis solely to mobile operators.

7 Press Release, “Ericsson selected by Vodafone Netherlands to manage core and transport network “, 2007. 8 Press Release, “Ericsson signs managed services and GSM infrastructure 10 Ericsson Managed Services White Paper, 2007. 11 Our analysis is based on the assumptions listed here: 1) Costs on access, transmission and core network segments are assumed to contract with Brasil Telecom”, 2004. 9 Revenues from network outsourcing for the year 2006 is based on 33 publicly announced deals and for 2007, it is calculated on the basis of form 45%, 25% and 30% of network OPEX 2) Planning, operations, maintenance/inventory, leases, service provider support and other costs (transmission etc.) are assumed to be 23%, 17%, expected total revenues. 16%, 12%,23% and 9% of total network costs respectively 3) Cost for a function include FTE cost as well as systems cost. 4) Savings realize through network outsourcing on planning, operations, maintenance/inventory and service provider support are assumed to be 25% 5) No cost savings on leases and other costs have been considered. 6) Cost after outsourcing is fee paid by operator to service provider and will include service provider’s profit margin. Note: a) Full network outsourcing is outsourcing of planning, operations and maintenance across access, transmission and core network segments. 12 Note: Assuming other operational costs and revenues unchanged.

22 23 A mobile operator is LIKELY “

We will now look at some of the cost- side, operators can expect a saving of work. For instance, Telecom New TO EXPERIENCE SAVINGS OF AROUND cutting mechanisms, which include 7-9% by outsourcing field Zealand has realized over €74M in transferring of full-time employees, maintenance and operational benefits by reducing the number of 15-17% IN NETWORK OPEX, or discounts from vendors for management. This represents nearly service providers from over twenty to “ maintenance and licensing as well 25-30% of the overall savings from a one. almost 5% of overall OPEX as a reduction in service provider network outsourcing contract. management costs. We look at each Operators can expect savings from Risk Assessment of these three cost-cutting inventory management as network While network outsourcing can help mechanisms in detail. outsourcing providers utilize operators achieve financial benefits in assets as a strategic advantage — 95% arrangements agreed at the start of a year deal to manage billing systems economies of scale for managing a terms of lower network management of interviewed operators cited loss of contract may not be appropriate or due to higher than expected costs on Reduction in Networking Planning and common inventory for multiple and operations costs, it also comes control over network assets as the flexible further down the road. the outsourcing deal.14 Operations Costs operators, thereby reducing the cost with its own set of risks (see Figure most prominent risk associated with Network planning, operations and of procurement and management. 6). The risks can emerge from internal outsourcing. Operators also risk Risks Related to Change Management Operators face the risk of higher maintenance are resource-intensive issues, often due to job cuts and losing out on benefits from Most operators in Europe have large monetary outflow than expected as functions. Employee costs contribute Equipment Maintenance Costs Reduction transfer of personnel associated with operational capabilities developed employee-bases dedicated to network well as loss of time on renegotiation of to up to 20-30% of an operator’s License cost reduction and vendor- outsourcing deals. Moreover, network over a long period of time. Entering operations and management function. deals or rebuilding competencies in network cost. Service providers add service support activities such as outsourcing can also mean that the into a multi-year contract with a Outsourcing necessitates the transfer the event that the deal does not value by reducing the FTE (full-time equipment maintenance are the other operator will be tied to a single single vendor may result in the of some personnel from the operator perform as expected. employee) requirements for operator’s key cost saving mechanisms. License vendor for a long period of time, and operator limiting itself to the service to the outsourcer, which can result in network functions. costs are recurring by nature and as a result, lose control over network capabilities offered by the vendor, or some degree of employee resistance. Recommendations constitute a significant portion of the operations and potentially impact its compromising on flexibility to choose Often, the outsourcer will enter into The trend to outsource network Serving more than one operator overall costs. Operators can expect to ability to differentiate from future technology upgrades. In agreements with multiple operators in operations seems to be emerging as an simultaneously enables service save around 5% of network OPEX on competitors. situations where the vendor manages the same geography to benefit from industry norm, as operators providers to benefit from economies these activities through outsourcing. the network assets of more than one scale, and as a result, may not be in a increasingly enter into agreements of scale. Moving operations to a low- Loss of Flexibility and Ability to operator in the same geography, the position to accommodate personnel with service providers and succeed in cost center is another mechanism Vendor Management Costs Reduction Differentiate operators may restrict their capability from all clients. In such cases, obtaining the anticipated financial and adopted by service providers to A single outsourcing service provider Full outsourcing of network to differentiate their offerings from operators face the risk of losing focus strategic benefits. However, while reduce the FTE cost in network can reduce the number of management can result in loss of competitors on parameters such as on strategic areas of customer finalizing and executing their network planning and operations. We found administrative interfaces with various control over performance parameters service quality. retention and service development outsourcing strategy, operators will that an operator can achieve a vendors that an operator needs to and make the operator dependent on due to HR-related and political issues, have to consider a number of factors reduction of 5-7% of overall network manage. A single service provider can an external provider. Our primary Transition and Vendor Selection Risk thereby diluting the benefits accrued including market position, existing OPEX through the outsourcing of also negotiate lower prices from research reveals that many operators Transitioning and project management from the outsourcing deal. technology complexity and future these activities. On the operations sub-contractors employed for civil perceive their ownership of network processes can pose a unique set of technology roadmap, as well as risks, given the complexities Risk of not Achieving Expected internal issues such as employee associated with transferring significant Performance Benefits resistance. Telecom operators will also Figure 5: Average OPEX Savings in Year 1 for an Operator Adopting Full Outsourcing, (% of Network OPEX) operational processes to a vendor Operators’ objectives from outsourcing have to carefully consider the risks while maintaining ongoing service to may not be completely met requiring involved with outsourcing, and take customers. During the course of re-negotiation of the contract terms, steps to mitigate potential downsides. network transitioning, service or in extreme circumstances, result in providers may introduce new the deal collapsing. What Approach Should Operators processes in order to cut costs that Adopt? could lead to the risk of adverse While there are no prominent Fixed-line Leaders Should Adopt a practices being implemented. examples of failed deals in network Wait-and-See Approach Moreover, the process of transitioning management, there have been some Fixed-line leaders are often traditional employees in itself could involve risks instances in IT outsourcing where the incumbents with highly complex such as disruption in network operator has terminated its agreement legacy networks of heterogeneous operations. Of operators interviewed, and reverted back to in-house nature. Fixed leaders also employ a 90% cited transition and selection of resources. In 2006, Sprint brought large workforce closely monitored by vendor as prominent risks. Service back in-house a significant part of the government and hence subject to providers lack of experience in IT work that it had outsourced to political sensitivities. Due to these handling similar scale projects or IBM, citing that the deal did not reasons, we recommend fixed-line inflexibility towards managing change provide the expected productivity leaders take a measured approach could create additional risks. KPIs and improvements.13 Similarly, in 2003, towards network outsourcing. We other supporting commercial Cable & Wireless rolled back its 10- advise fixed-line incumbents to look

Source: Capgemini TME Strategy Lab analysis. 13 Information Week, “Sprint Scraps Major IT Outsourcing Deal With IBM” Jan 2006; Network World, “Sprint sues IBM over failed outsourcing deal,” May 2006. 14 Computer Weekly, “Cable & Wireless drops IBM outsourcing five years early,” June 2003.

24 25 Figure 6: Prominent Risks Cited By Operators in Order of Importance, (as a % of at outsourcing access segment “ Respondents) network elements such as last mile infrastructure, for example, building In the next two to three years and managing Wi-Fi networks. They can also look at outsourcing network elements of the transmission segment. WE EXPECT NETWORK OUTSOURCING TO Incumbents, who are considering building NGN infrastructure, can BECOME THE NORM IN THE INDUSTRY potentially look at outsourcing, as it “ will bring a high-level skill set from the outsourcer. full network outsourcing approach should have a comprehensive SLA Renjish Kumar is a manager in the Mobile Leaders Should Adopt a Phased that will help save costs and increase and maintain a small in-house team to TME Strategy Lab. His current work

Approach focus on customer acquisitions. These constantly monitor the network focuses on the impact of new pricing Mobile leaders face increasing operators should outsource the “plan” performance to lower loss of control mechanisms on billing systems. Prior to Source: Capgemini TME Strategy Lab analysis. competition in the market but still and “optimize” functions across all risks. Risk/Reward analysis based on joining Capgemini, Renjish worked on

hold dominant positions. The segments to acquire skill sets and KPI performance should also be mobile and convergence issues with workforce-related political sensitivities realize cost savings rapidly. Within the performed regularly. As an example, leading European vendors and operators. also tend to be lesser than these of “operate” and “maintain” function, Bharti Airtel’s payments to outsourcers He is based in Mumbai. challengers should outsource all are linked to network quality “ fixed leaders. Hence, we recommend mobile leaders to adopt an activities across all segments since parameters specified in a Rahul Prabhakar is a senior consultant 15 incremental approach by outsourcing their networks are often less complex comprehensive SLA. in the TME Strategy Lab. His recent Mobile leaders functions across segments in a phased compared to market leaders, and research includes a business case for mobile manner to help achieve a balance hence easier to be outsourced. Changing market conditions could instant messaging, analysis of the telecom between cost savings and control over Challengers should also outsource the reduce the savings factor and hamper and the media market in Japan, South should ADOPT A PHASED the network infrastructure (see Figure “build” function across all segments. growth. Operators must regularly Korea and China, as well as development 7). With regard to the extent of perform price benchmarking exercise of MVNOs in Europe. His current work APPROACH outsourcing, mobile incumbents Irrespective of the outsourcing model, to assess its service provider against focuses on broadcast technologies. Prior to “ should consider outsourcing network it is imperative for operators to adopt the competition. In high-growth joining the Lab, Rahul worked in India’s functions such as “operate” and measures to mitigate the various risks oriented markets, operators must leading ICT company as a solution “maintain” across the access segment. associated with outsourcing. ensure that the service provider is able architect and key account manager, Since they have lesser complexity in to provide scalability and flexibility in designing and selling enterprise connectivity terms of equipment diversity, How to Mitigate Risks While terms of network and resources. and security solutions. He is based in inventory management (both for Outsourcing Network Functions Mumbai. Figure 7: Recommended Network Outsourcing Strategy And Extent of Outsourcing access and core) will generate Top-tier operators have large existing In conclusion, while challengers have By Type of Operator significant savings. Operators should employee bases, and hence should been embracing network outsourcing outsource the “build” function across build compelling arguments in favor for some time now, large players are all segments, since it is non-recurring of outsourcing through a watertight still hesitant. Although network (required only for upgrades and business case. Small operators face outsourcing has certain risks involved, expansions) by nature and hence does lesser pressures on this account, but careful consideration and design not require FTEs throughout the need to cautiously handle the issue of strategies can mitigate these risks. In network lifecycle. As a next step, they transfer of personnel. To mitigate risks our view, large players can potentially can also outsource network related to the operating model, adopt a phased approach to outsource optimization at the access level. incumbents must keep an option of certain network functions and should working with multiple service actively participate in facilitating the Fixed and Mobile-line Challengers providers while considering transition process, and must Should Adopt a Full Outsourcing outsourcing, as they have complex constantly monitor network KPIs to Approach networks. Lower-tier operators should ensure progress of the deal in Fixed and mobile challengers choose a prime service provider (who accordance with their expectations. In experience fierce competition in the may have further sub-contracts). the next two to three years, we expect market and also own networks of a network outsourcing to become the relatively smaller scale, resulting in Post-deal, operators must actively norm of the industry. less complexity. A smaller workforce monitor the engagement to gauge also reduces the risks of political performance and manage service Source: Capgemini TME Strategy Lab analysis. sensitivity. Hence, we recommend a provider-related risks. Large operators

15 Bharti Airtel Presentation at the 3rd Annual Bear Stearns and Motilal Oswal Investor Conference, August 2007.

26 27

OVER HALF OF CONSUMERS ARE

WILLING TO PAY A PREMIUM for recorded music when “ “ the proposition is compelling Music Labels: Striking the Right Chord for Stimulating Revenues by Patrick Ferraris, Nicolas Auberty and Tushar Rao and the Figure 1: Recorded Music Value Chain Disruptions packaging Abstract: While the overall global music industry is growing, the recorded music segment is in decline. Although digital music is right revenues have been growing strongly, they have been unable to sufficiently offset the steep decline of the entrenched physical recorded music business. In particular, the value of the recorded music business is being depressed by changing consumer behaviors driving the “unbundling” of the album, non-traditional competitors making disruptive moves across the music value chain, and also the effects of online and physical piracy. Despite these alarming trends, there are a number of opportunities for players in the recorded Sources of Revenue Destruction music industry to stimulate their revenues. Music labels can offer value-added physical and digital content that consumers are Driven by the development of willing to pay a premium for. Music industry players can also offer consumers a more flexible download value proposition by offering broadband and the growing DRM-free music as well as pricing models relevant to the way they consume digital formats. In addition, music labels can partner to penetration of digital devices, music create aggregation platforms, which provide genre recommendations in order to drive cross-selling opportunities, and they can also has become a multi-format industry. Digital delivery possibilities are evaluate alternative music distribution options. transforming the traditional music value chain and depressing value for music labels. New music consumption The global music industry is growing. to $1.9bn in the US.5 However, consume more music than ever patterns are rapidly emerging, which Between 2006 and 2007, worldwide growth in the digital music sector has before. Indeed, in 2006 the average are having negative impacts on music industry revenues grew by still been insufficient to offset the consumer in the UK spent 4.6 hours revenues, and piracy is placing firm 1.3% to $62bn. However, this declining physical sector and there are per week listening to recorded music, downward pressure on revenues. In marginal growth masks two starkly also early signs of a recent slowdown a 15% increase compared with 2001.8 this section, we provide a brief contrasting trends, for while live in digital revenue growth. Although much of this growth in overview of each of these sources of music1 and music publishing2 consumption is currently under- revenue destruction. Source: Capgemini analysis. revenues grew strongly by 9% and 4% In France for example, year-on-year monetized, there is promise in the fact respectively between 2006 and 2007, digital revenue growth declined from that over half of consumers are willing Change in Consumer Buying by over 10% compared with the year leadership positions in digital sales, recorded music3 revenues declined by nearly 80% in 2006 to under 15% in to pay a premium for recorded music Patterns before as a result of consumers while artists are causing disruptions 2.5% to $35bn.4 the first half of 2007.6 There are even when the proposition is compelling A key trend triggered by the increasingly only purchasing single by increasingly bypassing established alarming signs that digital revenues and the packaging is right.9 development of digital music and track downloads rather than albums.12 distribution channels. Within the recorded music sector, may be declining in certain developed growing web usage is the “cherry- physical music sales have been markets. In the Netherlands and Italy In this article, Capgemini’s Media and picking” of individual tracks online Moreover, the digital music Concert promotion companies in experiencing terminal decline in for example, digital revenues for the Entertainment practice evaluates rather than the purchase of entire phenomenon has reduced the price particular illustrate the move of recent years. Between 1999 and 2006, first half of 2007 compared with the current sources of revenue destruction albums. In the UK, 37% of users who users are willing to pay for music. players from different markets into the physical music revenues in the US year before actually declined by 7% in the recorded music industry, and purchase legal downloads instead of Compared with the average album recorded music arena. Benefiting from declined by 34% from $13bn to and 11% respectively.7 goes on to provide a number of CDs do so because they are able to price of €19 for a new release in concert revenue growth, these $9bn, while the number of units pragmatic recommendations for choose only one or two songs from a 1996, most new album releases now companies are competing with music purchased fell by 45% to 643 million. Amidst these trying times, there is still traditional music labels seeking to given album.10 command a price of less than €10.13 labels by offering attractive Conversely, digital music sales hope for the recorded music industry. stimulate revenues in their recorded propositions to artists, including experienced stellar growth between While recorded music revenues have music businesses. In 2006, digital singles represented Value Chain Disintermediation support on recorded music, live music 2004 and 2006, increasing by 900% been declining, customers now nearly 70% of digital sales in the US, In addition to driving new consumer and other commercial areas. in contrast with physical formats behaviors, digital music has also given Madonna, for example, recently ended where CD single sales represented less rise to widespread reorganization a 25-year relationship with Warner than 5% of total sales.11 By the middle within the recorded music value chain Music in favor of a lucrative deal with of 2007, the total volume of tracks (see Figure 1). New players in live event organizer Live Nation. The sold in the US had actually decreased recorded music distribution are taking 10-year deal netted the artist $120 1 Note: Live Music includes concert ticket sales, tour merchandise, music event sponsorship and other concert-related revenues. 2 Note: Music Publishing includes Income derived from mechanical royalties, public performances, broadcasts, cable, television, satellite radio and licensing of music for commercials, films, TV shows and video games. 3 Note: Recorded Music includes revenues from sale of physical music formats (including CDs, cassettes, LPs, vinyl singles and music videos), and digital music formats including online singles and albums (from a la carte downloads sites, 10 Olswang, “The Digital Music Survey”, July 2007. 11 RIAA, “Year-End Shipment Statistics”, 2006. 12 Enders Analysis, “Recorded Music: the bad news continues”, July 2007. 13 Prospect subscription and streaming services, legal P2P sites, ad-supported sites and e-commerce-enabled social networks), and also mobile music downloads such as ringtones, mastertones, ringback tones Magazine, “Off the Record”, August 2007. and full-track downloads. 4 eMarketer, “Global Music – Tuning into New Opportunities”, May 2007. 5 RIAA, “Year-End Shipment Statistics”, 2006. 6 SNEP, “Bilan Econometrique 1er Semestre”, 2007. 7 Music Ally, “The Report”, November 2007. 8 Capgemini TME Strategy Lab Analysis. 9 Olswang, “The Digital Music Survey”, July 2007.

28 29 each of these strategic options for million in exchange for the rights to Figure 2: Recorded and Live Music Industry Revenues ($bn), US Figure 3: Illegal File-Sharing Incidence Versus Recorded Music Market Decline, sell three studio albums, promote Japan and UK growing recorded music revenues. concert tours, sell merchandise and license her name. Develop Value-Added Content Consumers are Willing to Pay a Furthermore, artists are increasingly Premium For relying on live events and Although physical recorded music performances to generate revenues, revenues are declining sharply, a especially as live music revenues are significant proportion of consumers showing robust growth compared are still attracted by physical music with declining recorded music formats. Over 70% of consumers revenues (see Figure 2). Around 75% intend to continue buying CDs in the of the earnings of artists such as future,23 and among US “baby Madonna, Faith Hill and the Dave boomers,” consumers between the Mathews Band are now generated ages of 43-66, over two-thirds only from concert-related sales.14 As a buy physical music formats with a result, independent labels and further 26% buying both digital music Source: Capgemini analysis. Live Nation Investor Presentation, March 2007; RIAA Report 2007; eMarketer, “Global Music: 24 musicians are increasingly looking at Tuning into New Opportunities”, May 2007. Note: Recorded music includes both physical and digital formats. Live music and CDs. Even among teenagers, a revenues include concert ticket revenues and music sponsorship spending. recorded music merely as a means to social group typically at the forefront promote live events, and not as the of emerging consumer behaviors, 53% primary source of revenues. For do not download any digital music at all, and 37% buy both physical and example, in 2007 the artist Prince the growth in paid online music Furthermore, evidence from countries Source: Capgemini estimates based on IFPI and RIAJ data; Olswang, “The 2007 Digital Music Survey”, July 2007; Universal McCann, “Anytime, Anyplace: Understanding the Connected Generation”, 2007. digital music formats.25 booked 21 concert dates in London services, is beginning to combat illegal such as Japan seems to suggest that Note: Incidence of piracy in the UK includes those who have ever shared files illegally online. Incidence of piracy in Japan includes those who have ever shared files illegally over mobile, as over 90% of digital music in Japan is downloaded through and then gave away nearly 3 million music downloads. In the US for piracy is not the most important mobile channel rather than online. copies of his latest album “Planet example, the proportion of users factor in the decline of recorded Key to this trend is the appeal of the Earth” for free with The Mail on downloading music from legal paid music industry revenues. Despite tangible aspects of physical CDs and Sunday in the London area to sites has sharply increased compared relatively low levels of piracy in Japan, the wealth of additional material that promote the live events. with overall online music downloads. particularly in terms of P2P file- music than ever before. However, DRM-free.22 In addition, music CDs can offer in comparison with In mid-2006, consumer spend on sharing, recorded music revenues still recorded music revenues have failed companies have the ability to leverage downloads, such as artwork, lyrics Piracy digital music in the US grew 87% declined at a CAGR of 3.3% between to keep pace with this usage growth, their extensive catalogs to aggregate and bonus material. Indeed, 30% of A significant portion of recorded year-on-year, while spend on total 2002 and 2006 (see Figure 3), much resulting in the emergence of a music, and to sell digital “playlists” consumers state album art, bonus music value destruction is attributable recorded music during the same the same as the UK’s 2.7% decline “monetization gap.” Despite this around music genres. Finally, music materials and the tangible nature of to piracy. Of the various forms of period declined by 6.1%.16 The where piracy rates are considerably trend, it is still possible for music labels can also explore the potential of the product as the main reason why piracy, illegal downloads of recorded number of pirated music files in higher than in Japan. The Russian labels to begin closing this alternative music distribution models. they still purchase physical music.26 music from peer-to-peer networks circulation online also fell from 1.1 recorded music industry, for example, monetization gap and to increase In the rest of this section, we outline currently have the largest impact on billion in 2003 to 0.85 billion in also grew by 4% in 200619 despite recorded music revenues by deploying the music industry. Indeed, revenues 2006, while during the same period, having the world’s second largest a number of revenue-stimulating lost from P2P piracy are estimated at the number of legal online music physical piracy market and being host strategies. $3.7 billion in the US, while the download sites increased from 20 to to a number of illegal music

illegal copying of physical CDs also over 100 and traffic on these sites websites.20 There is scope to boost physical and contributes estimated revenue losses increased dramatically.17 In addition, digital music sales by developing Evidence from of around $1.6 billion.15 Additionally, there is also evidence to suggest that These trends imply that perhaps, value-added content that consumers

new forms of piracy are emerging, the number of consumers using illegal despite its well-established impact, are willing to pay a premium for, as countries such as Japan including the sale of tracks on illegal file-sharing services is actually piracy is not the most important well as offering consumers more sites, LAN-based file-sharing, “digital declining. For example while factor in the decline of recorded flexibility around how they purchase seems to suggest that stream ripping” or the use of software broadband penetration, a major music industry revenues. and consume digital music. There is a “ “ to record tracks from the Internet, and enabler of illegal file-sharing, grew significant opportunity for music mobile music and ringtone piracy. from 7% to 40% between 2002 and Revenue Stimulation Strategies labels to grow usage and revenues PIRACY IS NOT THE MOST 2006 in Europe, the proportion of Consumers now have access to a wide through redressing the divide between Although online piracy is no doubt a internet users regularly using illegal range of platforms and devices the current digital music consumption IMPORTANT FACTOR IN THE major issue, there is evidence to file-sharing services fell from 18% to through which recorded music can be experience and the latent desires of suggest that litigation, combined with 14%.18 consumed, and they consume more consumers. For example, while DECLINE OF RECORDED MUSIC around 70% of consumers want DRM- free music,21 only around a third of music that can be found on iTunes is INDUSTRY REVENUES

14 eMarketer, “Global Music – Tuning into New Opportunities”, May 2007. 15 IFPI, “The True Cost of Sound Recording to the US Economy”, August 2007. 16 eMarketer, “Digital Downloading: 21 Olswang, “The Digital Music Survey”, July 2007. 22 Capgemini Analysis; Company Websites. 23 Olswang, “The Digital Music Survey”, July 2007. 24 eMarketer, “Could Boomers Save the Music, Movies and TV”, January 2007. 17 IFPI, Credit Suisse, “Global Music Industry: Just the Two of Us”, June 2006. 18 IFPI, “Digital Music Report”, 2007. 19 IFPI, “Music Market Data 2006”, Music Industry?” September 2007. 25 IDATE, “Enquete Use-IT”, 2006. 26 IDATE, “Enquete Use-IT”, 2006. May 2007. 20 IFPI, “The Recording Industry 2006 Piracy Report”, 2006. 30 31

Figure 4: Proportion of Music Downloaders Interested In Value-Added Content, which enhances the digital music

Worldwide, 2007 consumption experience. Indeed, if offered, over 70% of digital music consumers would like to receive song CONSUMERS USE ILLEGAL DOWNLOAD lyrics with music downloads and over 45% would be interested in additional “ video material29 (see Figure 4). Warner SITES because they can discover Music also saw considerable success with the launch of a premium version “ of the same Linkin Park album on the and sample a wide iTunes music store in mid-2007, which included additional video material and interviews. Although range of new music priced at $11.99, $2 more than the standard album also available on iTunes, 97% of consumers opted for the more expensive version.30

Source: Soundcrank, “Is the Future of Music Selling Music?”, August 2007. Increase Flexibility of Digital Download Value Proposition In order to mitigate the decline of 2007 and priced at $27.98, a $9 There is scope to grow recorded physical sales as much as possible, premium over the standard album, it music revenues by offering customers launching DRM-free music, equating For example, “all-you-can-eat” In addition to offering compelling music labels should enhance the incorporated stylized packaging and a greater flexibility in the ways they can to 3,600 downloads per week subscription services like those subscription propositions, there is also physical music consumption host of bonus material including song purchase and consume digital music, compared with the average of 830 per currently offered by online players potential to drive significant usage experience and develop rich formats lyrics, behind-the-scenes material, for example, by offering digital music week for the previous three months.33 such as Napster, Rhapsody and growth by implementing variable with value-added content that photo galleries, interviews, wallpaper, free of DRM31 to increase usage and by Microsoft Zune Pass are gaining in pricing structures for digital content, consumers are willing to pay a and a software tool to create ringtones offering flexible pricing that is After moving to DRM-free music from popularity with heavy music similar to physical CD sales. For premium for. Indeed, over 55% of from favorite tracks. Also, in return cognizant of how customers consume independent artists, Deutsche consumers. Indeed, up to 70% of example, while nearly half of consumers would even be willing to for registering their MVI disc online digital music. Telekom’s Musicload service also saw teenagers would be willing to pay €10 consumers are willing to pay a pay a premium for albums with which helps Warner Music capture sales of DRM-free tracks and albums per month for an unlimited digital premium for newly-released digital exclusive bonus content included.27 valuable customer insight, consumers Offer DRM-Free Music Formats increase by 40% compared with music subscription service.36 tracks, 60% feel tracks by new or are presented with links to artist By offering DRM-free content, music protected music.34 In addition, 7 unknown artists should be cheaper, Some music labels have already seen blogs, exclusive news, and various labels could realize significant revenue Digital, a music download service in Some players have already begun and nearly 85% of consumers feel early signs of success. In mid-2007, concert ticketing and merchandising generating opportunities. Indeed, the UK, also experienced a similar adopting similar models. Indeed, older tracks should be cheaper than Walt Disney’s music label Hollywood opportunities. During its first week of almost 70% of consumers feel digital usage uplift by offering DRM-free music labels including Universal, new releases.39 Records offered customers a new CD sales in the US, the MVI version of the tracks are only worth downloading if music. While DRM-free music Sony BMG, Warner Music and EMI format packed with additional features album sold 60,000 copies, equating to they are DRM-free, and around 40% comprises 60% of its 3 million track have partnered with Omnifone and Develop Aggregation Platforms to for the launch of an album by teen 10% of all physical and digital units of consumers would be willing to pay catalog, it accounts for nearly 80% of various mobile operators around the Drive Cross-Selling Opportunities punk band Jonas Brothers. Priced at of the album bought in its various more for DRM-free music.32 all downloads, suggesting consumers world to launch an unlimited mobile With their extensive music catalogs $22.99, a $4 premium over the formats,28 and 15% of revenues due to download more when content is free music download service in mid-2007 and deep content knowledge, music standard CD, it included two bonus its premium pricing. EMI began offering DRM-free music of restrictions.35 7 Digital also found called “MusicStation”, priced at £1.99 labels should consider collaborating to tracks and a digital magazine with downloads from the middle of 2007, that DRM-free music encouraged the per week in the UK for example.37 form aggregation platforms selling song lyrics, video segments, behind- While the proliferation of digital and Universal Music Group recently purchase of digital album bundles MelOn, SK Telecom’s music service in directly to consumers, as well as the-scenes footage, printable photos, single sales has fuelled a degree of initiated a limited trial. EMI agreed to rather than single tracks. Indeed, South Korea, also offers an unlimited partnering with mobile operators. By exclusive news links, a customizable commoditization in the digital music allow the iTunes music store to sell albums represent 70% of 7 Digital’s subscription service for a monthly fee doing this, music labels will be able to poster creator, and a letter from the market, there is also potential to DRM-free audio and video tracks at a downloads by value, compared with of €4, allowing tracks to be played on satisfy latent consumer demands band. further grow digital recorded music cost of $1.29, a 30% premium over the average of just over 30% in the US. any device for up to one month. The around how they would like to revenues by enhancing the music tracks with DRM. As a result of service has seen strong uptake from explore music online. Warner Music’s new Music Video consumption experience. launching DRM-free music, EMI has Offer Flexible Pricing Structures consumers, with 15% of SK Telecom’s Interactive (MVI) format has also seen some initial successes. For Recorded Music labels should offer 4.5 million regular MelOn users Consumers use illegal download sites shown promising signs of success. In addition to the purchase of music example, downloads of Pink Floyd’s innovative pricing models to signing up to the subscription because they can discover and sample First launched with Linkin Park’s files themselves, there is strong Dark Side of the Moon album differentiate from the “pay-per-track” service.38 a wide range of new music. Indeed, “Minutes to Midnight” album in mid- customer appetite for rich content increased by 350% in the week after model popularized by iTunes. over 60% of French users of illegal

27 Olswang, “The Digital Music Survey”, July 2007. 28 Reuters, “Chart-Topping Linkin Park Puts MVI Format on the Map”, May 2007; Hollywood Reporter, “Standing ovation for MVI 33 PaidContent, “DRM-Free Swells Sales”, June 2007. 34 Yankee Group, “Kill DRM, Vol.1”, April 2007. 35 Computerworld, “DRM-free music boosts online album sales”, November format”, June 2007. 29 Soundcrank, “Is the Future of Music Selling Music?”, August 2007. 30 Hollywood Reporter, “Standing ovation for MVI format”, June 2007. 31 Note: Digital 2007. 36 IDATE, “Enquete Use-IT”, 2006 37 The Inquirer, “Omnifone launches iTunes killer”, February 2007. 38 IFPI, “Digital Music Report”, 2007. 39 Olswang, “The Digital Music Rights Management (DRM). 32 Olswang, “The Digital Music Survey”, July 2007. Survey”, July 2007.

32 33 file-sharing sites state the ability to Figure 5: Reasons For Using Illegal Music-Sharing Services, Proportion of In conclusion, there are number of Some recorded music players are consumer behaviors, and strive to discover new music as the main French P2P Users, 2005 strategies recorded music labels can already taking tentative steps towards create the right content to attract reason for using their services (see deploy to stimulate revenues creating integrated value propositions users to portals. They will need to Figure 5), closely followed by the including developing value-added through acquiring other music develop sizeable web audiences and ability to find what they are looking content consumers are willing to pay players, and by proposing new “360°” employ tools such as viral marketing for, while less than a quarter state not a premium for, enhancing the agreements to their existing artists through discussion forums, social wanting to pay for downloads as a key flexibility of download propositions, spanning recorded music, live music networks and blogs to promote artists driver.40 Similarly, while social developing an aggregation platform to and music publishing activities. Sony and genres online. Finally, music networks legitimately allow increase cross-selling opportunities, BMG for example acquired Arachnée labels will need to consider how they consumers to discover new music, the and by experimenting with alternative Productions, one of France’s largest can strengthen their partnerships with subsequent purchase can be far from distribution models. Some of these live music companies. Similarly, artists, device manufacturers, online simple, and nearly 50% of consumers initiatives will come with their own Universal Music acquired Sanctuary in channels, and perhaps the greatest would prefer a simplified buying inherent challenges. For example, the UK, a live music, merchandising, challenge of all, how they can forge experience.41 despite the potential revenue upside, and talent management company. mutually rewarding partnerships with DRM-free music also increases the other music players. If music labels can create an probability of piracy growth. In order Developing integrated value aggregation platform where various to mitigate this threat, music labels propositions such as these will also Patrick Ferraris is vice president and genres and varieties of music are will need to offer attractive pricing enable recorded music players to leader of Capgemini Consulting TME available “under one roof,” where models and develop an enhanced capture lucrative brand partnership France. Patrick has more than 15 years’ Source: La Documentation Francaise, "Le téléchargement sur les réseaux de pair à pair", 2005. search and discovery of music is customer experience. revenues, which have traditionally experience in consulting, of which 10 encouraged, where consumers have a been accrued by artists’ management have been in the telecom and media wider range of content to choose Telecom launching a genre-based negotiate favorable terms with In addition to these opportunities for companies. Beyoncé for example, and industries. He has led major strategic from, and where the purchase subscription service, and Nokia with dominant players in the growing stimulating recorded music revenues, her management company Music and performance improvement projects experience is simple, many users of its “Music Recommenders” service. online distribution space. Music music labels must also strive to World Entertainment have forged for mobile operators, triple-play peer-to-peer sites, and potentially players will need to develop leverage monetization opportunities in highly profitable sponsorship deals operators and media players (TV, music social networks, will migrate to this In addition to creating this alternative music distribution models the vibrant live music and music with Givenchy and Samsung around majors) with a recent focus on their platform. aggregation platform aimed at in order to retain control over digital publishing segments. Time is short, the launch of her “B’Day” album, with digital strategy. He is based in Paris. satisfying mass-market consumer distribution. though. Still reeling from the L'Oreal Paris and Samsung who When creating this aggregation demand, music labels should also shockwaves sent by Live Nation’s sponsor her “Beyonce Experience” live Nicolas Auberty is a managing service, music labels should also take consider launching a variety of niche Universal Music for example, is disruptive foray across the value tour, and also wider celebrity consultant in Capgemini’s Telecom, pointers from the success of genre-focused aggregation services. planning a proposition called “Total chain, recorded music players must endorsement deals with American Media & Entertainment practice in recommendation-based streaming With a focus on specific music Music”—a subscription service that work quickly to build integrated value Express and Emporio Armani. France. His recent work includes a services such as Pandora and Last FM, communities, exclusive rich content, proposes to offer consumers an propositions that offer artists true strategy project for a major music and incorporate a recommendation and the ability to offer even more alternative to the iTunes store. Under partnerships, and offer consumers Success will require music labels to company. He has also worked on a engine to encourage experimentation targeted recommendations and value- plans still being formalized, in return rich and immersive experiences, invest in building a host of additional number of strategy and marketing with new music and to stimulate added bundles, services such as these for “all-you-can-eat” music services, whether they are buying their favorite capabilities. They will need to projects in fixed-mobile convergence, opportunities to cross-sell artists and could prove to be an extremely owners of music devices would need artist’s CD, downloading their deluxe significantly enhance their rights home network and web services / e- promote new talent. Indeed, Last FM compelling proposition for “expert” to pay a monthly subscription fee of digital bundle, watching their music negotiation capabilities to allow them commerce. He is based in Paris. has 20 millions active users, while consumers with deep and highly around $5—which goes directly to video on TV, or enjoying a live to create offerings around their artists Pandora receives almost 3 million specialized interests. In addition, these the music labels—for the lifetime of concert. spanning recorded music in its Tushar Rao is a senior consultant in the unique visitors each month.42 The passionate music consumers are the device, or contract if the music multitudinous formats, touring, TME Strategy Lab. His recent work success of these initiatives highlights frequently less price-sensitive when device is a mobile phone.43 However merchandising and brand includes an evaluation of fiber the monetization opportunity considering purchases of premium this subscription would most likely be associations. Music Labels will need to deployments in Europe, online strategies available to music labels by selling content related to their interests, absorbed by device manufacturers or develop a deeper understanding of for communications operators, and the “digital playlists”, or compilations of offering music labels a range of mobile operators, effectively making development of fixed-mobile convergence tracks belonging to similar or related unique monetization opportunities. the service free to consumers.44 Recorded offerings. He has also authored a paper genres. Universal is reportedly discussing “ on the innovation challenge facing Evaluate Alternative Distribution partnerships with Sony BMG and music players must work telecom operators. His current work A number of online and mobile music Models Warner Music, which could ensure as quickly TO BUILD INTEGRATED focuses on assessment of Internet TV and stores have already started The business model for digital music much as 75% of the recorded music “ its implications for pay TV providers. experimenting with the sale of digital has mainly been driven by device sold in the US be made available on Prior to joining the Lab, Tushar worked playlists; for example, Apple with its manufacturers. Music labels are the service.45 PROPOSITIONS THAT OFFER ARTISTS with a leading Indian operator, where he celebrity playlists on iTunes, Neuf finding it increasingly difficult to was responsible for developing managed TRUE PARTNERSHIPS data services for enterprises. He is based in Mumbai. I

40 La Documentation Francaise, "Le téléchargement sur les réseaux de pair à pair", 2005. 41 Olswang, “The Digital Music Survey”, July 2007. 42 Guardian, “Music: Charts retuned as web decides what's No 1: Music industry magazine to list Last .fm listeners' habits alongside traditional sales”, August 2007; The Oakland Tribune , “Pandora lets listeners have music as they like it”, September 2007. 43 Business Week, “Universal Music Takes on iTunes”, October 2007. 44 Business Week, “Universal Music Takes on iTunes”, October 2007. 45 Business Week, “Universal Music Takes on iTunes”, October 2007.

34 35 penetration in Japan and South Korea. Figure 1: 3G Penetration as % of Total Mobile Subscriber Base and Broadband For instance, NTT DoCoMo’s mobile Penetration as % of Total Households in Selected Markets, 2006 Mobile and Broadband Services in Japan and South Korea: wallet service “Osaifu-Keitai,” in What can Western Operators Learn from their Eastern Peers? which mobile phones are equipped with contactless chips to make by Priya Mehra and Rahul Prabhakar payments at participating outlets, has around 12% penetration in Japan. Similarly, in South Korea, Abstract: Despite lagging the US and Europe a decade ago in wireless and broadband penetration, Japan and South Korea now have approximately 10% of mobile more developed 3G and broadband markets compared with their western peers. Mobile Internet, mobile email and mobile gaming subscribers use mobile banking have more than 40% penetration in Japan and South Korea compared with around 10-20% penetration in the US and Europe. The services. Further, penetration rates of two eastern countries also lead their western counterparts in mobile TV, mobile banking, mobile wallet usage and location based mobile location-based services from services. Further, broadband operators in the two countries have leveraged their large subscriber bases to successfully launch local- NTT DoCoMo and SK Telecom are around 18% and 10% respectively. In language offerings such as video-on-demand, social networking, instant messaging and digital music distribution services, avenues comparison, current penetration rates largely unexplored by western operators. The turnaround of the Japanese and South Korean data services markets has been driven of mobile banking, mobile wallet and Source: Capgemini TME Strategy Lab analysis. Company Websites; IDATE, “Mobile 2007: Markets & Trends, Facts & by a number of operator initiatives. Operators have used attractive flat-rate pricing plans to reduce billing uncertainty and stimulate location-based services in Europe and Figures”, 2007; “eMarketer”, Broadband Household Penetration (% of Households), March 2007. growth. Moreover, operators work closely with technology vendors to develop customized, feature-rich handsets and also encourage US are only around 1-2%. third-party vendors to develop content for their services by using vendor-friendly revenue sharing schemes and allowing unrestricted subscriber access to third-party content. Operators in other geographies can adopt some of the successful practices followed by Broadband-based services have also Japanese and South Korean operators to offer mobile and broadband data services more successfully in their respective markets. been very successful in the two countries, driven by attractive pricing and local language applications Japan and South Korea have markets compared with the US and is around 80% and 40% respectively, launched by operators. witnessed a significant turnaround in Europe (see Figure 1). Moreover, compared with less than 20-25% their mobile and broadband markets. operators in the two markets have penetration among European and US Supported by partial government Around a decade ago, the two markets been very successful with services mobile subscribers.1 funding and tax incentives, operators lagged behind the US and Europe in such as mobile email and mobile in Japan and South Korea have been terms of penetration and services gaming, whereas their western peers Mobile email usage is driven by able to offer high-speed broadband at offered. However, capitalizing on have struggled with popularizing mobile Internet and is an extremely lower prices compared to Europe and Figure 2: Subscriber Uptake of Advanced Mobile Data Services (% of Subscribers) in Japan, South Korea, Europe and US, 2006 favourable government initiatives, these services. For instance, 71% of popular service in Japan and South the US (see Figure 3). This has attractive pricing plans and the NTT DoCoMo subscribers in Japan Korea as it is a “push” and “always on” stimulated the uptake of broadband- introduction of innovative services, use mobile gaming whereas the service with support for attaching files based services such as online gaming, Japan and South Korea now have typical average for European operators and exchanging messages with any video-on-demand, social networking more developed 3G and broadband is only around 10%. Internet or mobile email user. and digital music distribution.

In this article, the Capgemini TME Mobile entertainment services such as One of the more popular services Strategy Lab studies the uptake of music, gaming and mobile TV exhibit used over broadband is online gaming. mobile and broadband data services good adoption, driven by consumers’ In South Korea, over 55% of Internet in Japan and South Korea, along with long average commuting times — as users play games online, compared to the key drivers supporting their high as one to two hours. Mobile only around 20% in the UK, where growth. We also identify key lessons music in Japan accounts for 90% of console gaming is more popular. that operators in other geographies total digital music distribution such as Europe and US can learn to revenues compared to 40% In South Korea, operators launched boost the uptake of data services in worldwide. Mobile TV has also been portal-based video-on-demand their respective markets. successful in South Korea with a services because IPTV was awaiting penetration rate of nearly 35% among regulatory clearance. In 2006, Hanaro Uptake of Mobile and mobile subscribers and high usage Telecom launched a video-on-demand Broadband Services averaging around 90 minutes per day portal service “Hana TV,” which has Japan and South Korea exhibit high among its users. experienced initial success with uptake rates of mobile data services, around 500,000 subscribers within driven by high penetration of mobile Moreover, services such as mobile one year of launch.2 Internet (see Figure 2). Mobile banking, mobile wallet and mobile Internet penetration among mobile location-based services have witnessed South Korean operators such as SK subscribers in Japan and South Korea initial success with around 10-20% Telecom have also successfully forayed Source: Capgemini TME Strategy Lab analysis. Company Websites. Company Annual Reports. Forrester, “Raining On The Mobile Banking Parade”, September 2007. Forrester, “Mobile Data Adoption Kicks Into High Gear”, April 2007.

1 Source: Forrester, “Raining On The Mobile Banking Parade”, September 2007. 2 AsiaMedia, “Korea: IPTV gains momentum”, 3rd September 2007.

36 37 into social media and digital music by manner. We now examine key Internet in South Korea when to help develop mobile phones that Figure 4: Relationships of Various Japanese and South Korean Operators with leveraging their captive subscriber operator initiatives that have fuelled launched in 2004. Moreover, support new services being Content Providers base to offer local language services. their growth. operators in Japan and South Korea introduced. Thus, mobile handsets are As of March 2006, more than 30% of have priced their flat-rate packages developed locally and tailored to the South Korean population was an Key Operator Initiatives Driving cheaper than those in Europe and US. preferences of domestic consumers. active member of SK Telecom’s social the Uptake of Mobile and For instance, Japanese users pay only For instance, NTT DoCoMo worked networking site, Cyworld. SK Broadband Services around €0.3 per megabyte of data with NEC as early as 1999 to design Telecom’s NateOn—with Cyworld The high uptake of mobile and compared to €3 paid by European Internet-enabled handsets to launch i- integration and mobile access—is the broadband services in Japan and mobile users. mode services. Similarly, NTT most popular IM service in South South Korea has been driven by DoCoMo jointly developed the Korea with 12 million registered attractive flat-rate pricing plans, Operators have also used flat-rate enabling technology for Mobile Wallet active users in May 2006 compared to partnerships with content and pricing to boost uptakes of mobile TV, services with Sony. 7 million for Microsoft’s MSN. technology vendors and the mobile location-based services, Further, SK Telecom’s MelOn digital introduction of new services coupled broadband video-on-demand and Moreover, operators have worked music distribution service, which with innovative business models. digital music distribution services. with handset manufacturers to launch offers the flexibility to download and feature-rich handsets at affordable consume music on multiple devices Bundling Attractive Flat-rate In addition to flat-rate pricing, prices to drive mass-market adoption. (PC, mobile phone and MP3 player), Pricing Plans operators use bundled services to As a result, Japan and South Korea has been very successful with around 4 Operators in Japan and South Korea drive the adoption of services such as have a far bigger penetration of million active users added in the first have used bundling and flat-rate mobile email. For instance, KDDI advanced handsets compared with year of launch since November 2004. pricing to stimulate adoption of charges €27 for unlimited browsing Europe and the US (see Figure 5) and mobile and broadband services. For and email.5 this has, in turn, driven the success of The high uptake of mobile and instance, KDDI Japan started offering mobile entertainment services. broadband based value-added services flat-rate pricing plans for its 3G Partnerships with Content Consider that KDDI’s mobile music Source: Capgemini TME Strategy Lab analysis. Company websites. in Japan and South Korea indicates services in 2003, and by 2005, 81% Providers service has been more successful than that these services hold a lot of of KDDI’s 3G users had subscribed to Japanese and South Korean operators Apple iTunes in Japan because many New Services and Business Models Average Revenues Per User (ARPU) potential for global markets provided flat-rate data plans.4 Similarly, flat-rate have identified the importance of mobile users do not want to carry a Operators have used new services and for Cyworld, at around €5.2 they are approached in the right plans provided a boost to mobile developing relationships with content separate music player when their innovative business models to drive compared with €1.7 for Myspace. providers for procuring large content phones are capable of receiving rapid usage and revenues of data services libraries to support their data services. music downloads. Similarly, the over broadband. For instance, after SK Similarly, in order to encourage the South Korean operators have even uptake of location-based services has Telecom acquired Cyworld in 2003, it adoption of its IM service NateOn, SK 3 Figure 3: Price of 1 Mbps of Residential Internet Access per Month in Select acquired equity stakes in been aided by easy availability of encouraged Cyworld users to buy Telecom integrated it with its social Countries, in Euros (PPP), 2006 entertainment companies to secure GPS-enabled handsets, which account virtual items such as “skins” and networking site Cyworld in 2004 and content for their video-on-demand, for around 20% of all mobile phones furniture for decorating their web- also started offering free SMS to users, IPTV, mobile TV and digital music in Japan. pages. This has resulted in high whereas similar features became services (see Figure 4). available on other IM services such as MSN only in 2006. Consequently, Additionally, operators encourage users saw more value in adopting

third-party vendors to develop Uptake has been driven NateOn and it overtook MSN in content by allowing unrestricted March 2005 to become the leading subscriber access to third-party IM service in South Korea.

content and adopting vendor-friendly by flat-rate pricing, revenue-sharing mechanisms. For Lessons for Operators in instance, NTT DoCoMo retains only ....partnerships with content/ Other Geographies around 10% of revenues obtained Studies suggest that US and Europe “ “ from selling mobile games, and shares technology vendors, currently lag Japan and South Korea the rest with content providers. These by around five years in the adoption initiatives ensure a vibrant vendor of various mobile services, despite ecosystem that fuel subscriber adoption ...INTRODUCTION OF NEW SERVICES, almost simultaneous introduction in and usage through widespread the 1990s.6 Even in broadband availability of relevant content. AND INNOVATIVE services such as video-on-demand, Source: Capgemini TME Strategy Lab analysis. OECD Communications Outlook 2007. operator-backed social networking Note: $1 = €0.8 in 2006. Partnerships with Technology Vendors ....BUSINESS MODELS and instant messaging, Japanese and Mobile operators in the two countries South Korean operators have been work closely with device manufacturers more successful. US and European

3 Note: The prices here reflect the lowest prices available in the respective countries. 4 Source: Analysys, “Japanese and South Korean Mobile Markets”, 2006. 5 Source: Capgemini 6 Source: Forrester, “Why Japanese Mobile Internet Is A Success”, March, 2007; Forrester, “What’s Wrong With The Mobile Web”, February 2007. TME Strategy Lab Analysis; Gartner,” Forecast: Wireless Data Applications, Asia/Pacific, 2000-2009”, August 4, 2005; IDATE, “Mobile 2006; Markets and Trends, Facts and Figures”, July 2006; Eurotechnology, “Scenarios for Japan Mobile ecosystem”, 2004; ITU,” The crisis in the western mobile internet”, 2004; Company Websites; www.eurotechnology.com.

38 39 operators, therefore, need to various value-added services and Figure 6: Voice and Data ARPU of KDDI au and NTT DoCoMo in Japan, in ‘000 Yen, incorporate certain Japanese and driving user adoption. FY2005-FY2007 South Korean practices to offer value- added services more successfully. For instance, in Japan, any content provider can offer i-mode services

Offer Bundles and Attractive independently. This has resulted in the Flat-rate Packages creation of more than 90,000 Introduction of flat-rate data packages independent sites in addition to

reduces billing uncertainty and around 12,000 sites listed on the i- encourages service adoption. This has mode menu. On the other hand, US been witnessed not only in Japan— and European mobile operators, until Over 80%“ of where KDDI’s launch of flat-rate plans recently, followed a “walled garden” in 2003 boosted 3G uptake approach, wherein they tried to KDDI’s 3G users significantly—but also in Western control the user experience by Europe where broadband penetration encouraging users to access only their surged by over 135% between 2004 own portals or a restricted set of SUBSCRIBE TO FLAT-RATE and 2006 when operators introduced partner sites. Moreover, operators “ flat-rate packages that reduced prices retained around 40% of content DATA PLANS by around 35%.7 revenues, compared to only around 10% in Japan. Consequently, content 6 Sources: Forrester, “Why Japanese Mobile Internet Is A Success”, March 2007. Forrester, “What’s Wrong With The Mobile Web”, February 2007 7 Forrester, “Mobile Internet Pricing Strategies Mature”, July 2007. Note: KDDI au is the mobile Although a few operators such as providers in the mobile space in US communications branch of KDDI. Verizon (US), Vodafone (UK) and and Europe are currently far fewer KPN (Netherlands) have started than in Japan and South Korea, offering flat-fee data pricing, a number resulting in limited content availability In conclusion, Japan and South Korea Rahul Prabhakar is a senior consultant Figure 5: Penetration of Advanced Handsets as a % of Total Mobile Handsets in of operators still do not offer flat-rate for end-users and thereby discouraging lead their western peers in mobile and in the TME Strategy Lab. His recent Japan, South Korea and UK, 2006 data packages. Additionally, services large-scale adoption. broadband data services by having research includes a business case for mobile such as mobile email could be made a series of choices aimed at instant messaging, analysis of the telecom bundled with mobile Internet Therefore, US and European operators encouraging user adoption through and the media market in Japan, South subscriptions to drive adoption, need to weave relationships with third- attractive pricing and abundant content Korea and China, as well as development of similar to Japan and South Korea. party content providers to develop a availability. Additionally, Japanese and MVNOs in Europe. His current work strong ecosystem of suppliers who are South Korean operators have focuses on broadcast technologies. Prior to At the same time, operators need to motivated to develop or share large proactively made efforts to be at the joining the Lab, Rahul worked in India’s carefully price their flat-rate data content libraries of data services. leading edge of technology and service leading ICT company as a solution architect tariffs to prevent cannibalization of innovation. By applying some of the and key account manager, designing and voice revenues by email/IM. For Increase Customer Awareness successful practices followed by selling enterprise connectivity and security instance, in Japan, although data European and US operators also need Japanese and South Korean operators, solutions. He is based in Mumbai. I ARPUs of operators increased between to increase awareness about the utility operators in US and Europe can 2005 and 2007, voice ARPUs have of mobile and broadband services stimulate the uptake of mobile and declined at a greater rate, resulting in among consumers to drive uptake. For broadband services in their respective lower total ARPUs (see Figure 6). instance, 39% of European mobile markets and restore parity compared consumers do not see value in using with their eastern peers. Therefore, operators need to find the mobile Internet due to the perceived right balance in terms of pricing of lack of compelling applications and Priya Mehra is a managing consultant voice and data services to stimulate unattractive pricing.8 Similarly, less with the US TME practice with extensive data ARPUs, without adversely than 7% of US mobile subscribers experience in the wireless sector. She was impacting voice ARPUs. consider mobile email, Internet, music earlier a manager in the TME Strategy and video as must-have features.9 Lab in Mumbai where she led various Weave Relationships with 3rd Therefore, consumers need to be studies covering topics such as WiMAX, Parties to Develop a Strong educated about the value of using FTTH and more lately Mobile Instant Ecosystem mobile Internet and associated services. Messaging and Innovation 2.0. Prior to Japanese and South Korean operators European operators can follow the Capgemini, she worked with a leading have proactively developed strong example of Japanese and South Korean wireless operator in India, helping to Source: Capgemini TME Strategy Lab analysis. Forrester, "The State of Consumers And Technology - Benchmark 2007", September 2007. www.3g.co.uk, “Japanese and South Korean Mobile Handsets Leading the World in Mobile TV”. IDATE, relationships with content and operators who have successfully used define and launch various products in the “Mobile 2007: Markets & Trends, Facts & Figures”, 2007. Forrester, “Mobile Data Adoption Kicks Into High Gear”, April 2007. technology providers. This has print and TV advertisements to enterprise space. She is based in Atlanta. facilitated the availability of a large encourage adoption and drive traffic to amount of content for supporting their portals.

7 Source: Forrester, “Mobile Internet Pricing Strategies Mature”, July 2007. 8 Source: Forrester, “Mobile Internet Pricing Strategies Mature”, July, 2007. 9 Source: Forrester, “Apple’s iPhone Changes the Stakes, not the Game”, January 2007.

40 41 44

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58 user-generated content together bill for fixed line, broadband and Consider that many of the new The Monetization Conundrum: account for another 8% of our time mobile subscription has fallen by services used by consumers are largely Lessons for Traditional Media for Generating Online Revenues spent on media and communications nearly 30% between 2002 and 2006.5 online and free, such as VoIP, email from virtually nothing in 2000. Moreover, the converging telecom and and instant messaging as well as free by Jerome Buvat and Benjamin Braunschvig media landscape is pitching different access to entertainment TV shows, Telecom and Media Revenues types of players in direct competition games and user-generated content. Abstract: Consumers now have a large number of options to communicate and consume media, largely facilitated by the growth of Against the backdrop of increasing with each other, further exerting And since the Internet allows the Internet. Time spent on media and communications has almost doubled over the past decade. Addictive experiences on the communication and media usage, let downward pressure on prices. BSkyB, consumers to select, “micro-chunks” Internet have attracted audience attention at the expense of traditional media such as television and radio. With usage increasingly us see how revenues have fared. We for example, entered the UK and retrieve only the relevant pieces moving online, the value of consumption has declined due to the proliferation of free services, as well as the ability to consume will now evaluate whether consumer communications market with a free of content, the value of an online user spending as well as advertising VoIP and broadband offer for its seems to be far less than an offline content selectively on the Internet. Moreover, music and video piracy offer free alternatives to online users. As a result, consumer revenues have evolved at the same satellite TV subscribers in July 2006.6 user. For example, while the volume spend and advertising revenues have not kept pace with the growth in usage, resulting in what we refer to as the “monetization gap” pace as usage. of music sales has increased by nearly estimated to be worth £4.1bn in the UK over the past two years. Closing the monetization gap is a key issue for media players, who Also of note is that usage is 9%, fuelled by digital distribution on are looking at new ways of generating revenues from their existing content, as well as diversifying into new online services to capture Consumer Spending increasingly moving online, where the the web and mobile platforms, total consumer interest. Two distinct models for monetization of online content have emerged. Some media players have successfully Over the last 5 years, consumer value of consumption is lower revenues have declined by 6% in executed a “volume strategy”, which generates ad revenues by leveraging existing content, unique demographic and large audience spending has seen a marked compared with the offline world. 2006 in the US.7 The devaluation of to attract advertisers. On the other hand, some companies such as ‘World of Warcraft’ have started to see success with a “value music content can be explained by the strategy”, focused on offering premium content and creating a compelling user experience to consumers willing to pay. Media ability of users to stream and Figure 1: Time Spent on Telecom and Media Activities, Hours per Week, 1975-2006, UK companies, through their ownership of valued content, relationships with advertisers and existing audience loyalties, already have download single tracks online as some of the assets necessary for success. Players will have to build expertise in online advertising, adapt their revenue models for compared with buying full albums the new platform and attract audiences to their portals. Media companies can build, buy or partner to obtain these capabilities. offline. Moreover, music and video piracy also offer free alternatives to online users. The Internet and broadband These emerging media patterns have in five online users worldwide in 2006, revolution is quickly changing the significant implications for the way it sold less than $15 million in ads.4 As a result, increasing online usage is media landscape, decreasing time money is made in the industry. In the not translating into a concomitant spent on passive and offline media, in first quarter of 2007 for instance, In this article, Capgemini’s TME growth in consumer spending on the favor of interactive and on-demand newspaper and TV advertising Strategy Lab analyzes how the Internet. Consider that consumer online content. In the UK between revenues showed a drop of 6.4% and Internet is impacting the established spending accounts for only 20% of 2000 and 2006, average time spent 2.7% respectively in the US compared revenue models and creating revenues generated online in the UK, per person watching broadcast with a year ago.2 Consumer spending monetization challenges for traditional in comparison with 60% in the offline television declined by 4% while radio on physical media such as CDs and media companies. We go on to world. Therefore, we see that the listening was down 2%. In contrast, music DVDs was also down by 14% consider how some companies have increasing usage has not been paid for time spent on the Internet was up by in 2006 in the US.3 Facing the decline started to successfully generate online by consumers. nearly 160% in the same period, now of established revenue streams, media revenue streams and derive lessons on Source: Capgemini TME Strategy Lab analysis. hitting an average of 36 minutes per and content companies are trying to the capabilities required to succeed in person per day in the UK.1 navigate this new terrain by launching the new media environment. slowdown. In 2005 and 2006, for Figure 2: Annual Growth in Consumer Telecom and Media Spending Revenues, %, service offerings online and offline example, growth in consumer UK, 2002-2006 that address emerging consumer Telecom and Media Usage spending has leveled at 2.4%, less expectations. Picking the right In the UK, time spent on telecom and than half the growth experienced at monetization strategy will be essential media has grown by more than 2.5 the turn of the century (see Figure 2). for a successful online foray. Consider times since 1975 to 60 hours in 2006 the launch of catch-up TV by Channel (see Figure 1). Consider that since The slowdown in consumer spending 4, making the latest TV shows 2000, time spent talking on the is a consequence of the increasing available online or Fame TV, which mobile has more than doubled. We maturity of fixed and mobile broadcasts user-generated content on also spend more time on new media; telephony markets, which comprise Sky. However, it remains to be seen gaming occupies nearly 10% of our nearly 50% of revenues. A whether media companies will be able time now, up from 2.5% in 2000. combination of high user penetration to develop sustainable revenue Moreover, online communications and as well as increasing competition has streams from such initiatives. Indeed interactive web activities such as led to price declines in the fixed and while Google’s YouTube attracted one browsing, social networking and mobile market, which has impacted communication revenues. Consider that in France the average monthly Source: Capgemini TME Strategy Lab analysis.

5 Electronic Communications Markets, ARCEP, Annual Report 2006. Note: The average monthly bill for fixed line includes the average cost of VoIP and PSTN subscriptions taking into account 7% pure VoIP subscriptions, 13% dual and 80% pure PSTN. 6 BBC News, “BSkyB joins ‘free broadband’ war”, 18 July 2006. Note: BskyB offer includes free subscription to 1 Ofcom Communications Market Report, August 2007. 2 Newspaper Association of America; MediaPost Publications, “Lone Good News In Dismal Newspaper Ad Picture: 1Q Web Ad 2MB basic broadband package for its existing TV subscribers. 7 RIAA, 2006 Year-End Shipment Statistics. Note: Each digital single is counted as 1/10th of an album. In case each unit Spend Up 22%,” 29 May 2007. TNS Media Intelligence, “US Ad Expenditures Down 0.3% in Q1, Internet Surges 16.7%”, June 2007. 3 RIAA, 2006 Year-End Shipment Statistics. 4 Seattle Times, “Can Google find the pot of gold”, 26 March 2007. 44 45

“ THE GROWING ONLINE ADVERTISING“ Consumer spend and advertising revenues have OPPORTUNITY has not been able to not kept pace with the growth in usage, RESULTING IN A attracted around $16.9 billion in MONETIZATION GAP substantially“ overturn the 2006, growing to nearly half the size “ of the cable and broadcast TV ad 13 consolidating access to a large variety slowdown in the market market and almost one third of the Figure 4: Growth in Telecom and Media Revenues versus Growth in Usage, total newspaper ad revenues.10 2002-2006, UK, % of content along with strong local and However, the growing national advertiser relationships. They online opportunity has essentially rely on a “volume strategy,” not been able to which attracts huge audiences to Figure 3: Advertising Revenues for Various Media as % of GDP, UK, 1991-2006 substantially overturn generate advertising revenues even the slowdown in the though the average revenue per visitor market. Including is low. Internet advertising, overall advertising On the other hand is the consumer revenues as a direct payments model, which is proportion of GDP in relatively underdeveloped online. the US declined from Some companies such as iTunes and 2.4% in 2000 to nearly online gaming sites, however, have 2.2% in 2006.11 If started to see success with this model. overall ad revenues had These companies rely on a “value remained steady at strategy”, aimed at creating a compelling and unique experience for 2000 levels (as a Source: Capgemini TME Strategy Lab analysis. Office of National Statistics (ONS), Consumer and Household Expenditure proportion of GDP), Reports 1970-2006. Advertising Association UK. consumers who are willing to pay for the market would have the service. The value per user in this generated an additional model is high, though the overall user Source: Capgemini TME Strategy Lab analysis. Institute of Practitioners in Advertising. Advertising Association Statistics. Ofcom Communications base is lower than in the “volume Market Report, August 2007. US$29 billion in 2006 players will try to poach revenues 4, said that he expected Google to alone. from traditional players. Hence, we generate more revenues from British strategy” (see Figure 5). are likely to see intense competition in advertising in 2006 than his own Some media players have started to Advertising Revenues One of the key reasons behind the Monetization Gap the near future with traditional media company.14 Company results for 2006, successfully leverage both of these We now evaluate whether this declining ad revenue growth prospects Consumer spending and advertising players battling Internet upstarts. in fact, show that Google’s UK ad models. In the next section, we will increasing usage has been paid for by of traditional media is that Internet revenues have not kept pace with the revenues were nearly 25% higher than look at examples of media companies advertisers. The advertising market in has substantially escalated the growth in usage, resulting in a Closing the monetization gap is a key Channel 4’s advertising and deploying these strategies to the UK has been facing a distinct competition for consumer eyeballs. “monetization gap” (see Figure 4). issue for media players, who have sponsorship revenues. These Internet understand the key elements behind downturn with radio, press and TV ad The online world is challenging the Since 2000, consumers’ telecom and started to look at new ways of giants have built a successful media their successes. revenues declining by around 4% in traditional media revenue model with media usage has continued to generating revenues from their aggregation and distribution platform, 2006.8 Over a longer time frame as cheaper ads as well as an improved accelerate, and in the last two years content as well as diversifying into well, we see that while the TV, radio ability to target the audience more alone, it has grown by 5-6% per new online services to capture and press ad market grew at a CAGR effectively, with measurable annum. This is more than double the consumer interest. In the next section, Figure 5: Volume and Value Strategy of Select Players in the Online Space, 2006.15 of 12.6% between 1970 and 2000, performance. Add the opportunities usage growth experienced between we look at successful instances of the market has been sluggish since the for consumers to avoid ads through 2000 and 2001, which registered advertising as well as consumer-paid beginning of the decade, registering a time-shifted viewing and declining around 2% increase per year. online business models. slight decline in revenue growth. engagement due to multi-tasking, and Compare this with advertising and the long term growth prospects of consumer spending per capita, which Successful Online Monetization In order to eliminate any cyclical advertising revenue model of has grown by only 2% per annum in Stratregies effects and evaluate whether the traditional media looks even more 2005 and 2006, against nearly 5% Media companies are looking at decline in traditional ad revenues challenging. Indeed a survey in the annual growth rates seen earlier this various options for generating herald a structural transformation in US in 2006 found that more than decade. In fact, if per capita consumer revenues in the digital world. Online favor of online media, let us consider three-quarters of national advertisers spending and advertising revenues advertising is a definite growth the evolution of advertising compared think that traditional television had grown in line with usage in the opportunity but traditional media with GDP growth. Our analysis shows commercials have become less last 2 years, the UK market would players have to contend with well- that TV, radio and print advertising effective in the past two years.9 have been worth an additional £4.1 entrenched competitors such as consistently grew as a proportion of billion.12 Yahoo! and Google. These players GDP until around the turn of the As consumer interest and usage shifts have successfully commandeered a century and has been declining ever online, advertisers are also flocking to While the growing online opportunity leading share in the online advertising since (see Figure 3). capitalize on the Internet opportunity. will present some respite, new media market. In November last year, Andy In the US, total online advertising Duncan, Chief Executive of Channel Source: Capgemini TME Strategy Lab analysis. Company Websites and Press Releases.

8 Advertising Association of UK: The Advertising Statistics Yearbook 2007. Note: Press includes newspapers, magazines and directories. All revenues trends are as per current prices. 13 Note: Telecom and media revenues refer to total consumer spend in telecom and media services as well as devices plus advertising revenues. Usage refers to time spent on telecom and 9 Forrester Research, “Advertisers Face TV Reality”, April 2006. 10 IAB Internet Advertising Revenue Report, May 2007. 11 IAB Internet Advertising Revenue Report, April 2001; IAB media activities. 14 MediaGuardian, “Google overtakes Channel 4 in ad revenue”, November 2006. 15 Note: Size of the bubble reflects the total revenues. Paid user base only has been Internet Advertising Revenue Report, May 2007; United Nations Statistical Database. 12 Note: This is calculated considering growth in per capita consumer spending and advertising at considered for companies under the direct payments model and reflects the ARPU for such users. Total user base is considered for companies with advertising model and ARPUs derived on the 5% per annum for 2003-2006. total base.

46 47 Runescape) per month. WoW also ranked as the fifth most popular site Other than internal initiatives to Value Strategy to Generate Online Figure 6: Estimated Average Revenues per Paid User Per Annum for Select Online 22 Consumer Spending Content Players, 2006, $ charges for character transfer fees when for kids in May 2005. distribute and monetize its content, Despite seemingly strong resistance by avatars are traded between players. Viacom has also entered into consumers towards paying for digital Viacom has built interactive partnership deals with multiple online content, there is some early evidence The gaming world demonstrates how communities around its online and digital platform providers to of the success of this model. Online compelling content, constant properties, integrating online videos, distribute its content as widely as gaming, for instance, is one area that innovation and creative revenue user-generated content, virtual worlds, possibly. For example, it has partnered has been able to successfully break models can be employed to develop video games and mobile content. This with Joost to distribute its ad- this pattern. It has generated consumer payments online. multi-platform approach enables supported programming online. More substantially higher revenues per user Viacom to capture an audience across recently in April 2007, it also entered compared with other paid content Volume Strategy to Capitalize various screens. Nickelodeon, a into a partnership with Yahoo! to services. Indeed, World of Warcraft Online Advertising Viacom kids’ entertainment channel leverage the potential of search (WoW), an online multiplayer role On the other hand, Viacom for instance, has created a multi- advertising to generate online revenues. playing game owned by Vivendi, exemplifies pursuit of a volume platform brand out of its hit TV show, The multi-year partnership positions generated around $80 in subscription strategy, engaging the online audience Naked Brothers Band. The TV show, Yahoo! as the exclusive provider of revenues alone per user.16 This is more to generate advertising revenues. popular amongst the 6-11 year olds, sponsored search and contextual ads to than double the ARPUs for iTunes and Source: Capgemini TME Strategy Lab analysis. Company Websites and Press Releases. Viacom’s online properties have grown can be streamed online on Nick.com, various key Viacom sites. more than 10 times those of Skype rapidly, with more than 75 million has been extended into an online (see Figure 6). Other popular games monthly unique visitors worldwide,18 game, “Ready to Rock”, has released a Hybrid Strategy such as Second Life and Lineage II WoW’s success can be explained by its standing. Players may often spend and generating an estimated $250-300 single that can be downloaded on It is not necessary that a clear 19 also demonstrated the ability of online interesting mix of innovative content, months to make their characters million of digital revenues in 2006. iTunes, and has a dedicated section on demarcation exists between the above 23 gaming to attract paid users, addictive experience and creative powerful, only to see game expansions This translates to $4 in revenues per the kids’ virtual world, Nicktropolis. mentioned strategies of advertising generating an estimated ARPU of revenue model. We look at each of broaden the horizon further, requiring user per year, far ahead of MySpace’s and consumer payments. There is a 20 around $120 and $80 respectively in these factors to analyze how WoW has new conquests and adding to the $2 and YouTube’s $0.40. Viacom has been able to maximize its middle path, or hybrid strategy, as 2006, albeit over a much smaller paid been able to sustain user interest and appeal of the game. advertising opportunities due to the adopted by Disney. Disney generated user base of around 55,000 and 1.3 generate substantial online Viacom’s success hinges on its ability multi-platform strategy. Take for more than $500 million in online million compared with over 8 million subscription revenues. Moreover, consistent with the to attract users through a targeted and instance its recent ad partnership with revenues with more than 50 million 17 subscribers globally for WoW. community-based behaviors emerging segmented approach. It treats its TV Sony for special previews of the monthly unique visitors in the US in 24 27 Quality of Content online (via social networking), WoW shows as brands and has created Spider-Man 3 movie trailer. The 2006. It has a wide array of offerings To understand the drivers of success World of Warcraft cost $70 million to is designed to encourage users to micro-sites around them; for example, trailer was showcased across six that that are free and ad-supported as 21 behind these gaming sites, we will develop and had 100 developers and collaborate as well as match wits MTV alone has 139 websites. networks and thirteen online well as subscription-based. focus on World of Warcraft since no designers while the average budget for against other players. This helps in Viacom’s strategy of creating micro- properties. Consider also th other property has been so successful a Hollywood movie is $60 million. further creating an audience for sites is aimed at taking advantage of Nickelodeon’s 20 Annual Kids The free/ad-supported model is being in driving consumer spending. New content is also continuously players to build their reputation and the fact that the Internet is leading to Choice Awards show, which was employed mainly for positioning its Consider that WoW accounts for added to create fresh challenges and status in the virtual world. audience fragmentation, creating presented to advertisers on the multi- mainstream broadcast TV content on nearly 55% of the subscription keep users hooked to the experience. smaller communities with distinct platform positioning. The campaign its online properties such as revenues generated by online gaming Moreover, as the game has captured a Creative Revenue Model tastes and behaviors. Therefore, this generated 41 million votes across all ABC.com, ESPN.com and Disney.com. in the US and Europe. Moreover, global subscriber base across the US, The game’s business model is approach tries to capture different of Nickelodeon’s digital platforms and Next-day access to episodes of unlike other games, which often see Europe and Asia, infrastructure structured from the outset to make users by catering to varied tastes the highest traffic ever on the day of Disney’s hit shows such as “Lost” and 25 consumer interest plateau once the growth as well as sound operational money at various stages. For instance, through specific subject-themed sites. the awards show on Nick.com. The “Desperate Housewives” have been novelty has worn off, WoW continues execution has helped to keep up to users need to buy the software for multi-platform clout is reportedly available on the web since mid- 28 to grow its paid subscriber base. For user expectations. around $10 to get started and then In order to grow its online presence enabling Viacom to generate high 2006. This model replicates the 26 example, the game was launched in pay a monthly subscription fee of $4 rapidly, Viacom has also acquired CPM rates for advertisements on its broadcast model of free programming November 2004 and had registered Addictive Experience to keep playing the game. In places various web properties. For example, sites supported by premium content supported by advertising. nearly 9 million paid users by July Long term user engagement and such as China, the model is modified MTV Networks acquired Quizilla.com and branded virtual environments. 2007, up from 8 million at the “addiction” are ensured by giving to charge on a per-hour basis. Other last year and Neopets in 2005, which The result has been than in Q4 2006 However, subscription and consumer beginning of the year. In contrast, users a chance to showcase their skills online games such as Runescape, have helped gather significant scale of the alone, the total number of advertisers paid services are still a large part of Lineage II, launched in October 2003, in front of other players. The game a tiered subscription model, allowing online audience in the kids and teen on Viacom’s digital properties grew by Disney’s strategy. While free content has seen its subscribers decline from a has nearly 70 levels of experience, users to play the core game for free, segment. Quizilla.com for instance, is 60% and ad revenues from online- helps to drive eyeballs on its websites, high of 2 million in early 2005 to less which along with reputation and but those that desire access to elite a top-five online destination for only clients grew by a factor of two- niche and targeted content is used to than 1.3 million currently. reward systems keeps users captivated weapons or other game content, must female teens while Neopets was and-a-half. up-sell consumers to subscription in search of mastery and online pay a small fee ($5/month for

16 Screen Digest research, “Western World MMOG Market: 2006 Review and Forecasts to 2011”, March 2007. Screen Digest research, The Earnings Call for World of Warcraft revenues for 18 ComScore Media Metrix, December 2006. 19 Forbes.com, “Viacom’s Digital Dilemma”, 1 March 2007. ComScore Media Metrix, Top 15 Global Properties by Unique Visitors, January China. 17 mmorgchart.com; BBC News, “MMO games on the rise”, March 2007. Lineage II ARPU estimated as $15/ month for US and Europe and $7/month for Asia with 93% subscriber 2007; Note: Although Viacom did not declare its digital revenues for 2006, it announced targeting doubling the revenues to $500 million for 2007. 20 Capgemini TME Lab estimates, base from Asia as per mmorgchart.com. Second Life is estimated to generate around $600,000 per month from subscriptions over a paid subscriber base of 57,000. Other revenues generating from CNNMoney.com, “Cyworld ready to attack MySpace”, July 2007. 21 Company Website. 22 Mediapost, “MTV Extends Cred With Kids Via Neopets Acquisition”, 21 June 2005. transactions in Second Life are not available and hence, not included. Nielsen//NetRatings May 2005. 23 MediaLife Magazine, “The big buzz of Naked Brothers Band”, 9 February 2007; Viacom Q1 2007 Earnings Call Transcript. 24 Paidcontent.org, “Earnings: Viacom Q1 Profit Falls 36 Percent; Will Hit $500 Million Mark On Digital Revs This Year”, 10 May 2007. 25 Viacom Q1 2007 Earnings Call Transcript. 26 Cost per Thousand Impressions (CPM). 27 CNNMoney.com, “The wonderful world of Disney earnings”, February 2007; Financial Times, “Studios attempt to widen web of movie distribution”, 29 December 2006. Disney Corporate Site News Release, “Disney creates one-stop online resource for parents”, March 2007. Note: Monthly unique visitors for Disney are for the US across Disney branded sites, ABC.com 48 and ESPN. 28 CNNMoney.com, “Disney’s better Internet Mouse trap”, 27 October 2006. USAtoday.com, “Miss an episode of ‘Lost’? See it online”, April 2006. 49 deals. For instance, while highlights, shows through iTunes, driven mainly can participate in online versions of media companies to adapt to new the possibility to develop advertising Media players can leverage these news and archived shows are available by leading titles such as “Pirates” and popular shows such as “Deal Or No paradigms of online distribution. revenues due to the growing interest lessons to move swiftly in the digital for free on ESPN.com, live event “Cars” in the former and “Lost”, Deal”, “Fame Academy” and “Big from advertisers in online virtual worlds. space, generate new revenues, and viewing is available on ESPN360.com, “Grey’s Anatomy” and “Desperate Brother” with self-created online Expertise in Online Advertising develop new capabilities in order to which is licensed to ISPs such as Housewives” in the latter category. avatars. Hence, media players should Relationships with advertisers in the In conclusion, the Internet is rapidly innovate and flex in this evolving Verizon and Comcast (and hence, develop interactive media brand offline world are a critical asset that reshaping the media landscape. The market. available to the end-customer on Outside of premium media content, extensions of popular traditional media players can leverage in the changing environment now mandates subscription to the ISP’s service).29 user-generated content sites, often media content and formats to create online world as well. Moreover, users’ that media companies roll out clear Jerome Buvat is the Global Head of the Direct consumer subscription services referred to as social media, are also value in the online space. tolerance of advertising seems to be online strategies as well as integrate TME Strategy Lab. He recently led a are also available for premium content growing in importance. However, greater when content transitions from them synergistically with their offline variety of studies including an analysis of such as ESPN Insider on the traditional media content still remains Another successful example is MTV offline to online as compared with presence. The business of monetizing fixed-mobile convergence services and the ESPN.com site, which has rumors, popular and has the ability to draw Networks, which has created virtual user-generated content, which has no content online is still nascent. development of home gateways. He breaking news, analysis, blogs and massive user interest on social media world extensions such as “Virtual history of the same. This puts However, some early movers offer closely follows the media market as well realtime score updates. And in the sites. For example, TV content Laguna Beach” and “Virtual Hills” established media companies in a indications of strategies to adopt, as as the emergence of alternative spirit to sell content through multiple comprises 80% of most viewed videos from its hit TV shows. MTV has favorable position to earn online well as the key success factors technologies and business models. Jerome channels, movies and TV programs amongst the Top 50 ideas on Daily garnered 600,000 registered users in advertising revenues from existing required to successfully create is often called on to speak at industry are also available on pay-per Motion. Moreover, the word of mouth only 6 months of launch of these content assets. substantial revenue streams online. conferences/events on these and other download basis over iTunes. generated from these sites can also help virtual worlds. Users can not only telecom- and media-related topics. Prior drive audience to the broadcast watch the latest episodes but also However, online advertising is not Strategic options for media to joining the Lab, Jerome led a variety of Viacom and Disney demonstrate how programs. interact with the cast and participate only about generating eyeballs and companies range between an ad- strategy projects in the telecom and an online income stream can be in online events or discussion forums. gaining a list of advertisers. based volume strategy on one hand, media sector, focusing particularly on the generated by media companies Therefore, considering social media Moreover, 99% of its users are Integrating search, for instance, will successfully executed by large mobile and broadband segments. He is through developing a massive online sites as an additional distribution exposed to branded content such as play a pivotal role in delivering Internet players, and a fee-based based in London. audience, leveraging various platform will help media companies cell phones, drinks and clothing, targeted ads and driving online value strategy, implemented by some distribution channels for their content seed their content widely on the web. creating a successful online advertising revenues. Media companies, online content providers, especially in Benjamin Braunschvig is a senior

assets and creating a cross-platform Since consumers are used to ad-free advertising platform for MTV. Media therefore, face a very different world gaming, on the other. Players need to consultant in Capgemini’s Media value for advertisers. play on these sites though, media players should, therefore, develop from offline, requiring expertise in evaluate their key strengths and practice. His current work focuses on community and interaction around search marketing, target algorithms, decide which one can be best monetization of digital content. His

media content to create user and click-through rates. Gaining such leveraged online. The success of recent consulting projects include digital engagement, loyalty and “stickiness”, expertise is essential in pursuing an gaming providers indicates that strategy development for various TV ad-funded strategy online. owners of “addictive” content can “ which will bring opportunities to and radio broadcasters. He is based TRADITIONAL MEDIA CONTENT monetize new and valuable consumer command a premium for a rich in London. I experience. Flexible Revenue Models experience. Similarly, some media STILL REMAINS POPULAR and has Relying on ad income is currently the companies have replicated their Partnerships most dominant revenue model existing ad-based model for the“ ability to draw massive user Reaching a large user base is critical online. However, monetization monetizing TV content on the Internet to driving online advertising revenues through subscription, licensing and by building on available expertise and interest on social media sites as well as consumer spending. sales are also opportunities that partnerships with advertisers. should be fully explored by media Some media players have built a large companies. Gaming, for instance, Irrespective of whether media players Recommendations players will have to look beyond the scale audience through building or demonstrates that consumers can, adopt an ad-based or a fee-based There are definite lessons to be 30-second ad-spot formats to acquiring web properties (Disney an and will spend on the right content. model, there are some common learned on how to best leverage generate revenues on these sites. example of the former, Viacom and Moreover, since the revenue models critical success factors. Valued existing capabilities as well as develop Media companies will also need to News Corp examples of the latter). are still evolving, players need to content is as important online as it is new skills to drive advertising and reconcile differences in interests with Others look to supplement their own- continually adapt pricing of their offline, to attract and retain audiences consumer spending online. these new players and look anew at branded portals through partnerships content. Consider Disney, which to the medium. TV and traditional their copyright protection and revenue with third-party service providers recently made the shift to an ad- media content often create strong Valued Content sharing approach. such as Google, Yahoo! and iTunes. supported free play option of its brands, which can be extended to the Gaming as well as media companies Here they undoubtedly gain the popular online interactive role online platform. Existing partnerships such as Viacom and Disney are Cross Platform Brand Extension immense pull these strong content playing game, Toontown. Formerly with advertisers are a valuable asset proving to be successful at generating TV and traditional media content also aggregator platforms have on the available as a subscription-only to exploit in the online world. revenues by offering highly valued create strong brands, which can be online audience. However, such service, Disney revised its strategy to Moreover, media players should content to users via the Internet. extended on different platforms and partnerships will present copyright offer Toontown as a hybrid explore partnerships with Consider for example that as of formats. Endemol in partnership with control and revenue sharing free/subscription option to play the established players on the Internet March 2007, Disney sold more than 2 Electronic Arts, for example, is challenges, requiring traditional game. The strategy change was driven which can serve as content million movies and 23.7 million TV developing “Virtual Me”, where users by competition from other kids- aggregators with a capability to targeted multiplayer games such as attract massive online audiences. 29 Paidcontent.org, “ESPN changes broadband game plan; will relaunch ESPN360 with emphasis on live events,” August 2007. Nickelodeon’s Nicktropolis as well as

51 50 Figure1: The Breadth of Services Defined as Mobile Transactions Mobile Payments: Are you Ready for the Early Majority? by Jean Diop, Rob Deitz and Bas van der Zijden

Abstract: M-payments refer to the use of mobile devices such as mobile phones and PDAs to make cashless financial transactions on the move. M-payments can offer a wealth of revenue generating possibilities for mobile telecom operators facing limited growth in ARPUs. Telcos in the Far East have already stolen a march on Europe and the US in this space. The market is likely to be shaped and powered by supply side technology standardization, financial services drivers, and growing consumer acceptance. We believe that there are three key strategic options for mobile operators: m-payments as a core business, provision of m-payments as an add-on service, and no direct, or limited m-payments business. We estimate the European market will be worth €913million in 2008, rising to over €8.7 billion in 2012, approximately 5-10% of total projected mobile data revenues. We recommend that mobile operators in Europe take an incremental but active approach now, according to their core competencies, appetite for risk, and strategic intent. Whichever route is chosen, mobile operators need to take strategic decisions with regard to their investment in this market, sooner rather than later, particularly with financial services companies waiting in the wings.

Bankers worldwide are considering market for mobile operators. Firstly, terminal to initiate payment and how to increase the profitability of we define mobile transactions and rapidly exchange information, content their retail accounts that bring in, on m-payments, and look at the market or transaction data over a distance of 1 average, just €77 annually, barely drivers that will impact both supply just a few centimetres. In contrast, Source: Capgemini analysis. enough to cover the massive costs of and demand. We then identify remote payment transactions are payment handling. Similarly, telecom strategic options for operators, handled over a remote channel, executives are wondering how to assessing each option for its usually via SMS or an Internet Figure 2: Mobile Payment Types, Characteristics and Example Services increase post-paid mobile subscriber competitive positioning within the browser. The user will have options in ARPUs, currently averaging about new m-payments value chain and its terms of the type of account from €25 per month. In both industries, revenue potential. Finally, we make which to make payments. This will senior executives have mobile recommendations for players, vary from prepaid (cash stored payments (m-payments) and according to key competencies, risk on a local chip or a dedicated transactions clearly on their radars as appetite, and strategic intent. “e-wallet”), direct payment (from a a potential revenue generator for the generic card or bank account) or from future. What are Mobile Transactions a dedicated postpaid account and Payments? (managed by an m-payment Some initiatives have already been The umbrella term “mobile provider). The latter two require a launched. Japanese pioneer NTT transactions” covers a broad range of higher level of security than the DoCoMo launched Mobile Credit services including mobile banking, wallet, because of the low amounts Services iD and DCMX with Visa mobile payments and mobile typically stored in prepaid accounts. and MasterCard two years ago, and ticketing/reservations and loyalty has extensive penetration with users services, all of which are designed to Our focus in this article is on m- and participating merchants. Other make it easier for consumers to get payments in the European market, leading financial institutions are information, to pay for goods and and on services using Near Field also convinced of the benefits of services, use public transport, and Communication (NFC) technology as 4 “mobility.” Visa’s strategic investments share data between devices (see their proximity wireless connection. Source: Capgemini analysis. and partnerships with technology Figure 1). We have chosen this focus as most leaders underscores its commitment industry influencers consider NFC as to “ubiquitous electronic payment on Within the m-payments category, it is the most likely technology to offer a Europe for mobile operators. In the payment initiatives in Europe, Africa market dynamics, consumer response, mobile devices2”. In November 2006, useful to understand, the different compelling user experience and Far East, significant m-payment and the US indicates that most NFC- and e-payment adoption. We now Rabobank launched its MVNO3 “Rabo types of payments determined by the successful mass-market rollout in the adoption has already taken place, with based services are still at trial stage, explore these factors in more detail. Mobiel”, targeting retail customers underlying device technology, near future. contactless smart cards being with launches imminent or planned with mobile prepaid and postpaid financial account type, and end user embedded into mobile handsets for the next 12-18 months. Supply-Side Technology phone services, and mobile banking usage, summarized in Figure 2. What Factors Might Influence (especially in Japan and South Korea). Standardization and payment services. the Development of this Market? Outside this Asian “cradle,” market The introduction and adoption of With so many m-payment Proximity m-payments involves using In researching this paper, we assessed penetration is very low, however, we mobile payments will be impacted by standardization factors and industry In this article, we assess the challenges a proximity-enabled device to the viability and attractiveness of believe we are on the verge a take-off. factors such as supply-side innovation bodies,5 there is certainly a challenge and potential of the m-payments communicate with a point-of-sale NFC-based m-payment services in A review of the current 30+ mobile and standardization, financial services ahead to bring about industry

1 World Retail Banking Report 2007; Capgemini, ING, EFMA. 2 Visa Press Release, Visa CEO Sees Collaboration with Wireless Industry as Key to Unlocking Potential of Mobile Payments; March 5 ETSI; NFC Forum; ETSI; EMVCo; GSM Association; Mobile Payment Forum. 2007. 3 Note: MVNO - Mobile Virtual Network Operator. 4 NFC Forum Website November 2007.

52 53 agreement. Standardization, on In addition, the debit/credit enhanced consider the availability of mobile industry model that describes a range However, despite these advantages, communities to parade a few. In such matters such as integration of the security standard introduced by EMV payment capabilities a valid reason to of strategic options, illustrated in developing banking expertise could be a set-up, operators can only claim a secure chip holding private consumer (Euro Pay, MasterCard, and Visa) will switch bank or mobile carrier. Figure 3. This indicates an a challenging venture for telcos, part of the transaction cost and data within handsets, is needed to force banks to replace their card incremental mobile payments business particularly given the effort required benefit from the incremental mobile boost economies of scale in order to payment infrastructure, thus creating The interconnectedness between model over a 5 year+ timeframe. to converge these services with their data traffic generated by m-payment bring down the price of chips by an opportunity for contactless- related mobile transactions services mobile activities to offer a truly usage. around 50% to below $1.6 With payments. Moreover, as already means that bundling complementary Our experience and discussions with seamless customer experience. regard to handsets, the only NFC mentioned, some banks such as services—combining the best of European and US major players Furthermore, players must have the By partnering, telcos would limit their phone available in the European Rabobank are involved in launching communication, entertainment and suggest that, over time, this market long-term commitment, patience and exposure but also gain greater insight market is the “Nokia 6131 NFC”; their own MVNOs, seeing the other services—is likely to be an will move from hesitant interest to stamina to run such a unique venture. into market drivers, enabling them to other major handset manufacturers opportunities in m-payments and effective means of meeting consumer increasing commercial offerings over Nevertheless, this has not stopped influence standardization to their are mainly at prototype stage. We using the mobile phone as a needs.7 the next 12-18 months. We expect NTT DoCoMo or Mobilkom Austria benefit, and to synchronize the expect standardization, alignment, convenient communication channel to activity to step up between 2009 to from developing pioneering services. development of m-payment in line and NFC handsets to come about reach their customer base. E-payments Success 2012, with major investment from a with the industry’s development, during 2008 in Europe, lowering While the mobile phone may be an number of operators, choosing We believe that only two types of including 4G and wireless/mobile investment risks in m-payment. Consumer Feedback essential daily tool for users, what appropriate positions within the operators could make such a strategic broadband multimedia. However, what is in it for the does the e-payments adoption rate emerging value chain. Standardization play: Global and multi-continental Financial Services Drivers customer? At face value, there would indicate for m-payment success? and deregulation could possibly also operators, and also innovative new This strategy would put mobile Financial services players themselves appear to be many obvious benefits— Certainly there has been a rapid and enable European mobile operators to mobile entrants with financial operators in a stronger position within are making inroads into this emerging easy access to money/cash, payments mass adoption of Internet payment consider offering a full range of m- institutions/banks as their main the m-payment value chain, a position market with some new developments. processed quickly and efficiently, mechanisms over recent years, and banking services in the longer term. shareholders. International mobile exemplified by Privat:Mobil in the The market is attractive for a number payment details always at hand, fewer research findings indicate that the operators have the market volume and Ukraine. This will require investments of defensive and offensive reasons. In cards to carry, seamless integration value of worldwide payments using By 2012, we predict there will be competitive presence to drive of time, money, and resources to addition to trying to drive customer with different loyalty schemes, and mobiles will follow suit, growing from three key strategic options for standardization and mass-market secure an influential and beneficial revenues, most banks are striving to immediate access to classic mobile $2 billion in 2007 to nearly $22 competitive involvement in this supply cost. Large multinational telcos role in several consortia. There is reduce the significance of cash and banking services. billion by 2011.8 mobile payment market: m-payments are already conglomerates of loosely obviously a risk that only a few of the cost of handling it. By lowering as a core business, as an add-on integrated divisions and diverse these initiatives will succeed; with so entry barriers, the harmonized Single Some consumer surveys and trials also Strategic Options for Mobile service, and no direct involvement. capabilities. They have experienced many players jostling for a favorable European Payment (SEPA) lead us to conclude that consumers Operators many of the financial/cash issues position, the road to agreement is infrastructure will cause major shifts would adopt m-payment services These industry factors seem to 1. Mobile Transactions as a Core traditionally associated with banking. likely to be slow and convoluted, in the European payment industry, provided they were easy to use, indicate that this market could be Business Shareholders with an existing retail particularly without proper and could also result in new non- convenient, cost-effective and secure both attractive and growing. So on In this option, mobile operators will banking network and financial know- governance. banking players entering the lucrative between the handset and point-of-sale what basis should mobile operators create and develop a separate business how, provide a unique competitive financial services sector. reader. Further studies have indicated consider investment and market unit for a broad range of retail mobile advantage to m-payment new This strategy is likely to be adopted that younger consumers would entry? Capgemini has developed an banking and mobile transaction entrants, creating a win-win model. by most national incumbents and services, building a solid position as a Take Rabobank’s Rabo Mobiel venture mobile operators with significant local Figure 3: An Incremental Approach to Mobile Payment Services dominant player in the m-payment for example. For the bank, Rabo market power. Their dominance of the value chain. Some operators may even Mobiel strengthens its innovative local mobile market would make take the ultimate step and become a brand image, helps to realize its them a natural m-payment form of bank themselves. Such a unit virtual banking vision, expand its consortium partner and allow them to would market, sell, and serve a set of multi-channel distribution, and claim a higher share of the transaction mobile financial services as a value- facilitates long-term cost reduction. cost. Although regulatory bodies added product over current mobile might find it difficult to acknowledge, services for a monthly fee, and as such, 2. Mobile Transactions as an governments are likely to favour the reap greater m-payment benefits. Add-on Service dominant mobile player to steer such Other mobile operators will consider a new mobile transaction and Only the most bold and daring mobile m-payment services alongside their payment national industry. operators will diversify to embrace existing service portfolio to generate banking competencies, but from a additional revenues. They will join 3. Marginal or No Involvement in shareholder perspective, banks have forces and partner with other players Mobile Payments significantly outperformed their telco in the value chain to complement Some mobile operators may choose rivals over the last two decades. In competencies. Potential partners will not to invest at all, or only marginally, addition, in some emerging be drawn from diverse origins; opting instead to reap the benefit of economies, prepaid mobile usage banking, capital investment, retail and increased data traffic or the profitable credit is already considered a parallel distribution, technology contribution margins of wholesale everyday currency. This more radical manufacturers, utilities, activities, such as hosting MVNO Source: Capgemini analysis. approach may in fact be more viable municipalities, quasi-governmental capabilities for other players than it appears to be at first sight. bodies, educational and social including banks. 6 ABI Research, 2006. 7 RFID Publieksonderzoek, 2007. 8 Juniper Research 2007.

54 55 This latter role — the provision of Figure 4: Summary of Revenues Streams by M-payments Strategic Option Figure 5: Comparison of Business Model Options by Revenue Stream (€Million) bearer services — is obviously the lowest (immediate) risk option for a mobile network operator or service provider. The downside is that the telco would be confined to a limited “transport” role in the value chain — a role easily commoditized. We believe that financial returns will therefore be limited.

We believe most second tier mobile operators will adopt this strategic route. The market position and Source: Capgemini analysis regulatory obligations often result in spare assets or idle capacity. This Source: Capgemini analysis. move is viable and sustainable only volume and value of these five sources Figure 5 illustrates the financial for these local players that have of revenue for the period 2007 to attractiveness of each Strategic Option developed a low-cost but high 2012.10 based on year-on-year revenue Forecasted Revenues for Mobile Transaction as Core Business: Strategic Option 1 (€Million) performance wholesale business 1. Traffic — Generated from mobile evolution. Looking at a comparison strategy. Such capabilities make them broadband Internet access. between the four European regions in Figure 6, as might be expected, the the “partner of choice” for hosting m- 2. Transaction cost — A percentage of EU-27 region shows the largest m- payment (and any other kinds of) m-payment transaction costs. MVNOs. The MVNO undertakes the payment opportunity. We estimate 3. Value-added services — Generated risk and investment of development, that commercial launches of m- by marketing own brand m- marketing and servicing m-payment payment services under Strategic payment services. business, with limited exposure for Option 1 are likely to show results as the network hosting MNO. In addition, 4. MVNO — A share of wholesale early as 2008. One should not the MVNOs contribute to maximize mobile data revenues from hosting underestimate other European regions the revenue (under-utilized) assets. m-payment MVNOs. though. Turkey, Russia and other non- 5. Product revenues.11 EU countries could represent almost How Big is the Opportunity for one-third of the total m-payment Source: Capgemini analysis. Mobile Operators in Europe? We then aligned the likely revenue market value by 2015. If the market drivers appear on the streams for each of the Strategic whole to be positive, can we Options, as represented in Figure 4. Recommended Strategies for ranging from full participation — the and ability to package and sell for leading European telecom companies determine if the market opportunity is Mobile Operators core business — through to minimal services — mean they are well- over the past ten years. Robert large enough to justify investment? In conclusion, our calculations point There is indeed an attractive, long- or no involvement at all. Taking into positioned to claim a differentiated specializes in program management, Some industry executives have to a very significant European mobile term, financially sound business account the many challenges of and major role in this exciting market, transformation management, MVNO, disputed that banks and telcos can payment market opportunity for opportunity in Europe, provided the standardization, acquiring banking starting today. technology governance, CRM and generate significant revenues from m- telcos, starting at a value of €913 offering is relatively broad and value- and payment knowledge, and m-commerce. He holds a PhD from payments, forecasting only small-scale million in 2008 and growing to over adding. Moreover, financial services managing a complicated ecosystem of Jean Diop is a principal consultant in Einhoven University of Technology and revenues, and declaring it a market €8,7 billion by 2012 for operators players are already pioneering m- suppliers and business partners, Capgemini’s Telecom Media & has been published on topics such as IT driven by handset manufacturers choosing strategic option 1 (see payments initiatives and could take smaller players should adopt a Entertainment Consulting practice in The governance and management decision rather than consumer demand. Figure 5), making a very positive pre-emptive competitive positions in “follower” strategy, while tier 1 telcos Netherlands. He specializes in making. He is based in Utrecht. impact on overall mobile data ARPU. this emerging market unless telcos are need to adopt a more “bullish” telecommunications strategy development To objectively assess the viability and A conservative assessment would clear over how they too could take position. and realization, financial business Bas van der Zijden is a consultant from attractiveness of m-payments for indicate that this would constitute advantage of the opportunities. planning and appraisal, and technology the Capgemini Telecom, Media & mobile operators, we developed a between 5-10% of the projected total Whichever way telcos react, it is clear network/product operations. He leads the Entertainment practice in The forecasting model focusing on four mobile data revenues for the Over the next three years, we believe from our analysis that following Asia’s Capgemini cross-unit business Netherlands. He has worked on several European regions: EU-27, Non EU- European countries modelled in the that the market will open up rapidly. lead, this is potentially a dynamic development initiatives for mobile projects in the mobile and fixed telecom 27, Russia and Turkey.9 same period, and comparable to the Telcos must define and claim a market for Europe, shedding new banking & payments, working at the industry and cable and media industry; estimated share of m-payment value position now, before m-payments light on the issues of industry inter-section of telecom, banking, and IT in roles varying from process We started by identifying five main within the total mobile data-related become mainstream. Telcos have a convergence once again. As Visa US’s applications. He is based in Utrecht. development lead to mobilization and sources of revenue and estimated the revenue projections for Japan. number of options to consider CEO commented; “the convergence of communication expert. He is based in payments and mobile communications Robert Deitz is a managing strategy Utrecht. I is not just logical — it is inevitable.” consultant at Capgemini’s Telecom, 9 EU 27 countries are: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxemburg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom; Non-EU countries are: Albania, Andorra, Belarus, Bosnia-Herzegovina, Croatia, Cyrpus, Gibraltar, Kosovo, Telcos’ unique capabilities — their Media & Entertainment practice in Monaco, Norway, Serbia, Switzerland and Ukraine. 10 Assumptions: value-added service retail price of €5-8, with a 5% yearly price decrease; transactions costs of €0.05 per transaction; MVNO data revenue of €10 ARPU per month; (80% voice, 20% data); product revenue of €2-6 per user per month flat, depending on the strategic option. 11 Diverse income sources directly (e.g. B2B networks, technology “ecosystems” Benelux. He has led a number of project service management fee) or indirectly (e.g. advertising, retention/usage benefits) linked to offering m-payments.

56 57 GAM can potentially improve customer“ satisfaction by 20% AND INCREASE REVENUES “AND PROFITS FROM A CUSTOMER BY 15%

additional staffing and coordination under GAM contracts. Similarly, large products and services, consistent costs, the products and services being carriers such as AT&T, BT, Orange service quality and performance, covered under GAM should ideally (FT) and Cable & Wireless provide uniform or consistent prices and have higher margins to cover the extra multi-geography connectivity uniform terms for volume discounts Global Account Management Frameworks: Managing the Complex costs. In case it becomes essential to solutions and managed enterprise and other items for their global offer GAM for low margin products or services through their global units. operations. Portfolio of Global Accounts for Telecom and Media Players services, the supplier needs to ensure These offerings, when procured at a by George Yip and Didier Bonnet that the costs of GAM are compensated global level, help customers to ensure Suppliers often resist customer through increased volume, service common operating and quality requests for GAM, thinking that the payments, or through some other means. standards across geographies. only result would be higher discounts Abstract: Many telecom and media players need to manage customer relationships across numerous countries. Although suppliers and lower prices. However, these in general have traditionally been reluctant to implement Global Account Management (GAM) programs, research suggests that if In the media space, Reuters offers Customers’ Wants concerns are exaggerated as globally implemented correctly, GAM can significantly increase not only customer satisfaction but also revenues and profits that accrue from GAM to some of its multinational After assessing that the offerings are consistent service performance is customers who need globally appropriate for GAM, the supplier usually more important to multinational customers. First, suppliers need to assess the suitability of using GAM by analyzing factors such as products and standardized products such as Reuters needs to consider whether its multinational customers than lower services offered through global contracts, customers’ wants, the importance of multinational customers and competitive advantages. terminals and data-feeds. In the customers want GAM. A large number prices. Therefore, suppliers adopting Next, customers suitable for GAM should be identified by assessing parameters such as their size and revenue potential, strategic telecom sector, offerings suitable for of multinational companies have now GAM can build long-term importance, integration capabilities, geographic spread, relationship strength and strategic, and cultural as well as geographic fit. GAM include procurement, instituted global purchasing or relationships with multinational Once the right customers have been identified, the appropriate form of GAM - Coordination GAM, Control GAM and Separate GAM - deployment as well as management of supply-chain programs to buy customers by meeting their global should be used, depending on the desired balance between global integration and national autonomy. Coordination GAM encourages network equipment, multi-geography offerings suitable for GAM. These needs. national autonomy with a central GAM unit playing a supporting role. At the other end of the spectrum is Separate GAM, in which a connectivity solutions and managed multinationals seek standardized supplier creates a separate business unit for sales as well as support and with complete responsibility for managing global accounts. services such as MPLS and enterprise Control GAM divides responsibilities between the central GAM unit and national operations, with the former given the upper hand. voice, including VoIP. For instance, Suppliers can use these frameworks to assess the suitability of using GAM and to offer the appropriate form of GAM to the right equipment vendors such as Cisco, customers, in order to build long-term relationships and increase their revenues as well as profitability. Nortel and Alcatel-Lucent offer networking products and services

Global Account Management (GAM)1 few years of introduction. Mature implementation. The appropriateness has traditionally been viewed as a programs, more than five years old, of using GAM depends on the need as bug-bear by executives at suppliers of can generate returns that are twice as well as the ability of a customer to multinational corporations. Although much as newer programs.2 globally coordinate purchasing of GAM programs have proliferated over products or services, the desire of the last decade, research suggests that In this article, Capgemini examines multinational customers to use GAM, only about a third of involved the factors that telco and media the importance of multinational suppliers are happy about using it. players need to consider while customers to business and the ability Moreover, early adopters of GAM, who evaluating GAM. We also discuss the to derive competitive advantage started implementing it from late 1980s types of customers that are suitable from GAM. to mid-1990s, took around ten years of for GAM initiatives as well as the trial and error to achieve the desired different forms of GAM that are Products and Services returns from their GAM programs. appropriate for various contexts. The primary factor that a supplier These should help suppliers in taking needs to consider when However, GAM can be good too, if the first steps towards implementing contemplating GAM is the nature of implemented correctly and for the successful GAM programs for the products and services being offered. right customers. As per a study of right customers in the right form. The offerings need to be globally around 165 major suppliers, GAM consistent or compatible to ensure can potentially improve customer Factors Driving GAM meaningful discussion and effective satisfaction by 20% or more and Before initiating a GAM program, implementation of contracts using increase revenues and profits from a suppliers need to ensure that the GAM. Also, since a GAM program customer by 15% or more within a program would be suitable for usually entails higher costs due to its

This article is adapted from George S. Yip and Audrey J. M Bink, “Managing Global Accounts” Harvard Business Review, September 2007. We have also added extensive examples from the telecom and media sector. 1 Global Account Management (GAM) refers to treating a multinational corporation’s worldwide operations as one integrated account, with coherent terms for pricing, product specifications and service. 2 David B. Montgomery and Geogre S. Yip, “The Challenge of Global Customer Management”, Marketing Management 9, no 4 (Winter 2000): 22-29; George S. Yip and Audrey J.M. Bink in the Harvard Business Review, “Managing Global Accounts”, September 2007.

58 59 In the telecom and media space, Competitive Advantages Size and Revenue Potential Figure 1: Integration Capabilities of Customers multinational customers increasingly GAM can help suppliers to win The current size of an existing expect a supplier to handle their business in global or regional bidding account is a critical parameter for complex networking requirements situations more easily than in national offering GAM to customers due to the world-wide and also provide a single ones. This is because there are always increased investments in staff and point of contact. When such fewer competitors that can make systems. For instance, AT&T deploys customers are important to a global or regional offers than those global account managers for supplier’s business, it is essential that that can make national offers. Also, a multinational customers that provide the supplier sets up a dedicated GAM supplier may need to offer GAM if its at least US$ 8-10 million of revenues unit to serve these customers. AT&T, competitors do so because global annually. However, suppliers need to for instance, identifies global customers may consider the features be wary of offering GAM to clients customers as those who require of suppliers’ GAM program when that are interested only in volume worldwide services and provides them selecting sourcing partners. A case in discounts. For instance, Marriott with a single point of contact for point is the GAM program for top 40 International once revoked the GAM domestic and international operations global customers started in early 2007 program for its largest customer and consistent worldwide service for by Australian operator Telstra as it (worth $100 million in revenues) due the global account. Similarly, Cisco aspired to spread around the world to such pressures.7 has also identified more than 110 and compete with operators such as customers with global delivery needs AT&T, BT, Orange and Cable & Therefore, suppliers should also assess and supports them with dedicated Wireless, which already have strong the potential of generating additional global account managers. GAM programs.4 revenues from a customer before initiating GAM. Future revenue Importance of Multinational Identifying Customers Suitable upsides can come from the customer’s Customers for GAM operations in countries that currently A supplier should consider The next step is to identify customers use other suppliers and jointly implementing a GAM program when that are suitable for GAM. It is not developed programs with the multinational customers account for a enough if a multinational customer customer at a global level. Source: Capgemini analysis. George S. Yip and Audrey J.M. Bink in the Harvard Business Review, “Managing Global Accounts”, September 2007. significant proportion of its revenues buys GAM-suitable offerings and is or profits. The supplier can use important to the business. A GAM Strategic Importance several measures based on program should be implemented for a A customer should be offered GAM if contributions to revenues and profits customer only after assessing the it is deemed to be of strategic to assess the importance of potential for value creation from the importance. This can be judged based Integration Capabilities only small operations outside its Services to provide IP-based multinational customers in its ensuing partnership in terms of on the customer’s contribution to Centralized account management, as home country, it is not a good equipment and solutions to global business. For instance, a supplier may growth potential, increased share of overall sales and profitability. For mandated by GAM, needs the candidate for GAM and it would be enterprises, the target market consider starting a GAM program if the customer’s business, margin instance, a customer that buys 10% of requisite structure, processes and better to not invest additional of both.10 more than 10% of its revenues or improvement, and opportunities to total production or 60% of the information systems to integrate and resources for GAM until its operations profits come from multinational learn about each other’s business. production of a crucial product line coordinate global purchases. In the in other markets mature. For instance, Culture compatibility is also an customers that coordinate their should be considered for GAM. absence of such enablers at both Reuters offers its Focus Group important aspect of GAM as supplier- purchasing globally or regionally. Moreover, there is no single ideal Similarly, a reputed customer that can customer and supplier ends, it would Accounts program to customers that customer relationships entail Similarly, if more than 25% of a number or percentage for GAM influence others to buy from the be very difficult to negotiate, as well not only meet a certain revenue interaction between executives of supplier’s revenues come from partnerships. For instance, Reuters, supplier should also be considered as enforce contracts at a global level. threshold but also have a global customer and supplier organizations, multinationals not currently pursuing Nortel and Telstra have around 30 to strategically important. Lastly, a The supplier would still need to sell presence with a significant portion of across hierarchies, and across global sourcing or if large 50 global accounts,5 whereas Cisco customer whose strategic goals are in country by country, negating the revenues accruing from outside their geographies. The extensive scope of multinationals are the most profitable has more than 100.6 For each alignment with those of suppliers benefits of GAM. Therefore, a supplier largest time zone.9 interaction among employees of the accounts, the supplier can initiate customer, the potential for value should also be considered for GAM should offer GAM to only those two organizations demands a cultural GAM and introduce the same to its creation needs to be judged on a case- from a long-term perspective. For customers that have moderate or high Strategic, Cultural and fit, or at least cultural empathy customers. For instance, Reuters offers by-case basis and a GAM program instance, BT is considered as a integration capabilities (see Figure 1). Geographic Fit between customer and supplier its Focus Group Accounts program to accorded if found beneficial. The key strategic customer by Cisco due to When both supplier and customer organizations to understand each around 30 of its multinational criteria for selecting customers for their close relationship over setting up Geographic Spread follow similar strategies, targeting the other and build meaningful customers that comprise GAM programs are discussed below. BT’s 21 CN network.8 Multinational customers with same customer segments for example, relationships over a longer term. For approximately 27% of its overall businesses spanning several countries the relationship can be strengthened instance, it would be difficult for a revenues.3 are usually good partners for GAM. further by extending GAM to a supplier with performance-oriented However, if the customer’s business is strategic alliance. For instance, Cisco values and methodical processes to concentrated in one market and has has partnered with Orange Business develop a trusting working

3 Reuters, “Lehman Brothers Media Conference”, June 2006. 4 Datamonitor ComputerWire, “Telstra Faces Partner-or-Buy Decision for European Expansion”, October 2007. 5 Datamonitor 9 Reuters, “Lehman Brothers Media Conference”, June 2006. 10 Company Websites. ComputerWire, “Telstra Faces Partner-or-Buy Decision for European Expansion”, October 2007; Reuters, “Lehman Brothers Media Conference”, June 2006. Nortel, “Nortel Enterprise Story”, August 2006. 6 Cisco, “Global and Multinational Resale Program”, January 2007. 7 George S. Yip and Audrey J.M. Bink in the Harvard Business Review, “Managing Global Accounts”, September 2007. 8 Company Websites. 60 61 8 Company Websites. Figure 2: A Scorecard for Assessment of Customer Fit for GAM relationship with a customer that has balance between global integration creative values and flexible ways of and national/regional autonomy, there operating. are primarily three types of GAM -

Coordination GAM, Control GAM, Moreover, there needs to be a fit and Separate GAM. These forms differ between the geographic presence of from each other in parameters such as A GAM program

the supplier and the customer. A the complexity of GAM organization, supplier should be able to serve global degree of involvement of national should be implemented for a customers in most of their key sales units, integration capabilities, locations, either by having service ease of implementation and costs customer ONLY AFTER “ operations in those countries or by involved (see Figure 3). “ arranging for reliable local partners to provide the services. Therefore, Coordination GAM ASSESSING THE POTENTIAL FOR suppliers such as Orange Business In this form, the GAM unit is weak Services and BT Global Services have and the national sales units retain VALUE CREATION FROM THE established a presence in over 70 most of the power and responsibility countries worldwide to ensure the for making deals. The main task of ENSUING PARTNERSHIP maximum possible overlap with their the GAM unit is to coordinate the customers’ operations.11 sales and support activities of national units serving GAM customers. Close and Trusting Relationship However, this form of GAM can be When a supplier and customer trust hindered by potential disagreements and value each other, the relationship between GAM and national units, can deepen further. For instance, BT making it difficult to negotiate and appointed Cisco as its preferred implement a global contract. supplier for setting up BT’s 21CN IP- based Next-Generation-Network Alcatel-Lucent uses coordination (NGN) due to their shared vision for GAM, wherein a single team handles Figure 3: Forms of GAM: Coordination GAM, Control GAM and Separate GAM the future of IP-services.12 When the global accounts, but the in- deciding whether to make a customer country management teams are given a global account, a supplier should more autonomy.13 This form of GAM consider whether it would be able to is appropriate when local relationships forge a trusting relationship with a are extremely important and the need customer if it does not already have to standardize services across borders one. is relatively lower. This approach is Source: George S. Yip and Audrey J.M. Bink in the Harvard Business Review, “Managing Global Accounts”, September 2007. also appropriate when suppliers lack Based on a careful evaluation of their the integration capabilities required customers, suppliers can identify to centrally manage multinational clients suitable for offering GAM. customers. Suppliers can use the framework in Figure 2, with or without Control GAM modification, to assess whether a This approach is the most common GAM program would be suitable for form of GAM and divides a customer. responsibility between the GAM group and national operations, but Which Form of GAM is Best? gives the upper hand to the former. After identifying customers suitable Control GAM usually also includes a for GAM, suppliers need to determine support team that identifies the appropriate form, or forms, of opportunities, makes plans for global GAM to offer. The key issue that accounts, manages information and Source: Capgemini analysis. George S. Yip and Audrey J.M. Bink in the Harvard Business Review, “Managing Global Accounts”, September 2007. determines the form of GAM to be communication, and strengthens the offered to a customer is the division of relationship network. power as well as responsibility between the central GAM group and the national sales units. Based on the

11 Company Websites. 12 Company Websites. 13 Computer Reseller News UK Edition, "Alcatel-Lucent Tackles Partner Concerns", 26 February 2007.

62 63 Control GAM is frequently both local teams and global account Customization and Evolution of In conclusion, suppliers can establish Dr. Didier Bonnet is a vice president implemented through a matrix managers get the credit for worldwide GAM Relationships value-added, long-term relationships and the Managing Director of organization structure resulting account business. This helps in Although different multinational with their multinational customers by Capgemini’s global Telecom, Media & potentially in friction between the reducing friction between the global customers may want different forms of effectively implementing Global Entertainment consulting practice. He GAM group and national operations and local sales units. GAM based on their capabilities and Account Management (GAM). was for many years a Vice President with as a result of the ambiguity about comfort levels, suppliers may find it Suppliers currently unhappy with Gemini Consulting and prior to this with authority. However, control GAM has Separate GAM hard and expensive to offer different their GAM programs should revisit several large and small strategy many benefits including alignment of In this form of GAM, a supplier forms of GAM to individual their current form of GAM and the consulting firms. He is based in London. the organization behind one customer creates a separate business unit with customers. An effective solution is to customers to which they provide it to focal point (the GAM team), its own sales service as well as customize one form of GAM for in order to identify the required achievement of a better balance technical support personnel, and the different customers by varying adjustments and changes. Suppliers between global integration and local unit has complete responsibility for parameters such as service levels, contemplating GAM should evaluate autonomy than coordination GAM, managing global accounts. The key involvement of national units and the program in the context of their and engagement of many parts of the advantages of separate GAM are items covered under the contract. overall strategy as well as systems, and company at multiple levels and across reduced friction between global and the attractiveness, importance and countries in serving the customer. local operations, and improved For a supplier aiming to initiate GAM capabilities of its customers. This customer service due to dedicated for its multinational customers, it would help suppliers offer the Control GAM is most suitable when personnel. However, very few would not be prudent to start with a appropriate form of GAM to the right the product and customer attributes suppliers use separate GAM due to form of GAM that is too ambitious to customers, leading to the point to a strong need for GAM, but the difficulty of implementation and implement effectively, from the point development of healthy, long-lasting compelling reasons exist to anchor the increased costs arising from major of view of the supplier or its customer relationships with the account in the national operations. organization structure changes and customers. Otherwise the program tangible benefits of increased share of For example, an account may not be dedicated staff and systems. may be weighed down by high costs, customer wallet and higher big enough to justify the considerable political resistance and failure to profitability. The bug-bear of GAM expense of dedicated global sales and An example of separate GAM is BT deliver the desired benefits. First-time can certainly be tamed. support team. Global Services, which is a distinct GAM implementers can reduce the division within BT and focuses on execution risk by beginning with Dr. George Yip is a vice president and Cisco uses a variant of control GAM, providing services such as networked coordination GAM, which is the least Director of Research & Innovation at wherein large multinational accounts IT solutions, outsourcing and systems challenging to implement. As the Capgemini Consulting, UK. He manages are handled by global account integration to multi-site organizations. partnership matures and the the research and innovation process to managers, supported by regional Separate GAM is most suitable when capabilities of both the supplier and develop thought leadership for the managers and a dedicated technical all the drivers for GAM are strong and its customers increase, GAM programs company. He is a professor of strategic engineer. They are also supported by the supplier has customers whose can evolve into control GAMs and and international management at online tools, indicating good businesses are big enough and separate GAMs. London Business School, and has also integration capabilities. Moreover, profitable enough to support the extra taught at Harvard, Stanford, Oxford and incentives are also aligned so that costs, as in the case of BT. Cambridge. He has published widely on issues of global strategy, including Managing Global Customers (Oxford University Press, 2007) and Total Global

Strategy (Prentice Hall, 1992 and 2003, Suppliers currently in ten languages). He is based in London.

unhappy with their GAM program should REVISIT “ “ THEIR CURRENT FORMS OF GAM AND THE CUSTOMERS TO WHICH THEY PROVIDE IT TO

64 65 Addictions SMS and E-mail •Britons send a staggering 1 billion SMS messages each week, the same as the total number sent during the whole of 1999 – Mobile Data Association •50% of 25-34 year-old Britons also admitted they “would not be able to carry on” without email – BBC News Social Networking •British employees spend so long surfing on social networks like Facebook during the working day that it costs businesses £130m per day in lost productivity - Peninsula Gaming •Multiplayer online role-play gamers play for an average of 21 hours per week, and 61% admit to at some point having played for over 10 hours consecutively – nickyee.com •A Dutch youth was recently arrested for stealing €4000 of “virtual furniture” from fellow Habbo Hotel gamers, which he used to customize his own virtual room. Considering a virtual sofa can be bought for €3, he must have stolen dozens of items – BBC News

Myths Online Gamers are Male •64% of US online gamers are actually female - Entertainment Software Association Users of Web 2.0 Sites are Young •53% of US YouTube users and 46% of MySpace users are aged 35 or over - Comscore Parents have Better ‘Mobile Manners’ than their Children •71% of youths find it inappropriate to SMS while at a wedding or funeral, compared with only 64% of adults. Saying this, 40% of youths also find it appropriate to end a relationship by SMS – The Mobile Life Report

Cultural Differences Mobile Internet •Britons use the mobile Internet to search for very different local information to the rest of their European cousins. While top European local searches are for restaurants and taxis, top British searches are for fast-food and drinking establishments – eMarketer Instant Messaging •In Shanghai, the CEO of MySpace China announced to reporters plans to launch instant messaging "as soon as possible." Local scribes took the CEO literally and began reporting that its IM service would be called “ASAP” – Business Week Mobile Content We value your comments and ideas. Please contact us at [email protected] •South Korean mobile users avidly personalise their handsets, with a massive 97% of consumers having downloaded a ringtone at some point, compared with just 35% of Insights is published by Capgemini’s Telecom, Media & Entertainment (TME) consulting practice. US mobile users – eMarketer We are the leading global management consulting group dedicated to helping CEOs and senior executives in the converging communications industries address their most critical strategic and operational challenges. And Finally … In multiplayer online role-play games such as World of Warcraft, 85% of gamers are For further information visit: www.capgemini.com/tmeconsulting male in real-life, and yet only 65% of virtual characters, or ‘avatars’ are male. Editorial Team: Benjamin Braunschvig Jerome Buvat Alex Kitson Bobby Ngai What does this mean? It means this: if you are communicating with a female avatar in Design: Kristin Waring World of Warcraft, there is more than a 50% chance that ‘she’ is not female at all.

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