Internet TV Private Equity Online Advertising Making of Strategy Open Mobile Ecosystem volume 5: summer.08 Capgemini’s telecom, media & entertainment journal telecom, media & entertainment Capgemini’s

Capgemini’s telecom, media & entertainment journal volume 5: summer.08 ” —Olivier Fleurot, Executive Chairman of Publicis —Olivier Fleurot,

It becomes necessary It becomes

for ad agencies to re-examine for ad agencies

“

their business model their business industry insights

6 Mobile 2.0: Strategies for Operators CONTENTS in an Open Mobile Ecosystem

14 Internet TV: Evaluating the Disruptive Potential in Western Europe

24 Online Advertising Opportunities: A Telco Value Chain Analysis

34 Mobile Internet Services in Europe and USA: Initiatives to Drive Adoption and Usage

management insights

44 The Making of Strategy: Formulating Strategies in a Structured Manner

48 Private Equity: Strategies for Weathering the Storm

56 Telecoms in Africa: Reaching Consumers in “Constrained Markets”

62 Better Global Sourcing of Services: Frameworks for TME Players lite bytes

70 Paying for Mobile Data, Going Online and All About Devices editorial

Welcome to the Summer edition of Insights.

The Internet is emerging as the platform of choice for content delivery. Traditional media players are making aggressive online forays, seeking a share of shifting consumer attention and advertising spend. Devices are playing a pivotal role in driving convergence, with the rapid development of consumer electronics and the emergence of handset vendors as service providers. These developments are disruptive to many industry players and success will depend on the creation of innovative business models centered on collaboration rather than competition.

We start our Industry Insights section with an assessment of the potentially disruptive development of open mobile ecosystems that could significantly impact the control that mobile operators have over the consumer experience. Our second article details developments in Internet TV, and investigates whether it could be utilized by content players to reach consumers directly, disrupting existing broadcasting business models. Advertisers’ spend is increasingly shifting online, and telcos are looking at this space as a potential area for diversification, which led us to evaluate the opportunities for telecom companies in the online advertising business. Finally, we investigate initiatives to drive the uptake of mobile Internet services in Western Europe and USA.

In an industry faced with dramatic change, players will need to develop radical strategies to effect sweeping changes in their business models. In our Management Insights, we first propose a framework for strategy development, leveraging our ongoing work in collaboration with business school INSEAD. A number of macroeconomic developments are posing key challenges to the private equity industry, and our next paper identifies some strategies for private equity players to sustain growth in a time of uncertainty and slowdown. For Telcos in developed countries, emerging markets in Asia and Africa which are at the cusp of rapid growth in mobile services, continue to remain attractive expansion areas. Therefore, the next paper highlights the key challenges ahead in these affordability-constrained markets and details strategies for profitably delivering mobile services in Africa. We close the journal with an article on how industry players could decide on a model for global sourcing.

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

Didier Bonnet Managing Director, Consulting Telecom, Media & Entertainment

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34 Mobile 2.0: Strategies for Operators in an Open Mobile Ecosystem Jerome Buvat, Tushar Rao and Varun Saxena

Abstract: The mobile ecosystem has historically been a closed system with little choice for end-users when it comes to applications and services on handsets. However, recent initiatives by various players in the mobile value chain seem to suggest that these closed ecosystems are soon going to be a thing of the past. Online players such as Google are coming up with open platforms that seek to create a level playing field for all players by ensuring that preferential and discriminatory treatment of applications and services is done away with. Moreover, the emergence of device initiatives from challenger operators Figure 2: Definition of an Open Mobile Ecosystem players as “service providers” is making a wide range of applications available to end-users with little intervention by telcos. These developments seem to also have had an impact on An Open Mobile Ecosystem allows a consumer to access any application and content are directly impacting operators’ ownership of the consumer and their service delivery experience. Capgemini has identified three broad strategic mobile operator strategies. In Europe, on a device of their choice without binding them to any single network options for operators in the evolving open mobile landscape. It is our recommendation that operators position themselves as platforms for operators are adopting open access in delivering a wide range of third-party and self-developed applications, and adopt a “compete-in-some, collaborate-in-some” model with third contrast to their erstwhile “walled parties. Operators should open up network APIs, build common content platforms in collaboration with online players, and also partner with device garden” strategies, and providing users access to a set of external vendors for mutual benefit. Operators who adopt this platform strategy are likely to see maximum revenue uplift, without ceding a significant applications. Similarly, in the US, amount of control over the customer. Verizon Wireless has announced that it will open its network to external The mobile industry has remained a nature, spawning an entire ecosystem application itself are closely tied to the applications and devices1—a closed ecosystem where operators of application developers and service hardware specifications of the device significant shift from its policy so control almost all aspects of the providers. On the contrary, in the and technical features of the far—to restrict applications and consumer experience. This is in direct mobile space service innovation has operators’ network, thereby restricting devices that run on its network. These contrast to the fixed PC and Internet historically been limited to initiatives reuse of applications and/or platforms developments appear to point towards Source: Capgemini TME Strategy Lab Analysis world where access providers have led by the operator, and third party across device categories and operators an open mobile ecosystem at each had little control over the applications application providers have little direct (see Figure 1). stage of the value chain (see Figure 2). that are consumed by the end-user. access to end-users. Moreover, the Fixed Internet thrives in its open development process and the Recent industry announcements, In this paper, Capgemini analyzes the Figure 3: Recent Initiatives Leading to an Open Mobile Ecosystem however, promise to change the factors that are leading to an open mobile ecosystem by mitigating some mobile ecosystem, and evaluates key Figure 1: Key Differences between Fixed and Mobile Ecosystems of the controls at each stage of the strategies for telcos to benefit from it. value chain. Evolution to an Open Mobile Companies such as Nokia and Google Ecosystem have launched multiple “over-the-top” The mobile ecosystem is slowly, but services that directly interact with the definitely, changing in the way it has end-user. Online players are traditionally operated. Initiatives that strengthening their capabilities to have been taken by various players target mobile users directly by seem to suggest that the ecosystem is launching application platforms. For likely to undergo a transformation instance, Google has introduced that it has not been seen in years (see Android, an open source mobile Figure 3). The pace of these changes platform that marks a significant shift has been steadily increasing as more from the proprietary platforms and players embrace the philosophy of operating systems that dominate the opening up networks and access. Source: Capgemini TME Strategy Lab Analysis industry. Consumer demand and

Source: Capgemini TME Strategy Lab Analysis. Company Websites and News Releases

1 AOL News, “Verizon Will Open Network to All”, November 2007.

6 7 In this section, we analyze trends BY ENSURING THAT ANDROID Figure 4: Changes Happening Across the Value Chain availability of applications to end- towards openness across the value users. The Android OS is expected to chain (see Figure 4). be available for free10, and CAN RUN ON LOW-END consequently device manufacturers Increasing Availability of stand to gain an immediate advantage “ Unmanaged Applications as software costs typically make up PROCESSORS, Google is looking Online players are looking at between 10-20% of the total handset replicating their successful manufacturing cost. ad-supported business model in the to tap the mid-range handset mobile space, which has hitherto seen Moreover, by ensuring that Android subscription-based models. These can run on low-end processors11 segment players are looking to tap into a (at speeds of 200 MHz), and yet portion of the global mobile deliver rich applications, Google is advertising market, which is estimated looking to tap the growing mid-range common platforms is likely to give evolving to offer higher speeds and 2 3 to be $10bn -$19bn by 2011. handset segment (see Figure 6), way to a scenario where there are few lower data carrying costs. Network Currently, unmanaged services from thereby reaching a wider audience. dominant platforms. These platforms evolution to High-Speed Downlink online players include Google Maps, Source: Capgemini TME Strategy Lab analysis will ensure that the much” needed Packet Access (HSDPA), which offers Yahoo! Go, and Gmail. VoIP players In addition to these initiatives, AOL standardization becomes a pervasive up to 1 Mbps throughput, is such as Skype have also entered this a challenging task. For instance, today, ground-up with the specific objective has announced an open mobile reality. eliminating some of the earlier market with Java-based clients that there exist over twenty major handset of enabling wider availability of online development platform, while other technical constraints faced by can be used for making calls at low manufacturers developing hundreds services. initiatives that were started earlier Operator Response to Consumer unmanaged services such as VoIP. 4 rates. New players such as Nimbuzz of models on over six different such as the LiMo foundation are and Competitive Pressures Evolution of network technology to have launched integrated instant platforms that include Symbian, Online players’ standardized platforms gaining more traction with recent Historically, third-party application High-Speed Uplink Packet Access messaging services that combine Windows, Apple, and many other seem to be the early steps towards an announcements. For instance, LiMo and service providers were limited in (HSUPA), which offers average uplink 5 mobile VoIP with IM and file-sharing. proprietary platforms. Similarly, open ecosystem. As an example, received a boost in its efforts with their reach of consumers due to speeds of 600 kbps and beyond is Over the years, such applications are adapting applications to different Yahoo! has launched its Mobile Verizon Wireless’ recent inherent limitations of the networks. likely to ensure that technical expected to become more classes of browsers with different Developer platform, consisting of announcement of its decision to However, mobile network technology hindrances to deployment of comprehensive in their offerings and capabilities, and collaborating with middleware, device client and a support it.12 The current industry has evolved significantly in the past unmanaged services are removed. include mature VoIP/SMS services, multiple stakeholders also leads to Software Development Kit (SDK). The fragmentation surrounding such few years and is expected to continue These advances in network video calling and mobile shopping significant delays and cost in making initiative is aimed at enabling technology are likely to encourage consumers in increasing their usage of platforms. a service available to a wide mobile developers and publishers to take Figure 5: Architecture of Yahoo! ‘Mobile Developer Platform’ audience. It is estimated that the cost their services quickly across multiple mobile Internet. Advent of Multiple Device/Network of porting an application to each device models without incremental Agnostic Platforms handset platform often amounts to as costs of development. The SDK can be Increasing Consumer Interest While mobile advertising offers much as 60-80% of the actual used to write code “once” and Towards Near-PC Experience significant growth potential, online development cost.6 efficiently publish applications and on Mobile players will need to surpass content across hundreds of devices7 Consumers increasingly want seamless formidable barriers. They need to To overcome limitations that arise due (see Figure 5). access to their favorite online services work around the issue of hardware to platform and device diversity, that they have been accessing via the diversity in the mobile devices space, online players are looking at setting While Yahoo!’s initiative aims at PC, on their mobile phones as well. which makes customizing applications up open platforms that are built creating an OS and device agnostic For instance, the top three websites aggregation platform, Google has accessed on Vodafone mobile Internet in the UK are Facebook, Google and announced the launch of a full- Source: Capgemini TME Strategy Lab Analysis. Company Website fledged software stack including an BBC.13 Similarly, NTT DoCoMo’s data operating system, middleware traffic trends clearly show that Online players are Figure 6: Mobile Handset Shipment Market Share Based on Type of Handset, platform, development toolkit and key operator “walled gardens” no longer Global, 2006-2008 applications. The Android initiative find favor with consumers. Over 70% launching open application was announced in November 20078 of NTT DoCoMo’s i-mode traffic is and consequently an update of its generated by consumers accessing “ 9 non-official sites.14 Going forward, it platforms THAT STRENGTHEN SDK was released in February 2008. Google has also facilitated the creation is likely that consumers will want to of the Open Handset Alliance (OHA), treat the mobile Internet as an THEIR CAPABILITIES IN TARGETING drawing in a number of handset extension of its fixed counterpart and manufacturers, operators and browse their favorite sites, MOBILE USERS DIRECTLY application developers to create an disregarding operator owned portals. ecosystem that promotes wider Such developing consumer browsing patterns are likely to impact operator choice of ecosystem. 2 Stanford Group Company, “Google Inc”, November 2006. 3 ABI Research, “Mobile Marketing and Advertising to be Worth $3 Billion by 1Q 2008”, April 2007. Source: Haywood Securities Inc, “Intrinsyc Software - The Right OS at the Right Price”, November 2007 4 Skype, “Skype Tests Software for Mass-Market Mobile Phones”, April 2008. 5 Washington Post, “Nimbuzz - VOIP/IM aimed at mobile and social networks”, May 2008. 6 AOL, “Open Source Technologies: Powering the Mobile Experience – the AOL Perspective”, March 2008. 10 The Android OS kernel is expected to be distributed under an open-source licensing model. 7 Information Week, “Yahoo CEO Jerry Yang: The Mobile Web Needs Openness”, January 2008. 11 PC Mag, “Hands-On Android Demo”, February 2008. 8 CNET News, “Google launches its cell phone ambitions”, November 2007. ” 12 Business Week, “Verizon Snubs Google's Platform”, May 2008. 9 TG Daily, “Google pumps out updated Android SDK”, February 2008. 13 Vodafone, “Unlimited Internet Access on Vodafone’s New Monthly Price Plans”, May 2008. 14 Telecoms Magazine, “Walled gardens come tumbling down”, August 2007. 8 9 Operators are Introducing Open Figure 7: Evolution of Price per MB of Mobile Data Traffic, UK, 2005-2008 and entry of open platforms such as Figure 9: Possible Strategic Positioning Choices for Mobile Operators Internet Plans Android will ensure that even entry- Operators are responding to the level mobile devices have a rich set of growing data needs of consumers by base features. coming up with flat-rate plans. For instance, in the UK Vodafone and 3 These developments will have a have announced that they will be significant impact across the value offering flat-rate data plans providing chain as it gradually opens up, unlimited usage to the consumer operators will start experiencing within fixed monthly data limits (see tangible loss of control over the Figure 7). customer service delivery experience.

Operator flat-rate plans also come The Road Ahead for Mobile with restrictions in place. For Operators instance, Vodafone in UK does not The emergence of an open mobile allow VoIP, IM, P2P15 file sharing, and ecosystem is posing new challenges using the phone as a modem in its for operators in terms of their strategic flat-rate plans.16 However, going Source: Capgemini TME Strategy Lab Analysis. Operator Websites positioning in the value chain. forward, it is likely that true flat-rate Operators may need to forego their Source: Capgemini TME Strategy Lab Analysis pricing with minimal restrictions on to open platforms, driven by a ecosystems and participating actively control over the value chain, and network usage will be in place. combination of consumer, competitive in it. Nokia has released an adopt an “open” strategy allowing a Flat-rate pricing has also led to a steep and regulatory pressures. application development tool for its wide range of external applications external content. Operators opting for Differentiated Network Access fall in the absolute cost of data. For Series 60 based phones that run on and devices over their networks. One this strategy will allow most external With the “Differentiated Access” instance, in Italy, the cost per MB of Open Ecosystems Facilitated by specific chipsets from Texas of the foremost issues facing most devices on the network with minimal strategy, operators go a step further mobile data has fallen from €0.04 in Device Development Instruments. Similarly, Apple has operators is whether they should subsidies. from playing the role of an 2006 to €0.01 by 2007. Similarly, in Device development has advanced released a software development kit allow external applications and application-agnostic access provider, Germany, price per MB has come significantly in recent years to catch that enables external developers to devices on their networks, and This is a strategy that enables by creating distinct service pipes down from €0.33 to virtually zero, up with the proliferation of advanced write applications for the iPhone. provide them access to core network operators to have revenue upside from priced at different levels for the end- due to the enhanced data traffic limits. mobile services. Device capabilities in Such toolkits help in simplifying the functions; and if so, how to mitigate the increased usage of data services, user. Operators can offer multi-tier the three core areas of processing process of simulation, testing and the risks associated with adopting an by ceding significant amount of access plans, which users could Operators are Opening Networks to power, storage capacity and battery porting applications for the developer open strategy. Operators need to control across the value chain to choose from depending on the External Devices and Application life have been increasing rapidly. A community. understand this new context that they online players and third party applications they wish to consume. While most operators are coming up case in point is the Apple iPhone are operating in and redefine their developers. The strategy does not For example, subscribers who wish to with flat-rate data plans to encourage available with storage of 16GB, a Going forward, advances in devices, role. Capgemini has identified three entail any costs to acquire or develop use mobile Internet only for browsing active uptake of mobile data services, healthy battery life and a powerful enabled by open architectures and possible positioning choices for content, or to create and manage the and other basic Web applications can a few are realizing the customer 400 MHz processor that runs an public software development kits, are mobile operators (see Figure 9). aggregation platform. However, this choose a low-priced basic data plan demand for greater access to their advanced operating system (OS-X) on likely to ensure a significantly strategy also leaves holes in its which blocks VoIP and bandwidth- favorite applications and online the phone.17 Device manufacturers integrated user experience. Alongside, Possible Options for Mobile monetization potential by neglecting intensive applications such as video content, and responding to the same. are recognizing the shift to open declining costs of electronic hardware Operators For instance, in the US, operators With these positioning choices, areas such as content revenues. Open streaming; while users who wish to such as Verizon Wireless and AT&T operators have three associated access can also pose a threat of access a wide range of advanced have announced that they will be Figure 8: Key Features of Open Access Initiatives of Verizon and AT&T options (see Figure 10). cannibalization of existing revenue services such as VoIP, over-the-top opening their networks to external streams of operators, especially in video and file sharing could buy a devices and applications (see Figure Open Network Access voice and messaging by third-party premium data subscription. 8). While this may imply erosion in The “Open Access” option is the most “over-the-top” communication control of the consumer experience, straight-forward of the three options, services. operators are leaning towards opening and is analogous to the role of an their networks in search of a first- Internet service provider in the fixed mover advantage. By opening their space where operators offer networks, operators are addressing application-agnostic network access THE ADVENT OF OPEN competitive and regulatory pressure as that supports all kinds of applications well as customer concerns. and end-user devices. The operator extends its access network to all third- ECOSYSTEMS will result in a In the coming years, consumer party “over-the-top” services and plays “ demand towards a seamless Internet no role in provisioning or billing of definite erosion of operator experience is only likely to grow external applications. The operator stronger. It is also likely that more Source: Capgemini TME Strategy Lab Analysis. Company Websites also stays away from participating in control over the customer operators will actively consider a shift content and application development or creating aggregation platforms for experience 15 Peer 2 Peer, a system of direct connectivity between two consumer devices. 16 Forrester, “Mobile Internet Pricing Strategies Mature”, July 2007. 17 Tech Radar, “Apple iPhone-Our Review”, November 2007. 10 11 ” Figure 10: Comparison of Operator Benefits from the Various Strategic Options Benefits of Adopting the Platform Operators should create platforms Strategy around their unique assets, and add Operators need to clearly Of the three strategic positioning value to the user experience by choices that operators have before enabling and delivering external understand THE RISKS AND them, the platform strategy offers content and applications. “ maximum revenue uplift, without REWARDS OF OPEN ECOSYSTEMS ceding significant strategic control For most telcos, this will require over the value chain. While there are consolidation of their core data assets investments involved in embracing related to subscribers such as AND ADAPT ACCORDINGLY this platform fully, these costs are demographics, authentication, credit imperative to position operators information, usage patterns and social strongly in the value chain as “service networks. Such information is often enablers” for the mobile platform, in spread across disparate systems Towards this, operators should plan a the external developer community. contrast to reducing them to simple acquired over time, and is often clear roadmap for deployment of Some operators such as Orange have utility providers. available in non-standard or technologies such as IP Multimedia already launched initiatives” such as proprietary formats that cannot be Subsystem (IMS), which abstracts the the Orange Partner Program to attract Our estimates indicate that an directly used by applications. application layer from networks, and third-party developers. Source: Capgemini TME Strategy Lab Analysis operator in the UK with a market Operators will need to make open creates open interfaces that allow core share of 20% could look at a net APIs available to the external information to be made available to In conclusion, the mobile industry is At the same time, the operator also messaging, user authentication, revenue uplift of 12% by 2011, by developer community for location, applications in a standardized manner. bound to see a major disruption with partners with specific online players location and presence. Operators can carefully adopting the platform presence, authentication and other Operators will also need to take steps the unshackling of operator controls in introducing services that come with also provide billing and hosting strategy after considering any possible data repositories (see Figure 12). to promote their platforms amongst over the development and delivery of a guaranteed level of Quality of platforms for third-party applications erosion of core revenues by over-the- applications. These changes threaten to Service (QoS), and are much more and content. In doing so, operators top services (see Figure 11). A bypass those that choose to ignore them integrated with operator offerings. not only mitigate the risks of their significant portion of these revenues and reward those that welcome them. Operators then take a proactive role in “on-deck only” strategy, but also open Figure 11: Potential Revenues in 2011 for an Operator Adopting the Platform could come from data traffic uplift Operators and other stakeholders alike managing such services by taking care themselves up to gaining richer Strategy (Assuming an Index of 100 basis points) driven by a rich suite of third-party would do well to adapt themselves to of issues such as handset integration, customer insights. Operators also applications available on the operator’s these changes in order to ensure that billing and customer service, and have the option of working with open platform. In addition to access they stay relevant in the new mobile sharing any consequent revenue handset manufacturers in customizing fees, operators can accrue a 5% world order. Operators are best uplifts with the online player. their devices to ensure easier access to revenue uplift from billing of third- positioned to play the role of enablers, content and applications from the party applications and by providing by unlocking their network and data This strategy offers significantly more operator as well as its partners. open APIs for authentication and assets to third-parties, and in the options for revenue uplift than what location information for end-users. process, creating value in terms of “Open Access” offers. By tying up This strategy not only offers scope for additional revenues. Operators will with online players in building significant revenue uplift, but also However, these revenue streams are need to plan a clear roadmap in advanced services, operators ensure retains operator control over a only indicators of the possible value transforming themselves from delivery that the extent of control over the significant part of the consumer operators could unlock, as they can also players to platform providers. customer experience that they cede is service delivery experience. By leverage the vast authentication and matched by a corresponding rise in working in close association with location information to tap the high- Jerome Buvat is the Global Head of access and content revenues. content and application providers in growth mobile advertising opportunity, the TME Strategy Lab. He has more Moreover, operators also reduce the identifying and monetizing newer both through direct advertising as well than ten years’ of experience in risk of possible cannibalization that revenue streams, operators stay at the as third-party partnerships. strategy consulting in the telecom and some services could have on their forefront of innovation in the mobile media sectors. He is based in London. core revenues. ecosystem. However, operators will Recommendations for Telcos need to invest significant resources in We believe that leading mobile telcos Source: Capgemini TME Strategy Lab Analysis Tushar Rao is a manager in the TME Telco as a Platform building capabilities around platforms in Europe should open their networks Strategy Lab. His recent work focused The “Telco Platform” strategy presents and developer communities. to third-party applications and Figure 12: Key Initiatives towards Developing a Telco Platform on analyzing disruptive technologies in a significant shift in the way current content, and allow a wide range of the broadcasting and mobile segments. networks operate. Operators adopt a external devices on their networks. Prior to joining the Lab, Tushar worked “compete-in-some, collaborate-in- with a leading converged operator in some” model with regards to India, where he was responsible for applications and content. Operators Operators should position developing managed data services for partner with third-party application enterprises. He is based in Mumbai. developers and content players, whilst also offering their own portals to themselves as platforms Varun Saxena is a consultant in the consumers. Third party applications TME Strategy Lab. His recent work are granted full access to network “ THAT ENABLE DELIVERY OF focused on advising a leading features, while being kept under the converged operator in Europe on its ambit of a fair usage policy. Operators APPLICATIONS AND CONTENT online advertising business. He is offer APIs to help third party based in Mumbai. developers build services around core network features such as voice, WITHOUT DISCRIMINATION Source: Capgemini TME Strategy Lab Analysis 12 ” 13 Internet TV Players ARE INCREASINGLY OFFERING “MAINSTREAM CONTENT Evaluating the Disruptive Potential of Internet TV in Western Europe by Jerome Buvat, Tushar Rao and Alex Kitson Figure 1: Select Launches of Internet TV Services, Worldwide, 2005-2007 ”

Abstract: Internet TV offerings are becoming increasingly comprehensive. Initial uptake suggests consumer receptivity to these services is growing. While some players are striving to understand how best to tap into opportunities afforded by Internet TV, others are grappling with how to mitigate the perceived threat to their own services. Capgemini’s TME Strategy Lab believes that content producers—through a collaborative offering—can offer a compelling Internet TV service directly on consumers’ TV sets. We believe that there is a business case for providing Internet TV services, if key service delivery issues surrounding access bandwidth limitations, delivery architectures and limited availability of devices can be overcome in the medium-term. Indeed, we estimated that an Internet TV offering launched jointly by content producers in the UK, for example, could garner a customer base of around one and a half million households, commanding annual revenues of over € 200 million and delivering a profit margin of up to 17% by its fifth year of operation. Content producers, established Pay TV operators and IPTV players must work quickly to map out clear strategies to accrue maximum benefits from Internet TV. We recommend that content producers work together to ultimately offer set- top-box based Internet TV services. Established Pay TV operators should use Internet TV to both capture a share of Free TV markets and complement their own services, while telcos should work to develop wholesale propositions around managed video delivery services and leverage Internet TV to extend their IPTV reach.

The Internet is fast-emerging as a new In this paper, Capgemini’s TME Comcast and Sky who own premium platform for consuming TV content. Strategy Lab assesses the likely impact valued content have also started In addition to the plethora of user- of Internet TV on the Pay TV and offering Internet TV services (see generated content already available, IPTV market. We first discuss the key Figure 1). Note: IPTV is the delivery of video content using closed network infrastructure while Internet TV is the delivery of video content over an open Internet Source: TME Strategy Lab Analysis; Company Websites. recent initiatives by content producers barriers impeding consumer uptake of Note: (a) Due to the fundamentally different nature of the content involved, User-Generated Content (UGC) has not been addressed in this study and online players have enabled Internet TV services, and assess when Not only are an increasing number of consumers to view full-length, they are likely to be overcome. Next, Internet TV services being launched, professionally produced TV content we question the validity of the the content now available online is A number of content producers have sets rather than PC screens. The Apple Internet TV. In the UK, between 2006 delivered over the open Internet to business case for content producers also of greater appeal to viewers. Most also begun collaborating to launch TV device, for example, links the PC and 2007, the number of Internet their PCs via their web browser or offering Internet TV services, and Internet TV specialists began by only shared online platforms to expand the and TV, allowing users to watch users watching TV online increased by through dedicated applications such finish by outlining a set of pragmatic offering niche content; however, they reach of their premium TV content. downloaded content on their TV sets, over 50% to nearly 3 million users as the BBC’s iPlayer. In addition, recommendations for content are increasingly offering mainstream Hulu, for example, is an online portal while the Babel TV set-top-box and (see Figure 2). During the same players such as Apple are enabling producers, established Pay TV content on their online TV platforms. jointly developed by NBC Universal selected Sony Bravia TVs enable direct period, the number of online TV customers to view Internet-delivered operators and telcos. AOL Video, for example, struck and NewsCorp, offering consumers streaming of content from the Internet streams1 watched grew even more TV on their TV sets through set-top content distribution deals with Disney free premium ad-supported content to TV sets. strongly by 75%, suggesting viewers boxes and devices which stream and Players are Launching Increasingly and ABC to stream full-length from content producers such as are also becoming heavy users. download TV content. Comprehensive Internet TV premium shows the day after their National Geographic, Sony Pictures Initial Consumer Uptake of Internet Similarly, in the US, 43% of viewers Services telecast on broadcast TV. Content and MGM. TV Services has been Encouraging reported to have watched TV online in While uptake of Internet TV to date Internet TV has seen significant producers who initially offered only The increasing array of Internet TV 2007, up from 25% in 20062. has been predominately limited to activity from both online players as short video clips have also begun Recent developments in set-top services along with the growing range early adopters, content producers well as content producers. In recent offering full-length premium content. devices are also enabling the of premium content is driving both Some players in particular have seen commanding reach and offering years, a host of “Internet TV In 2007, for example, CBS began consumption of Internet video on TV significant uptake and usage of strong uptake of their Internet TV valued premium content have the specialists” such as Babelgum, Joost offering full-length episodes from potential to disrupt the established Pay and Vuze have launched platforms premium shows such as Desperate TV market by collaborating together to offering niche and mainstream TV Housewives and the Apprentice on its jointly offer Internet TV services direct content on the Internet. In addition, Internet TV service. to consumers’ TV sets. content producers such as Disney, 1 Note: An online TV stream is a continuous flow of multimedia content delivered in real-time to the end user. It is not permanently stored on the PC. 2 Source: FierceIPTV, ”US Internet TV usage surges”, Feb 2008.

14 15 services. Online players such as AOL We expect bandwidth-related Figure 2: Uptake and Adoption of Internet TV Services, UK, 2006-2007 Figure 3: Broadband Average Actual Bandwidth Speeds (Mbps), Western Europe, constraints to be resolved as speeds Video, for example, which launched 2007 in mid-2006 and offers content from available to the end-user evolve and NBC, Fox and ABC receives around advanced compression standards 19 million visitors per month. reduce bandwidth requirements. Similarly, Vuze which launched in Operators in Europe are upgrading early 2007 and has content access networks to provide speeds partnerships with the likes of National upwards of 24 Mbps to a large Geographic and the BBC has an percentage of households. Operators installed base of over 10 million users3 in France and Belgium are rolling out for its software application. Certain fiber to the node (FTTN), while in the content producers have also seen UK, BT has commenced deployment notable successes. Disney registered of fiber to the home (FTTH) in select 200 million streams in August 2007 geographies.7 As a result of such from its video service which was re- initiatives, the average maximum DSL launched in early 2007 with enhanced download speed in Western Europe is content. expected to grow to 15 Mbps by 2010, and 30 Mbps by 20128. The Disruptive Potential of Internet TV In mature broadband markets such as Source: Capgemini TME Strategy Lab Analysis. Continental Research “Internet & Convergence Report”, Autumn 2007; Screen While there have been a number of Digest, “Online TV: prospects for the UK market”, October 2007 the UK, for example, initial telco promising recent developments in the resistance to Internet TV is likely to be Internet TV services space as well as resolved in the medium-term. In encouraging initial uptake from early- addition to growing access speeds, it is Source: Capgemini TME Strategy Lab analysis; Zdnet, “Watchdog condemns broadband-speed claims”, August 2007; BBC, “World Broadband Speeds”, December 2007; BBC, “Government cracks broadband whip”, December 2007. adopters, Internet TV services will offering Internet TV directly to average actual broadband speeds fall likely that government regulation will Note (a): Standard definition resolution video delivered over Internet and viewed on a TV set only become mainstream once consumers’ TV sets. significantly short of the 3 Mbps prevent telcos and ISPs from blocking companies are able to deliver high requirement for Internet TV delivered video traffic. Further, content quality services to viewers’ TV sets as Only once players have addressed on a TV set (see Figure 3). Moreover, producers will be able to exert opposed to the predominately PC- these key questions will Internet TV contention ratios in some geographies considerable pressure against throttling based services available today. In a be capable of increasing its such as the UK are as high as 50:1, of their Internet TV services, given that penetration and impact video on survey in the US, respondents resulting in a wide gap between actual telcos must depend on them for Figure 4: Comparison of Delivery Architectures for Various Content Types overwhelmingly favored TV sets for demand revenues of the established available broadband access speeds and content for their IPTV offerings. watching Internet TV. Over 80% of Pay TV and IPTV market. In the rest the maximum possible speeds. Over respondents aged above 35 years of this section, we assess when these 60% of broadband users, for example, Content Delivery Network (CDN) is prefer to watch Internet TV on a TV key service delivery issues are likely to have experienced speeds less than half Emerging as the Architecture of set, while 60% aged between 18-24 be overcome, and as an illustration, those advertised6. Choice for Delivering Video Content years prefer a TV set for watching quantify the potential uptake and Internet TV providers will have to Internet TV4. revenue evolution of an Internet TV Moreover, telcos and ISPs are choose an optimal distribution offering launched jointly by content becoming increasingly concerned architecture for delivering video over However, Internet TV providers face producers in the UK over a five year about capacity requirements of high- the open Internet. Hybrid P2P offers several challenges in the delivery of period. bandwidth applications such as players with a low cost architecture for TV services to the living room. These Internet TV. Companies such as streaming content; however, it can include access bandwidth constraints, Service Delivery Challenges are Comcast in the US are already maintain high quality of services only challenges around the suitability of Expected to be Resolved in Medium implementing “traffic-shaping” for an extremely high user base and delivery architectures, as well as issues Term measures to prioritize other traffic popular content. Content Delivery around the basic feature set of Sufficient Access Bandwidth is over peer-to-peer video, while Network9, on the other hand, is Internet TV devices. In addition to Expected to Become Available numerous other companies are emerging as the most suitable choice, as these service delivery challenges, After taking contention ratios5 into imposing fair usage limits on it provides the desired quality of service content producers wishing to offer account, access speeds currently customers, thereby discouraging large for both streaming video and on- Internet TV services also need to available in Western Europe are barely video downloads. As a result, Internet demand services (see Figure 4). Internet examine the business economics to sufficient to deliver standard broadcast- TV companies may find it difficult to TV players such as Jump TV and Source: Capgemini TME Strategy Lab analysis. iDATE, “IP Video Distribution”, June 2007 ensure there is a compelling case for quality TV content on a TV set, let ensure access bandwidth for YouTube have built CDN architectures; alone HDTV. In Italy, for example, broadcast-quality TV services. however, despite its benefits, even CDN falls short of offering linear TV services over the Internet.

3 Source: Business Wire, “Vuze Passes an Installed Base Milestone of 10 Million Viewers and Opens Its Internet Publishing Platform to Networks, Studios, and Content Creators “, October 7 The Guardian, “BT bets its future on broadband 20 times faster than now”, January 2008. 2007. 8 Deutsche Bank,” The Digital Content Wave”, January 2007. 4 Source: eMarketer, “Online Video: Making content pay”, August 2007. 9 Note: Content Delivery Network (CDN) is a video distribution technology which localises content caching with servers deployed at locations closer to the user. Users receive streams from 5 Note: Contention ratio describes the maximum number of users sharing the bandwidth of a broadband connection between the local exchange and broadband provider. With a 50:1 the closest caching server and route optimization techniques are used to ensure quality of service. contention ratio, one dedicated access line could be shared by up to 50 users. 6 Source: Zdnet, ”Watchdog condemns broadband-speed claims“, August 2007; BBC, “World Broadband Speeds”, December 2007; BBC, ”Government cracks broadband whip”, December 2007. 16 17 Content Delivery Network is AS INTERNET TV SET-TOP BOXES ARE RELATIVELY emerging“ as the preferred delivery EXPENSIVE,“ a rental model will lower technology, AS IT PROVIDES THE DESIRED QUALITY OF the entry barriers for consumers SERVICE FOR STREAMING VIDEO who do not wish to pay upfront AND ON-DEMAND SERVICES

Figure 6: Positioning of Internet TV

Internet TV Devices are Expected to 2008 itself, LG is expected to jointly genre allowing easier search and rental model will lower entry barriers for consumers” who are not willing to Become Mainstream in the Medium launch Internet-enabled TV sets with content selection. Also, search Term Netflix; Babel TV plans to launch a algorithms based” on analyzing video invest around € 150 to € 200 upfront Compared with other Pay TV devices, hybrid set-top box combining digital tags or “metadata” are being in procuring the STB. The smooth Internet TV set-top boxes are at an terrestrial TV, PVR functionality, and developed, which are more suited to functioning of Internet TV will of early stage of development and offer Internet TV; and British Telecom will searching through large volumes of course depend on the mitigation of a only basic features. For example, set- begin streaming live content including content. number of the key service delivery top boxes from Internet TV players football matches to Microsoft Xbox challenges already discussed10. such as Vudu do not have features console users over broadband. Content Producers have a Business such as surround sound or remote Case to Offer Internet TV Profitably Consumer Uptake is Likely to Grow recording which are standard on other Similarly, advances are now being In order to evaluate the disruptive Strongly Although Penetration will Pay TV services such as Sky or Verizon made in content search technologies potential of content producers jointly Remain Low Fios. Moreover, most devices for suitable for Internet TV. For example, offering an Internet TV service to TV Content producers launching such an Internet TV do not have a mechanism recently introduced “Auto Hot Key” sets, Capgemini’s TME Strategy Lab offering in the UK are likely to to consume broadcast TV and cannot EPGs automatically classify content by has quantified the likely business case increase Internet TV penetration from be used as an Internet or WiFi a low base of 1% of all TV households Customer Premise Equipment (CPE). in Year 1 to 5% in Year 5, representing over 1.3 million Figure 5: Forecasted Penetration and Subscriber Base of STB-Based Joint Content households (see Figure 5). As delivery Also, many Internet TV user interfaces Producer Internet TV Offering, UK offer a poor navigation and search issues gradually become resolved and user experience as present Electronic on-demand premium content Program Guides (EPGs) are not becomes available at lower costs, we capable of organizing large volumes of expect uptake to increase rapidly, with content in a user-friendly format. For annual subscriber growth rates of up example, while EPGs on cable and to 55% between Year 1 and Year 5. Source: Capgemini TME Strategy Lab analysis satellite platforms are designed for fewer than 150 channels, Joost and Existing free-TV households will form other Internet TV players typically the primary target segment for offer over 300 channels categorized by Internet TV services, as it will allow genre. Large Video on Demand (VoD) free TV subscribers to upgrade to content libraries also require advanced for such an initiative in the UK DTT will allow content providers to on-demand content offerings at a navigation and search methods. In the market, forecasting consumer uptake, deliver linear TV as part of the overall minimal incremental cost (see Figure US, Comcast’s VoD library comprises revenues and costs over a five year Internet TV package, while 6). Free TV households will be able to over 5,000 programs, rendering period. partnership with external content watch premium content at a fraction traditional navigation and search tools producers will ensure availability of a of Pay TV subscription fees, since ad ineffectual. The most likely scenario would be that wide range of content on the platform. revenues will subsidize the cost of the content producer consortium The Internet TV offering can offering. A small proportion of Pay TV However, advances are being made in would launch a service utilizing a encapsulate free streamed catch-up households can take up the service as set-top box (STB) and EPG hybrid set-top box in order to offer content in addition to pay-per-view well, but mainly for the purpose of functionality. With an increasing customers a bundle of linear broadcast on-demand content such as movies upgrading secondary TV sets rather number of Internet-enabled devices “free TV” channels through a Digital and premium TV show episodes, than replacing their existing Pay TV becoming available, we expect feature- Terrestrial TV tuner in addition to which are downloaded onto the hard subscriptions which have wider Internet TV and PVR capabilities. drive of the set-top box. Since Internet premium content offerings at a rich set-top boxes to become Source: Capgemini TME Strategy Lab analysis mainstream by 2011. For example, in Offering free-to-air channels through TV STBs are relatively expensive, a proportionately higher monthly fee.

10 For the purpose of our business case analysis we have assumed that media players offer the service over the open Internet and that access bandwidths are sufficient for delivering high- quality video content to TV sets. We have assumed the media players uses a CDN-based network architecture which delivers streaming and on-demand video download services, and that the media players will make use of a managed CDN service to eliminate upfront investments in delivery infrastructure.

18 19 Internet TV Players can Maintain a Figure 7: Monthly ARPU Evolution (€/month) for STB-Based Joint Content Producer could break-even in the fourth year, Internet TV is Likely to Disrupt Pay In summary, at the current pace of Profit Margin of about 17% Internet TV Offering, UK 2008 - 2012 delivering a profit margin of 15-18%, TV and IPTV On-Demand Revenues development, key Internet TV service We expect the Internet TV service and generating revenues of over In the medium-term, we believe delivery challenges will be largely launched jointly by content producers €200m by year 5 (see Figure 8). Internet TV will heavily impact Pay overcome in the next three years. The to generate monthly average revenues TV and IPTV on-demand revenues. In reduction of these service delivery per household of around € 14 on TV While set-top box costs are likely to the case of established Pay TV issues will enable the growth of in Year 1, comprising an STB rental account for nearly three quarters of all operators, consumers are likely to be Internet TV services, and although we charge of € 5, and € 5 consumer costs in the first year due to high attracted by the relatively cheaper, ad- do not expect the service to rival spend on VoD services in addition to current prices of Internet-enabled subsidized on-demand offerings mainstream Pay TV platforms, we do € 4 from advertising revenues. STBs, it is likely these costs will available through Internet TV services. expect strong subscriber and revenue recede by as much as half over the IPTV players’ prospects are also likely growth over the next five years. As a As video advertising matures, content next three to four years. As the service to be under threat, especially given result, in three to four years, Internet companies can generate advertising would leverage an outsourced video that many telcos in Europe are TV is likely to have a strong effect on revenues by inserting two 30 second delivery service from a CDN provider, positioning VoD as the key selling existing on-demand revenues, and also advertisements, for example, one in CAPEX investments other than STBs point of their IPTV services and content producer and broadcaster the beginning and another in the are also likely to be minimal. relying on it to make IPTV offerings advertising revenues to a lesser degree. middle of the video. An average profitable. household consuming about 20 TV OPEX on the other hand is likely to Recommendations episodes or 30-minute videos per grow substantially over time as user To a lesser degree, we also believe that Amidst rapidly developing services month can generate up to € 4 per uptake grows. In order to encourage as video ad targeting capabilities and encouraging initial consumer month per household in advertising greater usage and uptake, content mature, Internet TV is likely to uptake, many players are considering revenues at current CPM levels. producers will have to offer an accelerate the ongoing migration of how best to tap into the opportunities Although usage will grow rapidly, this increasingly wide variety of content to ad-spend from traditional TV to Source: Capgemini TME Strategy Lab analysis afforded by Internet TV, while others figure might grow only by € 1 as consumers. We expect companies will online channels. However, while are grappling with how to mitigate the CPMs are expected to fall rapidly with need to add more and more content on-demand and advertising revenues perceived threat to their services. In increases in ad-inventories. from external sources, until almost will be impacted, we do not believe the rest of this section, we outline half of all content consumed is non- that the core Pay TV subscription some key recommendations for Content companies can also look at proprietary by Year 5, driving up revenues will be impacted to any content producers, established Pay TV Figure 8: Break-Even Analysis for STB-Based Joint Content Producer Internet TV garnering a share of the current content acquisition costs from around significant degree. Internet TV offers a Offering, UK, in € millions operators, and also telcos. average household spend of around a quarter to nearly half of all OPEX. fundamentally different proposition to €11 per month per household on Despite these growing content Pay TV, and in the medium-term, is videos, whether DVD purchase, rental acquisition costs, steadily falling CDN unlikely to displace consumers who or pay-per-view video. As the content prices, due to growing are willing to pay a premium company adds an extensive catalogue competition,are likely to help mitigate subscription fee in order to avail a of on-demand content to the Internet the impact and achieve earlier wide range of linear and on-demand TV platform, it can expect to make up profitability. content. to € 6 per household through paid on-demand content (see Figure 7).

Finally, it will be important for content companies to offer the STB on a rental model to lower the entry cost of the Free TV households will service for consumers who may find upfront cost of € 150 to € 200 for STBs prohibitive. We have modeled our case form the primary target considering the price point at the lower end that a player could possibly charge segment for Internet TV services for the set-top-box, at around € 5 per “ month for a 24 month contract. Given that a significant quantum of CAPEX is AS IT WILL ALLOW UPGRADE TO incurred on STB-subsidies, upfront sale of the STB to a section of users can only ON-DEMAND CONTENT OFFERINGS AT A improve the business case in favour of the content company. Source: Capgemini TME Strategy Lab analysis MINIMAL INCREMENTAL COST We believe Internet TV is a viable proposition for content producers. Our analysis shows that the service 20 21 ” Cable and satellite players

Content Producers Should Initially, because of low customer not covered by their existing offerings can leverage Internet TV to expand Collaborate to Offer Compelling awareness and familiarity for this (see Figure 10). Offering web-based Internet TV Services service, players will have to themselves TV and subsequently integrating “their reach, ESPECIALLY IN GEOGRAPHIES WITH We recommend content producers provision STBs dedicated for the Internet TV capabilities into their should consider collaborating with Internet TV services. As customer STBs, will allow satellite operators to LOW PAY TV PENETRATION each other to provide joint Internet TV acceptance for the service increases, in offer premium on-demand services, services, offering customers a rich the longer-term, players can envisage a catch-up TV and video downloads. variety of popular content across genres. fully open Internet TV offering where users are free to choose their own Cable and satellite players can for delivery of multimedia content to interest of viewers, telcos can display operators the opportunity to widen Leading content producers should CPE, whether a STB, Internet-enabled leverage Internet TV to expand their consumers over the Internet. Telcos ads relevant to users’ interest area and their reach by tapping markets pioneer the creation of an Internet TV TV set or gaming console. reach in geographies with low Pay TV platform, provide valued content and penetration. Countries with high Free should also consider propositions realize higher CPMs. previously left unaddressed. The drive STB development in Crucial to their success will be content TV penetration, such as Italy, where around broadband access. Qwest in ” impact of Internet TV is likely to be In conclusion, Internet TV offerings collaboration with partners. Smaller producers’ abilities to also forge nearly three quarters of households the US plans to sell higher capacity most prominent on telcos as their are developing rapidly and seeing players should leverage the platform successful alliances with other value take Free TV services, and Spain, broadband with speeds of up to 38 precious on-demand revenue streams encouraging uptake. As service created by leading media players and chain players to gain capabilities where France and Austria, where free-TV Mbps at a premium to consumers become affected, especially as many delivery issues gradually become add value by providing popular they lack experience. In particular, penetration is over 60%12, offer large wanting to access Internet-based TV are positioning on-demand as the resolved, we expect Internet TV on the content. The consortium should content producers will need to partner addressable markets for Internet TV and HDTV services. main selling point of their IPTV TV set to become widely available in partner with a Free TV player to to gain advertising expertise in offerings. By offering low-cost/high- services; however, we believe that Moreover, with IPTV likely to have the next two to three years. Content provide the DTT or free satellite embedding ads in video content and value Internet TV propositions, Pay telcos can turn Internet TV to their limited uptake in most geographies, producers, Pay TV operators and platform for delivering linear TV selling ad spots. In order to broaden the TV operators can target expansive advantage by not being defensive and telcos could view Internet TV as a telcos should work to rapidly chalk services (see Figure 9). appeal of Internet TV, content customer groups who have an taking advantage of emerging means to reach an extended consumer out clear Internet TV strategies to producers will also need to partner with appetite for premium content and yet opportunities. base. Telcos should consider complement their existing offerings Offering Internet TV services will STB manufacturers and leverage their do not want a significant monthly partnering with free-view channels to and generate additional revenue enable content producers to foster expertise to create feature-rich and low spend. Jerome Buvat is the Global Head of the offer free content and position streams. Content producers should new revenue streams in the form of cost devices. TME Strategy Lab. He has more than ten advertising, on-demand and Telcos Should Develop Wholesale Internet TV services as a basic/entry collaborate to launch compelling years’ of experience in strategy consulting subscription revenues. No longer Pay TV Operators Should Use and Retail Propositions Around level service to target consumers who Internet TV services, affording in the telecom and media sectors. He is solely dependent upon broadcasters to Internet TV to Complement Their Internet TV are not ready to pay a premium for opportunities to reach the customer based in London. telecast their shows, content Services and Extend Reach Telcos should view Internet TV as an fully-fledged IPTV offerings. By directly and tap into the online producers will be able to use on- We recommend cable and satellite opportunity to develop propositions offering IPTV as a premium service, advertising market. While Pay TV Tushar Rao is a manager in the TME demand services to monetize their players to consider leveraging Internet around managed video delivery whilst exploiting targeted advertising operator on-demand revenues are Strategy Lab. His recent work focused on catalog further by serving niche TV to complement their existing services. AT&T, for example, is and interactive capability of the likely to be disrupted by Internet TV, analyzing disruptive technologies in the markets more comprehensively and services and address market segments developing a managed CDN offering internet, telcos can build new revenue their subscription revenues are likely broadcasting and mobile segments. Prior extending the shelf-life of content; as streams and maximize overall to remain unaffected in the short-term. to joining the Lab, Tushar worked with a an example, programs outside the top revenues. By analyzing the genre Internet TV will also afford Pay TV leading converged operator in India, fifty account for over 50% of all where he was responsible for developing 11 managed data services for enterprises. downloads on the BBC iPlayer. Figure 9: Potential Roles in a Content Producer Internet TV Consortium Figure 10: Recommended Strategy for Pay TV Operators Direct reach to consumer homes He is based in Mumbai. through the Internet TV platform will Alex Kitson is a senior consultant in allow content producers to assert Capgemini’s Telecom, Media & greater control over the value chain as Entertainment practice. He has six well as explore the viewing behaviors years’ consulting experience in the of consumers, potentially channeling telecom and media industry, and has this insight into the creation of new authored studies on topics including content. mobile advertising, convergence and We believe content producers should emerging consumer behaviors. He is chart a clear roadmap to offer STB- based in London. based Internet TV services, beginning with online video services in the immediate-term where users can stream videos through their website, in order to tap the online advertising opportunity. In the short- to medium- term, players could then offer Internet

TV to the living room through a STB. Source: Capgemini TME Strategy Lab analysis Source: Capgemini TME Strategy Lab analysis

11 Guardian, “BBC iPlayer bursts through user target”, January 2008. 12 Source: Ofcom, “International Communications Market 2007”, December 2007. 22 23 In the UK, ONLINE ADVERTISING CURRENTLY REPRESENTS A MARKET AS LARGE“ AS BROADBAND AND GROWING Identifying Opportunities for Telcos in Online Advertising RAPIDLY A Value Chain Analysis by Tushar Rao, Kaushal Vaidya and Manik Seth

Abstract: Increasing Internet penetration and time spent online offer advertisers a growing audience for marketing messages. As a result, online decline in their core revenues by evaluates key opportunities to advertising spend has grown rapidly across the world. This has attracted the interest of a variety of players, including telcos. Although still fringe diversifying into new areas. In the UK,”improve their market presence. players in the online advertising space, we believe telcos can enhance their presence by exploring a number of opportunities. Capgemini online advertising currently represents Subsequently, this paper offers recommends that telcos decide their strategy based on their current breadth of services and online ad revenues. Telcos with limited presence in a market as large as broadband and is recommendations for telcos to online advertising, i.e. the “slow starters,” should consider leveraging their capabilities in procuring local content to offer portal services and growing rapidly (see Figure 2). maximize revenues from online utilize their existing directory assets to launch online directory services. Other areas of online advertising can be explored subsequently. Certain Although telcos currently do not advertising services. dominate the online ad market, the telcos generate significant online ad revenues from a limited range of services such as online directory services and content portals. For such dynamic nature of the industry allows Telcos’ Current Status in Online “specialist” players, it is important to diversify into other areas. For instance, they can offer social networking services to their existing residential new players with the right offerings to Advertising and business clients. They can also utilize the intelligence available to them about consumer behavior, demographics and location, to offer gain market share quickly. New A number of telcos now offer online targeted ad network and ad agency services. Telcos with a wide range of online ad offerings but low corresponding revenues, i.e. the “strivers,” entrants, such as MySpace, have often advertising services. In this section, should focus on improving monetization of their existing operations. This can be achieved through better differentiation of their online ad offerings toppled online leaders to become one we provide a brief overview of current by effectively leveraging their brands, existing subscriber bases and consumer intelligence. Finally, telcos who have emerged as online advertising of the world’s most visited websites. telco activity in the online advertising leaders should strive to remove dependencies on partners to command a higher share of advertiser spend. space and also classify them into four In this study, Capgemini’s TME different categories based on their Strategy Lab outlines telcos’ current breadth of services and revenues from status in online advertising and online ads.

The online advertising market has Figure 1: Worldwide Advertising Spend by Media, € billions, 2002-2007 been growing rapidly across the world. Between 2002 and 2007, worldwide online advertising revenues Figure 2: Size, Profitability and Growth of Selected Industries, %, UK, 2007 grew by a CAGR of 30% to €26 billion, compared to only 6% for overall advertising revenues1 (see Figure 1).

Growth in online advertising has attracted the interest of a variety of players. News Corporation, for instance, has recently acquired a majority share in Utarget, a European advertising network specializing in rich formats2, while Google made a similar move to expand into display advertising by acquiring DoubleClick3.

Online advertising also represents a significant opportunity for telcos looking to mitigate the threat of Source: Capgemini TME Strategy Lab analysis. Zenith Optimedia, “Global Advertising Figures”, December 2007. Zenith Optimedia, “Zenith Optimedia upgrades global ad forecasts again”, October 2004 Source: Capgemini TME Strategy Lab analysis

1 Zenith Optimedia, “Global Advertising Figures”, December 2007. Zenith Optimedia, “Zenith Optimedia upgrades global ad forecasts again”, October 2004. 2 Company websites and press releases. 3 Company websites and press releases.

24 25 Figure 3: Extent of Presence in the Online Advertising Value Chain, Selected Telco Revenues from Online Ads Telcos, March 2008a Some telcos have been successful in generating online advertising revenues. AT&T, for example, was able to generate €438 million in online advertising revenues in 2007 through its local search engine YellowPages.com, and by offering content on its portals7. Verizon’s TELCOS HAD ONLY affiliate company, Idearc grew its online classifieds and local search AROUND 4% MARKET SHARE in revenues by a CAGR of 20% between € “ 2005 and 2007 to reach 208 the US online advertising million8. France Telecom also generated €150 million in 2007, market in 2007 primarily through portal ads9.

Despite these initiatives, telcos’ share of the online advertising market

Source: Capgemini TME Strategy Lab analysis. Company websites remains small. In the US, for instance, Categories of Telcos in the Online few key offerings to generate high Note: (a) 1. Search Marketing entails helping advertisers with keywords auctions. 2. Creative campaigns involve planning advertising campaigns for advertisers. 3. “Own properties” refers to telcos who handle their own ad inventory on their telcos are estimated to have only 4% Advertising Market online ad revenues; for instance, 85% sites. 4. “Publisher affiliates” refers to telcos who handle their partners’ ad inventory as well. 5. Ad platform refers to telcos € 10 ” who have their own ad network platforms or have a partnership for the same. 6. Content portal refers to telcos who have of the 15.6 billion market in 2007 Based on their breadth of services and of AT&T’s online ad revenues come a content portal. 7. Local search & directory entail telcos having online local search and directory services. 8. Telcos who have social networking websites. (see Figure 4). online advertising revenues, telcos can solely from directory service be categorized into leaders, specialists, offerings11. Strivers such as France strivers or slow starters (see Figure 5). Telecom and BT. offer a wide breadth Telcos’ Presence along the Online Additionally, BT has launched portals Leaders, such as SK Telecom, offer a of ad services but have not been able Advertising Value Chain such as BT Tradespace, a business wide range of online advertising to monetize them optimally. Telcos’ presence in the online networking site, and BTPodshow, a services and generate significant advertising value chain ranges from user generated content portal, to online ad revenues, while specialists monetizing publishing assets to acting enhance its publishing assets6. such as Verizon and AT&T focus on a as marketing agencies and online advertising networks (see Figure 3). Figure 4: US Online Advertising Market Shares, %, 2007 Figure 5: Breadth of Services and Online Advertising Revenues for Select Telcos, 2007 South Korea’s SK Telecom, for example, recently ventured into advertising by increasing its shareholding in online marketing company AirCross to 100%4. Orange, in addition to its local content portals in France and the UK, launched its own ad network in 2007, offering premium online ad inventory across third-party sites as well as its own5.

BT recently launched BT WebClicks as an online search marketing agency targeted at SMEs, while its partnership with ad network Phorm will help it enter the ad networking space.

Source: Capgemini TME Strategy Lab analysis. Company websites Source: Capgemini TME Strategy Lab analysis. Company websites. eMarketer, “US advertising spending”, November Note: (a) BT revenues are estimated to be low due to its recent market entry. (b) SK Telecom revenues include those from 2007. Advertising Age, “Digital Marketing and Media Fact Pack”, April 2007. eMarketer, “Portal Marketing: The Big Four”, its ad agency Aircross (approximately €16.7 million) and social network Cyworld (estimated at around 10% of total March 2007 Cyworld revenues of approximately €146 million)

4 Company websites and press releases. 11 AT&T, “Analyst Conference - Advertising and Search”, 2007. 5 Company websites and press releases. 6 Company websites and press releases. 7 AT&T 2007 analyst conference “Advertising and Search”. 8 Company 2007 annual report. 19 Societe Generale “Online advertising: a growth market but need for telecoms operator to prove its mettle”, January 2008. 10 eMarketer “US advertising spending”, November 2007. 26 27 Social Networking Sites for Consumers and/or Businesses Many telcos have unique assets such Online social networking is a rapidly growing opportunity. Between 2006 as extensive consumer behavior, and 2007, worldwide online social networking ad spend grew by a demographic and location information, staggering 155% to € 876 million20. “ Telcos wishing to enter the social WHICH CAN BE LEVERAGED TO SERVE networking market will need to compete with existing consumer and TARGETED ADS business networks. While MySpace and Facebook dominate the landscape, there is still scope for telcos to address the niche and portal- Opportunities for Telcos in the relevant strengths and success stories, 53% of the display advertising based market, which in 2007 was Online Advertising Market where available. market, while media companies estimated to represent a significant Telcos possess several key strengths control 18%, and other websites 36% of US online social networking 21 that they can utilize to play a more”Local Content-Based Portal Services including smaller search engines, revenues . significant role in the online The market for display advertising on gaming, gambling and niche sites advertising market (see Figure 6). For portals is large and growing. Between form the remaining 29%13. Many telcos have existing example, telcos like AT&T and BT 2006 and 2007, US spending on relationships with businesses as well as consumers. These can be leveraged have unique assets such as extensive portal display ads grew by 16% to Telcos can utilize their knowledge of US, while the European market for services through affiliate Idearc Inc., to successfully offer targeted social behavioral, demographic and location €4.2 billion, while in Western Europe local markets to procure relevant local the same was €2.04 billion in 200723. and has 12.5 million unique visitors networking services. Although information about their consumers, it increased by 18% to €1.5 billion12. content to tap into the display per month26. consumer social networks might be which can be leveraged to serve advertising market. Orange and The market for online directory and more difficult to monetize, as effectively targeted ads. Each Although this market is sizable, it is T-Online for instance, were able to local search is keenly contested, with Targeted Ad Network Services consumers tend to be loyal to their opportunity can be evaluated based dominated by pure online players. In reach the top 10 websites in France offerings from global search players Online advertising networks store ads existing social networks, telcos can on market size, existing competition, the US, pure online players dominate and Germany, offering local content such as Google, regional search in databases and dynamically select target their SME clients as customers portals to drive traffic14. Telcos with players such as Baidu and Suchen.de, the ads to be placed on various for business networks that help strong brand names also have the and independent print directories. In websites depending on the relevance advertise them within their own Figure 6: Telco Strengths and Potential Offerings in the Online Advertising Space advantage of lending credibility to ads the US, for example, Telcos such as of content published on the site community. Large telcos also benefit on their portals, thereby enticing AT&T and Verizon have just around pages. This market has been growing from their strong brands, which lend advertisers. 14% of the market. steadily over the past few years; them credibility as social networking between 2004 and 2007, global ad hosts and ad publishers. Additionally, Telcos have large Still, telecom operators can enter the network revenues grew by a CAGR of customer bases that represent market as many of them already have 21% to €5.8 billion27. Some telcos have successfully potential portal traffic. AT&T’s portal existing directory assets that can be launched social networking sites and generates significant traffic from its leveraged upon. Additionally, they can Google, Yahoo, MSN and AOL attracted significant number of 11.5 million broadband and 67.5 generate revenues by convincing currently hold about 33% of the ad subscribers. BT Tradespace, a business million fixed-line subscribers15: the existing corporate clients to advertise network market28. However, Telcos networking site, has witnessed rapid portal received 27.9 million unique on their online directories. have the necessary attributes to tap uptake with around 10,000 visitors in the month of December into the online ad network market, subscribers in three months from its 200716. AT&T’s 2007 revenue from Many telcos have already started particularly the significant share launch in April 2007 and 39,000 advertising on its portals, excluding attracting significant traffic to their currently held by smaller networks. subscribers by end of 2007. its online directory, reached € 65.7 directory and local search sites. Firstly, telcos can utilize intelligence million17. T-Online and Orange were Currently, around a quarter of about consumer behavior, Online Classifieds and Local Search also able to create their own local bt.com’s traffic is generated through demographics and location to offer The local online advertising market is content portals, attracting 13.218 and BT Phonebook. Through targeted advertising. Additionally, also rapidly growing; for example, in 14.8 million19 unique visitors per Yellowpages.com, AT&T generated telcos with high-traffic portals and the US, it is estimated to have grown month respectively. revenues of €372.3 million in 200724, strong relationships with online by 26% to reach €6 billion in 200722. with 18.3 million unique visitors advertisers and publishers have direct Online directory and local search Source: Capgemini TME Strategy Lab Analysis accessing its site per month25. access to a pool of web inventory and services generated €2.1 billion in the Similarly, Verizon offers directory

12 Forrester “European Online Display Advertising Spend Will Double By 2012”, August 2007. Advertising age “Digital marketing and Media Fact Pack”, April 2007 20 eMarketer, “Social Network Marketing: Ad Spending and Usage”, December 2007. 13 Capgemini TME Strategy Lab analysis. Advertising Age, “Digital marketing and Media Fact Pack”, April 2007. 21 eMarketer, “Social Network Marketing: Ad Spending and Usage”, December 2007. 14 comScore, December 2007. 22 Note: 2007 figures as estimated by Veronis Suhler Stevenson. 15 Company website. 23 The Kelsey Group “The Kelsey Report Annual Forecast”, February 2008. 16 comScore, December 2007. 24 AT&T, “Analyst Conference - Advertising and Search”, 2007. 17 AT&T, “Analyst Conference - Advertising and Search”, 2007. 25 Compete.com 18 ComScore, December 2007. 26 Compete.com 19 ComScore, December 2007. 27 CIBC, “Outlook for Online Ad Networks”, August 2007. 28 Capgemini TME Strategy Lab analysis. CIBC, “Outlook for Online Ad Networks”, August 2007.

28 29 complex keyword bidding processes Evaluation of Opportunities for Figure 7: Way Forward in Online Advertising for Different Telco Categories start by consolidating their position in has been increasing. This had led to Telcos publishing, as these opportunities the rapid growth of the online Considering the size of the couple low entry barriers with telco advertising agency market; between opportunity and ease of entry based strengths (see Figure 8). 2005 and 2006, US Internet ad on existing telco strengths, online ad agency revenues grew by 25% to publishing services such as portals Slow starters need to develop the €2.1bn31. and directories are an attractive necessary capabilities required for prospect for telcos to enter the space. offering these services. For instance, Currently, subsidiaries of large holding Offerings such as targeted ad for portals, telcos need to perform in- companies such as Publicis, WPP and networks and ad agency services are depth and ongoing consumer research Omnicom dominate the interactive the next area for diversification, due to identify the relevant content types agency market with 60% market to relatively smaller size of the market necessary for driving traffic. Telcos share. However, the market remains and higher entry barriers. may also need to forge partnerships fragmented, as no single company for content procurement and ad controls more than 10% share32. Recommendations inventory management. Developing Telcos can enter this market by using The way forward for various telcos in these capabilities can help telcos consumer intelligence to help the online advertising space depends successfully monetize their services; advertisers define target segments for on their current breadth of services for example, in 2007, France Telecom marketing campaigns. Due to their and online advertising revenues (see was able to generate €150 million in local or national presence, telcos are Figure 7). online ad revenues from its own better-placed than global players to portal, mainly through extensive attract local advertisers. Finally, telcos Slow starters content partnerships and a wide range can capitalize on their established The challenge for slow starter telcos is of innovative services. Source: Capgemini TME Strategy Lab analysis relationships with businesses to tap to identify appropriate opportunities into a sizable pool of potential for entry into the online advertising Similarly, for offering online clientele. market. Generally, telcos with little or directories and local search, telcos potential clientele for ad network third-party sites, and giving no online advertising presence should services. advertisers exclusive access to select Some telcos have already started sites for targeted advertising30. operating marketing agencies. In Some telcos have already forayed into September 2007, BT launched its BT Figure 8: Evaluation of Each Online Offering Based on Feasibility, Opportunity Size the ad network arena, but with Ad Agency Services for Online WebClicks service targeted at SMEs. and Telcos’ Strengths limited success. Orange, for example, Advertisers The service helps SMEs in designing started offering online ad network With advertisers trying to increase and placing sponsored links on local services in February 200729, selling their Internet exposure, the need to and major search engines33. SK inventory on its own portals as well as design ad campaigns and manage Telecom increased its shareholding in ad marketing company AirCross to 100% in 2007. In 2006, AirCross had revenues of €16.9mn. Online ad publishing services such as portals and directories“ ARE ATTRACTIVE PROSPECTS FOR TELCOS TO ENTER THE SPACE Source: Capgemini TME Strategy Lab analysis

29 Company Website. 31 Piper Jaffray Investment Research, “The User Revolution”, February 2007. 30 Company Websites. ” 32 Piper Jaffray Investment Research, “The User Revolution”, February 2007. 33 Company Websites.

30 31 LEADERS AMONG TELCOS should strive to reduce “ Moreover, these telcos can leverage Leaders should also regularly monitor competencies. Collaboration can help dependencies on online core strengths to enrich their services, market dynamics and make periodic telcos jumpstart their online ad which will help popularize their investments to keep their offerings offerings; however, they will also majors offerings. For instance, differentiating relevant and competitive. For require telcos to negotiate on the basis of consumer intelligence instance, telcos offering interactive ad partnerships carefully to protect their can help telcos achieve better click- agency services need to make regular interests and command a sizeable through rates for ad network services, investments in IT systems for share of advertiser spend. thereby attracting publisher affiliates analyzing consumer data, as well as as well as advertisers. After stabilizing incur the cost of building and Tushar Rao is a manager in the TME a few core offerings, strivers can sustaining creative marketing teams to Strategy Lab. His recent work focused need to develop capabilities” in online advertising. These telcos can leverage networks such as Friendster, ad subsequently explore further design online ad campaigns. on analyzing disruptive technologies in database development and their strengths to offer online social networks/servers such as AdBrite and diversification. the broadcasting and mobile segments. maintenance as well as search networks, interactive ad agencies or independent online marketing In conclusion, online advertising is a Prior to joining the Lab, Tushar technology. Verizon, for example, was targeted ad networks. agencies like AKQA with revenues of Leaders rapidly growing market and worked with a leading converged able to generate €208 million in €5-40 million35 per year. Leaders amongst telcos combine a represents an attractive opportunity operator in India, where he was online advertising revenues in 2007 In order to explore these new wide breadth of online advertising for telcos seeking additional revenue responsible for developing managed through its affiliate Idearc’s local offerings, specialist telcos will need to Strivers services with high revenues. The next streams. Telcos have a number of core data services for enterprises. He is search portal SuperPages.com. develop additional online advertising Strivers offer a breadth of online step for these telcos is to aim to strengths that position them well to based in Mumbai. capabilities. Online social networks, advertising services, but are unable to become dominant players in the enter the online advertising space. Acquisitions can also help telcos to for example, require extensive monetize them optimally. Therefore, online advertising space. Leaders Those looking at a successful foray Kaushal Vaidya is a senior consultant enter the market quickly. Smaller research to find out the right their primary focus should be to should therefore strive to reduce into online advertising will need to in the TME Strategy Lab. His recent content portals and local search demography to target. Additional improve the uptake and monetization dependencies on online majors and perform a thorough assessment of work includes analyzing trends in engine players represent attractive capabilities are required for of these services before diversifying increase their share of revenue from their existing portfolio of online online advertising and assessing acquisition targets, as they can equip management of content and ad into new areas. services. This can be done by services, and determine where they growth as well as profitability drivers telcos with essential capabilities inventory. Online ad networks selectively developing or acquiring stand on the services versus online of players in emerging markets. Prior without excessive investment. For function as mediators between In order to increase monetization from expertise to deliver display and search advertising revenues matrix. Telcos to joining the Lab, Kaushal has instance, local search engines such as publishers and advertisers, and offered services, strivers need to focus ads, and manage publisher and will also need to map their core worked as a management consultant 192.com are likely to have modest require investments in developing on improving revenue shares and advertiser relationships. For example, strengths against existing offerings and with the consulting arm of India’s valuations as they typically generate databases and systems for storing, increasing popularity of services. a telco partnering with an online identify areas for diversification based premier business house. He is based in less than €50 million in revenues per serving and monitoring ads. Similarly, Better revenue shares can be player for search ads can achieve on best fit with their specific Mumbai. year34. Telcos can subsequently scale the key capabilities required for telcos negotiated by leveraging their existing sizeable savings by acquiring or portfolios. Additionally, Telcos will up operations and drive traffic by to offer interactive ad services include customer base and strong local brand building capabilities to serve need to develop capabilities such as Manik Seth is a senior consultant in coupling the acquired capabilities the ability to use consumer name. For instance, AT&T recently contextual search ads themselves, content procurement, database and ad the TME Strategy Lab. His research with their strengths, which include intelligence to develop creative as well renegotiated its Yahoo! partnership to which usually takes up 35% of inventory management, and ongoing interests include new online and digital strong brand names, existing as relevant ads and coordinate with ad shift to a revenue sharing model from revenues. Developing in-house consumer research skills that they media, and next generation relationships, consumer intelligence networks for placement of ads. a fixed fees structure because of the capabilities reduces external currently lack. Telcos could choose to communications technologies. Prior to and publishing assets. traffic it provides to Yahoo! through dependence on critical areas of the build, acquire or partner to equip joining the Lab Manik was working Acquiring small-sized companies in its subscriber base36. Strivers can also offering, which frees telcos from themselves with the necessary for a leading software services Specialists these areas can help telcos in offering reduce dependency on partners for having to share their data assets with provider. He is based in Mumbai. Specialists, who generate high online relevant services quickly and also serving ads to retain all of their online online players. ad revenues from a few services, can obtaining the necessary capabilities for ad revenue. For example, France look to expand their portfolio by subsequent scaling-up. Acquisition Telecom handles its own publisher diversifying into other areas of online targets may include smaller social inventory, eliminating the online ad network’s share.

34 Capgemini TME Strategy Lab analysis based on Advertising age “Digital marketing and Media Fact Pack”, April 2007. 35 Piper Jaffray Investment Research, “The User Revolution”, February 2007. 36 Company websites.

32 33 AROUND 40% OF EUROPEAN MOBILE CONSUMERS DID NOT SEE “VALUE IN USING MOBILE INTERNET SERVICES Mobile Internet Services in Europe and USA: due to unattractive pricing Initiatives to Drive Adoption and Usage and the perceived lack of by Tushar Rao, Ignacio Blanco and Sushant Kumar compelling applications Abstract: Less than 15% of European and US mobile consumers use mobile Internet services regularly, significantly lower than leaders such as Japan which has a corresponding penetration rate of almost 90%. Moreover, growth in mobile Internet penetration in the two geographies has been slow recently. We believe that operators in Europe and USA can enhance their mobile Internet offerings and stimulate adoption by pursuing certain key initiatives. Allowing access to the open Internet and making popular Internet content available on mobile devices would encourage consumers to complement their fixed Internet browsing with regular mobile access. Operators should also encourage the adoption of smart phones and other feature-rich devices that allow user-friendly access to mobile Internet, as such consumers are more likely to use these services collaborate with various stakeholders lack of compelling applications2 . The ” extensively compared to regular handset users. Additionally, tariff packages in Europe and USA need to evolve from pay per usage plans to flat- rates. Evidence from Japan also suggests that certainty of billing is one of the key drivers for enhanced uptake of mobile Internet. Lastly, active such as device vendors and major key initiatives that operators need to online players to enhance their pursue to enhance consumer value of collaboration with content producers, device manufacturers and online majors can help mobile operators in Europe and USA deliver enhanced offerings in order to boost adoption as mobile Internet and drive its consumer value on each of the three key parameters and stimulate the adoption as well as usage of mobile Internet. well as usage of mobile Internet. penetration include offering a wide variety of content accessible from the Key Initiatives to Drive the mobile device, enhancing user Uptake of Mobile Internet experience by offering feature-rich Although operators in Europe and Internet services (see Figure 1). of mobile Internet services In 2007, around 40% of European handsets, and providing services at USA have tried to stimulate the Further, adoption rates have been aggressively to drive data revenues mobile consumers did not see value in cost-effective flat rates to stimulate uptake of mobile Internet in their almost stagnant or have witnessed and protect margins. using mobile Internet services due to adoption as well as usage. respective geographies, they have only a marginal increase over the unattractive pricing and the perceived been unable to drive adoption in the recent past in the two geographies. In this report, Capgemini’s TME mass market so far. Mobile Internet Strategy Lab suggests operator penetration rates1 in Europe and USA With highly saturated markets and strategies that would help in Figure 1: Mobile Internet Penetration (% of Mobile Subscribers) in Europe, USA were only around 14% and 12% competitive pressures adversely stimulating the uptake of mobile and Japan, 2007 respectively in 2007, compared with a impacting revenue and margin growth Internet services in the respective staggering 90% penetration rate in in the voice business, mobile markets. The study also identifies Japan, the world leader in mobile operators need to encourage the usage areas where operators need to Mobile Internet penetration rates in Europe“ and USA were only around 14% and 12% respectively in 2007, COMPARED WITH A STAGGERING 90% PENETRATION RATE IN Source: Capgemini TME Strategy Lab analysis. Forrester, “European Mobile Forecast: 2008 To 2013”, March 2008. eMarketer, “Mobile Search - Clash of the Titans”, 2007. Ministry of Internal Affairs and Communications (MIC) - Japan, JAPAN "Subscribers and Contracts to Information and Communications Services," March 19, 2008

1 Refers to consumers ”using mobile Internet services regularly (at least once a month). 2 Forrester, “Mobile Internet Pricing Strategies Mature”, July 2007. 34 35 Figure 2: Evolution of Operator Mobile Internet Offerings, 1999-2007 PARTNERSHIPS WITH KEY INTERNET PLAYERS CAN BE A WIN-WIN SCENARIO “for both mobile operators as well as the online majors

Operators should also aim to integrate made by operators to allow easy Enhancing user experience through consumers’ fixed and mobile web access to mobile” search services from feature-rich handsets experiences, thereby encouraging players such as Google and Yahoo!. A fast and hassle-free user experience them to use popular Internet Similarly, Research-In-Motion (RIM) while surfing the Internet on mobile applications over the mobile device. recently announced that almost 1 phones is one of the key drivers of For instance, around 75% of mobile million users of its Blackberry service adoption and usage growth. The Internet users in Europe used search had downloaded the Facebook minimum standard required for open services in 20077. This can be application in only five months since mobile Internet access is 2.5G; else attributed to the extensive tie-ups launch8. users can be turned off by the slow

Source: Capgemini TME Strategy Lab analysis. Company websites Figure 3: Operator Partnerships with Internet Players, 2007

Offering a wide variety of content around a quarter of offerings allowed through partnerships with online over mobile Internet access to the open Internet4. In fact, majors such as Google and Yahoo! Operators typically offer one of the players such as Telefonica in Spain (see Figure 3), and users are typically following four types of mobile did not allow access to the open offered easy access to popular web Internet access—walled-gardens, i- Internet and Verizon in the USA applications through operator portals. mode like schemes, walled-gardens restricted consumers from accessing This shift away from closed content coupled with access to popular content such as streaming audio and strategies, such as walled-gardens and Internet applications, and open, video services from non-portal sites in i-mode schemes, was driven by the unbridled Internet. Mobile content 20075. limited success of i-mode schemes offerings have gradually evolved from launched by operators such as KPN walled-gardens towards partnerships Capgemini believes that European and and Telefonica. with Internet players and US operators should endeavor to subsequently full access to open provide extensive mobile content to Partnerships with key Internet players Internet (see Figure 2). consumers by offering open Internet can be a win-win scenario for both services and/or by partnering with mobile operators as well as the online Almost 50% of the data plans offered online majors to ensure easy majors. For instance, in June 2007, by Japanese operators allow open accessibility of popular content around 4.8 million consumers Internet access. The rest of their plans through mobile Internet. accessed social networking sites such are usually i-mode type schemes, as Myspace, Facebook and Bebo on which have extensive content In fact, many European operators their mobiles in Western Europe, with availability3. In stark contrast, in increasingly allow access to the open Italy and UK being the leading 2007, almost half of US operator Internet and have also re-launched countries6. offerings allowed access only to the their portals with additional content. operators’ walled-gardens, while only The new content is primarily sourced Source: Capgemini TME Strategy Lab analysis. Company websites

3 Capgemini TME Strategy Lab analysis based on the study of mobile Internet offerings of NTTDoCoMo, au/KDDI and Softbank. 7 Capgemini TME Strategy Lab analysis. eMarketer, “Mobile Search: Clash of the Titans”, July 2007. 4 Capgemini TME Strategy Lab analysis. 8 Market Wire, “Downloads of Facebook for Blackberry Smartphones Top 1,000,000”, 1st April 2008. 5 Capgemini TME Strategy Lab analysis. Company websites and press releases. 6 M:Metrics, “Mobile Social Networking has 12.3 Million Friends in the USA and Western Europe”, August 2007.

36 37 speed of the Internet connection. Opera, an Internet player specializing without the need to know or Access technology such as 3G, which in web access applications, to pre- remember the URL13. Clickable news offers significantly higher speeds and install browsers in an extensive range “tickers” with scrolling news headlines rapid browsing, can provide a boost of mid-range handsets. This on the mobile screen that can take the Empirical evidence from Japan and to mobile Internet by enhancing partnership, initiated in 2006, now user directly to the relevant news item customer experience. Operators enables T-mobile to provide open is another example of simplifying South Korea suggests THAT THE INTRODUCTION should therefore strive to increase Internet access on almost 80% of the content access for users. Japanese penetration of 3G handsets, which devices it offers with its plans12. operators and Swisscom also allow “ currently lags the penetration of 2.5G camera phones to capture “quick- OF FLAT-RATE DATA PACKAGES REDUCES BILLING handsets by a significant amount (see Additionally, operators should partner response” codes printed on Figure 4). with device manufacturers and newspapers or banners/posters at UNCERTAINTY AND ENCOURAGES SERVICE Internet players to customize handsets public places, and take users directly Operators should also encourage the and incorporate features in the mobile to associated websites. 9 adoption of smart phones and other device to make web content more ADOPTION feature-rich devices that enhance the easily accessible from the handset. For Simplifying tariffs and offering mobile Internet user experience and instance, NTT DoCoMo (Japan), flat-rate plans to encourage usage therefore drive its adoption. The Vodafone (Portugal) and TMN We also believe that offering mobile recent launches of devices such as (Portugal) offer one-click-functionality Internet browsing at flat rates, instead is critical to increasing widespread high usage 3G consumers for to flat-rate plans allowing almost Apple’s iPhone have demonstrated that allows easy access to content, of charging consumers based on usage that smart phones indeed drive adoption and usage. ” accessing its proprietary EZweb unlimited usage, albeit capped by fair- adoption of mobile Internet. For content platform. A variant of the use restrictions (see Figure 5). Evidence from Japan and South Korea plan, aimed at low usage consumers, instance, almost 85% of iPhone users Figure 4: Global Penetration of 2.5G and 3G Handsets, % of Mobile Subscribers and around 58% of smart phone users suggests that the introduction of was launched subsequently. These Although operators in Europe have accessed news or information through flat-rate data packages in place of packages stimulated adoption and by started following the example of mobile browsers in January 2008, usage driven tariffs reduces billing 2005, 81% of KDDI’s 3G users had Japanese operators and started shifting compared with the market average of uncertainty and encourages service subscribed to flat-rate data plans15. towards flat-rate pricing for open only around 13%10. adoption14. The trend of offering such Internet access, such plans comprised plans was started by Japanese operator Accordingly, tariff plans for mobile only around one-third of the overall Moreover, operators and device au/KDDI in 2003, when it launched Internet across the developed world pricing plans offered in 2007 and manufacturers should also pre-load an unlimited flat-rate tariff targeted at have been evolving from “pay per use” targeted primarily high-usage more mid-range handsets with Internet browsers, which are necessary to access various services Figure 5: Evolution of Mobile Internet Pricing Plans of Selected Operators over mobile Internet. The worldwide penetration of handsets with pre- installed browsers was only around 20% in 200711. Operators should Source: Capgemini TME Strategy Lab analysis. Company websites. eMarketer, “3G Mobile Shipments Worldwide”, take a cue from players such as T- October 2007 Mobile, which recently partnered with

Almost 85% of iPhone users accessed news“ through mobile browsers in 2008, COMPARED WITH THE MARKET AVERAGE OF ONLY AROUND 13%

Source: Capgemini TME Strategy Lab analysis. Company websites and press releases

9 Smart phones include mobile handsets loaded with operating systems from vendors such as Windows, Symbian, RIM and Apple. 14 Capgemini Telecom and Media Insights, “Mobile and Broadband Services in Japan and South Korea: What can Western Operators Learn from their Eastern Peers”, December 2007. 10 eMarketer, “Mobile Content Consumption: iPhone, Smartphone and Total Market: January 2008”, March 2008. 15 Analysys, “Japanese and South Korean Mobile Markets”, 2006. Company websites. 11 Capgemini TME Strategy Lab analysis. m:Metrics.” The Mobile World. eMarketer. Online Publishers Association, “Going Mobile”, March 2007. Screen Digest. 16 Capgemini TME Strategy Lab analysis based on study of mobile Internet tariff plans of Vodafone, Orange, Telefonica/O2, T-Mobile, Boygues Telecom, E-plus Germany 12 Opera Software, “T-Mobile and Opera Mini-powered Web'n'Walk hits one million”, February 2008. and 3 Hutchinson UK. 13 Uniform Resource Locator that specifies the address of the website on Internet.

38 39 16 subscribers . Almost two-thirds of Figure 6: Distribution of Mobile Internet Pricing Structures, Selected Regions, 2007 Figure 7: Comparison of Mobile Internet Offerings of Selected Operators operator pricing plans across Europe offered either flat-rate in walled- garden or i-mode schemes or usage- based pricing for open Internet access. Similarly, only around a quarter of operator pricing plans in the US allowed open Internet access at flat rates in 2007 (see Figure 6).

We believe that operator pricing must evolve towards flat-rate access to the open Internet in order to have a significant impact on user uptake. For instance, T-Mobile was the first European operator to introduce open Internet flat-rate plans including both data and time-based pricing Source: Capgemini TME Strategy Lab analysis. Company web-sites and press releases Note: Percentages represent the proportion of operator pricing plans in each category, not proportion of customers using Source: Capgemini TME Strategy Lab analysis. Company websites and press releases structures. Its Web ‘n’ Walk offerings each enjoy high uptake rates with around 3.2 million mobile Internet subscribers across Europe in 200717. does not serve their needs on all three i-mode sites in Japan in 2006, there Tushar Rao is a manager in the TME Ignacio Blanco is a consultant in Sushant Kumar is a consultant in the parameters. For instance, i-mode were just 100 in the USA. Similarly, Strategy Lab. His recent work focused Capgemini’s Telecom Media & TME Strategy Lab. His recent work Operators need to ensure that they offerings in Europe did not work as 3 UK had initial traction issues, on analyzing disruptive technologies in Entertainment practice. He has more includes development of entry address each of the three critical well as in Japan due to non- regarding non-availability of best- the broadcasting and mobile segments. than 2 years’ of experience in strategy strategies into key African telecom success factors—content, handsets as availability of user-friendly handsets, selling or mid-range handsets, which Prior to joining the Lab, Tushar consulting in the telecom and media markets, and an assessment of well as user experience and pricing— operator restrictions regarding content resulted in a sub-optimal consumer worked with a leading converged sector. His recent work includes strategies to grow voice revenues in adequately and do not offer what availability over the open Internet and response. 3 Italy, however, built on operator in India, where he was assessing the mobile advertising Europe. Prior to joining the Lab, consumers could consider to be sub- unfavorable revenue sharing schemes the UK launch experience and was responsible for developing managed markets as well as evaluating new Sushant worked for a leading research par value on any of the factors. Figure that discouraged third-party content able to deliver high consumer value data services for enterprises. He is developments in television services. He and consulting firm. He is based in 7 demonstrates that consumers are development. For example, while on all the three critical success factors based in Mumbai. is based in Madrid. Mumbai. unlikely to subscribe to a service that there were around 12,000 official leading to high subscriber uptakes.

In conclusion, mobile operators need to drive the uptake of mobile Internet services by actively collaborating with content producers, device manufacturers as well as online majors to deliver high consumer value on the three key parameters of content, handsets as well as user experience and pricing. Continued operator initiatives to make the offerings more compelling will be OPERATORS NEED TO ENSURE THAT crucial in stimulating further adoption and usage of mobile Internet services. THEY ADDRESS EACH OF THE THREE CRITICAL However, as mobile Internet users and SUCCESS FACTORS mobile content revenues grow over “ —content, handsets as the next few years, content and device players are likely to make increasingly well as user experience and pricing— disruptive moves across the value chain in order to capture a greater adequately share of the market. Operators will need to continue offering the right mix of content, user experience and pricing to subscribers in order to avoid becoming reduced to undifferentiated data pipes.

17 Thomson StreetEvents, “DT – Q4 2007 Deutsche Telekom Earnings Conference Call“, February 2008 ”

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62 In the past, strategic reflection was focused 95% on“ execution and 5% on strategic choices; HOWEVER WE BELIEVE THAT TODAY, THE RIGHT The Making of Strategy: BALANCE IS AROUND 50/50 Formulating Strategies in a Structured Manner wider environment, rather taking a by Dr. Didier Bonnet, Andre-Benoit de Jaegere and Professor Gabriel Szulanski Figure 1: The TFAS (Trigger, Framing, Alternatives and Selection) Framework for more proactive and systematic Understanding the Making of Strategy approach to major industry and ” Abstract: In today’s world, where market conditions and industry boundaries change rapidly, strategy formulation has become more challenging macro-economic changing stimuli and important than ever before. Our research indicates that there is a high degree of correlation between the process of making strategy and its being adopted. eventual success. However, many companies still place more emphasis on execution rather on the strategy formulation process, which is typically more reactive than structured. We believe that organizations can approach the making of strategy in a systematic manner by following the TFAS The fast-changing environment of (Trigger, Framing, Alternatives and Selection) framework. The framework helps identify triggers or key changes in the macro-economic environment today demands organizations spend enough time and resources on making that necessitate strategic course correction, frames the key questions to be addressed from the point-of-view of the organization, identifies the right strategic choices. In the past, strategic alternatives and subsequently selects the optimal path to align the firm’s strategy with changes in the broader environment. By strategic focus was around 95% on developing strategy in such a structured manner, organizations can identify a strategic path with greaterr probability of success. execution and 5% on strategic choices. However, we believe that today, the right balance is around Until recently, it has been common Therefore, the key challenge for top formulation is also becoming 50/50, with more effort being spent wisdom that the main determinant of management is to determine the increasingly challenging as the fast- on the process of making strategic a company’s success was its ability to strategic direction–deciding what changing macro-economic choices. execute and implement its strategy. should be implemented before setting environments demand a Usually, companies were clear about the course for accomplishing it. In correspondingly fast-paced response. Moreover, many companies still their strategic direction, and the main fact, our research suggests a high consider the making of strategy as a priorities for implementation. degree of correlation between the Although strategy formulation in “closed room” exercise wherein very Source: Capgemini/INSEAD Research However, in today’s world, where we process of forming a strategy and its today’s environment is both few selected people are involved. continuously witness fast-pace eventual success. The research also challenging and important, many However, both the complexity of changes in market conditions, indicates that the strategy formulation companies do not follow a structured organizations and their environment making process and engages managers the organization hierarchy – from line increasing blurring of industry process of a firm is a source of approach towards the making of make it almost impossible for a few across the hierarchy. The framework managers to senior management. boundaries and the proliferation of differentiation by itself. Therefore, strategy. In most cases, strategy people to take into account all the helps business executives respond to new technology products as well as organizations would be well served if evolves as an afterthought as the internal as well as external dimensions changes in the macro-environment in The front-end of the process is the applications, it has become more they pay heed to the process of organization takes reactive steps to necessary to craft a relevant strategy. a structured way and by making the critical part. There is always a difficult for enterprises to define clear forming strategies. In addition to keep abreast of competitor moves and Therefore, organizations need to process more explicit, allows for “trigger”, a signal that reveals that objectives and direction. being extremely important, strategy changes in the industry as well as the develop a process of “inclusion”, better control of the strategy something is not going right. The key which opens up the process of formulation exercise. first step is to recognize that there is a strategy formulation to a wider group problem and that the part of the within the firm and the firm’s problem that is visible – for instance, COMPANIES USED TO HAVE STRATEGY ecosystem partners. The TFAS Framework a reduction in net margin – can be a The framework developed by strategic inflection point. This MEETINGS TWICE A YEAR. NOW WE HAVE THEM We believe that organizations need to Professor Szulanski at INSEAD, indicates that the problem could be follow a structured process for the dubbed TFAS (Trigger, Framing, due to a strategic dissonance where making of strategy in order to Alternatives and Selection) the current strategic insight, TWICE“ A WEEK. The fact is that the proactively identify problems, decomposes the strategy decision competitive position and performance continue to be in sync with the making process into four components model have started to get out of sync changing environment and stay ahead and helps organizations respond in a with the evolution of customers, metabolism of enterprises is changing of their competitors. systematic manner to various events competitors or economic trends that demand a change of strategy in within a sector. dramatically In this paper, we present an fast-changing environments (see “inclusive” framework for strategy Figure 1). Furthermore, this approach In practice, this is a very difficult formulation that brings out the is “inclusive” encouraging the exercise as we can easily see the Meg Whitman – CEO eBay implicit elements of the strategy participation of managers from across consequences - the lag effect - but ” 44 45 find it difficult to identify the root Figure 2: Strategy Formulation Process Mapped on the TFAS Framework In conclusion, in today’s era, where Dr. Didier Bonnet is a Vice President Professor Gabriel Szulanski is cause. We have observed that many strategy making is frequently and Managing Director of Capgemini’s Professor of Strategy at INSEAD, which organizations tend to dismiss early neglected or limited to yearly offsite global Telecom, Media & Entertainment is where he earned his Ph.D in Strategy signals hoping that the situation discussions that are often out of consulting practice. He was for many in 1995. He joined the faculty of would get better. This can lead to the rhythm with the fast-changing years a Vice President with Gemini INSEAD in 2002 after serving on the organizations missing important environment, organizations need to Consulting and prior to this with several faculty of the Wharton School at the strategic changes in their industry– ensure that they have a consistent large and small strategy consulting firms. University of Pennsylvania. Gabriel’s for instance, the early move to a new strategy making process with He is based in London. research interests focus on strategic business model. In addition, in sufficient time and resources management, with a specific emphasis complex and fast moving dedicated to it. The TFAS framework Andre-Benoit de Jaegere is a Vice the management of knowledge assets and environments, corporations tend to allows business executives to identify President and Director of Innovation & the making of strategy. adapt from the bottom-up, inventing key events in the macroeconomic Development for Capgemini Consulting the journey as they progress, leading environment as relevant triggers that in France. Andre-Benoit was leader of to potentially sub-optimal results. demand a strategic course correction, the strategy practice for Gemini and systematically explore alternatives Consulting in France and now focuses on Once the existence of a problem has that can ensure retention of the strategic aspects of large business been recognized, it needs to be competitive advantages for the transformation programmes. He is also a framed and the question that needs organization. This inclusive and lecturer in marketing strategy at the addressing should be clearly structured process to strategy ESSEC Business School in France. He is formulated. The difficulty is in finding formulation can help generate based in Paris. the right “frame” or the key question, strategies that have a greater challenge or issue confronting the probability of being successfully organization. If one frames the implemented. problem too narrowly, one will reduce Since 2006, Capgemini Consulting has been partnering with INSEAD on a the organization’s room for Source: Capgemini/INSEAD Research joint research and case building program focussed on deriving a better manoeuvre. On the contrary, if the understanding of the strategy-making process. As part of this partnership, problem is framed too widely, the Capgemini Consulting works with Professor Gabriel Szulanski’s innovative organization will find it impossible to The final challenge is the selection MBA course called “The Making of Strategy”. A case-based research find where to start. process. The challenges of selection in program has been designed and has already generated in excess of 130 fast moving environments are those of cases built around the TFAS framework to advance the understanding of Having framed the question the next managing uncertainty. How do we strategic decision making. step is to envisage the possible avoid killing promising projects early? answers. It is very rare that only one – “throwing out the baby with the answer will exist and yet many bathwater”. How do we spot losers corporations we have studied only early in the process? – “why are bad push a single answer through their projects so hard to kill?” If the process strategic process (e.g. we need to has been properly implemented to acquire this company or the answer is this stage, the organization should to boost our sales force in the US). face having to make tough choices Ideally for every question, executives only between good options. This is of need to form a series of options (say course the essence of strategy as most 3-4), but at the same time avoid the organizations will have far more good traditional problem that we encounter options than they have resources to in many organizations of throwing carry them through. several options on the table without proper research, knowing that they The TFAS framework thus helps will be rejected but they exist to managers to identify the important “make the numbers”. Each option events in the macro-environment that THE TFAS FRAMEWORK HELPS needs to be carefully documented and demand a strategic course correction, should represent a realistic alternative. and then takes a structured approach This part of the process is the most towards identifying alternatives and MANAGERS identify events that demand creative and therefore requires some subsequently selecting the optimal time and rigour. The final decision is path. Figure 2 illustrates the making “a strategic course correction, find a very delicate balancing act – first, of strategy using the TFAS framework. because there is a risk that good ideas It also highlights the involvement of might be disposed of and second, managers across the hierarchy, alternatives and select the optimal path because it is easy to make the choice reinforcing the inclusive nature of the by default due to a fear of failure or framework. in a structured manner for political reasons. 46 47 ” were eager to invest in this fast Figure 1: Global Fundraising by Private Equity Players, 2004-2007 ($bn) developing asset class which promised superior returns.

A Favorable Environment for Fund- Raising A low interest rate environment drove large institutional investors such as pension funds as well as high-net- worth individuals away from lower yield bond investments towards better Private Equity Players: performing PE investments (see Figure 1). For instance, in the UK, 10- year returns on PE investments were Strategies for Weathering the Storm around 16% as of 2005, compared by Stanislas Pilot, Thomas Bouton and Subrahmanyam KVJ with 8–9% for UK bonds and public equity.

Abstract: The Private Equity (PE) industry is currently going through a phase of slow growth. In the period up to the first half of 2007, the PE The Number of LBO Transactions has industry had seen strong activity, both in number of deals and in total value. However, the credit crunch of 2007—a fallout of the subprime Increased During the Growth Phase crisis—has resulted in an increased cost of debt. The slowing global economy is also threatening to have a significant impact on the growth of of PE Activity the PE industry; however, PE continues to attract new investors and is likely to stay. Recent fund closures have provided ample evidence that During the growth phase of the PE Source: Preqin through RREEF Research, “The Outlook for Private Equity: First Quarter 2008”, April 2008 investors continue to view PE as a strong alternative asset class. Limited availability of debt financing has dented the ability of PE firms to industry, most investments had focused on buy-outs. LBOs accounted continue seeking large leveraged buy-outs, as a result of which players are now looking for growth through newer types of transactions such as £10bn5, the buy-out of Danish continued into the first half of 2007, for over 77% of all PE investments in minority and no-debt investments. Firms will have to consider newer emerging markets across the world for identifying growth prospects. PE telecom company TDC6 for €10bn, proof of which lies in the biggest PE Europe in 2007, as is evident from companies will need to concentrate on creating value through a combination of strategies such as consolidation of asset portfolio, cost and the LBO of music label EMI for deal of 2007—TXU Corporation was Figure 2. Mega buy-outs accounted transformation and strategic course correction in order to ensure that their growth story remains intact. €3.2bn7. acquired by an investment group led for almost 18% of all deals in Europe by leading PE firms Kohlberg Kravis in 2007. Until recently, the Private Equity (PE) through LBOs. However, since strategic options PE players have to The growth story continued into the Robert & Company (KKR) and Texas industry experienced strong growth, summer 2007, PE activity has weather these turbulent times. Deal sizes have been steadily first half of 2007, and it was led in Pacific Group (TPG) for $44bn. The setting a new record each year in substantially slowed down as the increasing across Europe. Some of the large part by the US. The industry had pace of growth of the PE industry was fund-raising as well as the number credit markets have dried up and the A new context for the PE largest deals in Europe in recent years grown over 60% in terms of funds such that in early 2007, a PE player, and size of deals. For instance, in global economic environment is industry include the LBO of Boots by KKR for raised in 2006, reaching an all time Blackstone Group, raised over $4bn in Europe, 2006 saw over 1,290 deteriorating. In Q4 2007, deals 2004 – H1 2007: An Exceptional high of $290bn8. This growth a record IPO that ranked amongst “Leveraged Buy-Out” (LBO) deals worth only €45bn were completed, Period USA’s top 10 IPOs of all time9. valued at more than €250bn1. The compared with over €86bn in Q4 PE funds have had a strong period of Figure 2: PE Investments by Stage of Financing, Europe, 2007 (%)4 availability of large amounts of capital 20062. growth from 2004 up until the first H2 2007: Slowdown due to the combined with exceptional liquidity half of 2007. Leading firms were Credit Crisis in the debt markets enabled PE funds In this paper, we discuss the effects of aggressively deploying available Mortgage Crisis Effects of the US to make large acquisitions, gaining the current credit crunch on the PE capital and acquiring large companies. However, whilst there was strong majority control in companies industry and analyze the various Limited partners3 around the world growth in the PE industry up until the first half of 2007, the 2007 subprime mortgage financial crisis led to an unpredicted credit crunch. With THE PACE OF GROWTH OF THE PE INDUSTRY liquidity in global financial markets significantly reduced, PE players that were heavily dependant on syndicated WAS SUCH THAT IN EARLY 2007, A PE PLAYER, and high-yield debt, suddenly found themselves cash-strapped as banks BLACKSTONE GROUP started going back on their positions. “ Most major banks in the US and Europe have had to write-down multi- raised over $4bn in a record IPO that billion dollar losses due to their exposure in the subprime vehicles. ranked amongst the top 10 of all IPOs in Source: EVCA, 2007 Preliminary European Activity Figures, March 2008 Many banks are today sitting on

4 Early Stage — Investing in a company in its early stages of development. the US Buy-out — Outright purchase of a company or of a controlling stake in a corporation’s shares. Buy-outs comprise small, mid-market, large and mega buy-outs based on size of deal Replacement Capital — The acquisition of existing shares in a company from another private equity investor or from other shareholders, or financing made available to a company as an alternative to a bank loan. Expansion — Financing for the expansion plans of a company that might be at various stages of its growth. 5 Guardian, “High court sanctions £11bn takeover of Boots”, June 2007. 6 Datamonitor Computerwire, “TDC Finally Agrees to Buy-out Deal”, December 2005. 1 Mergermarket-Browne, “European Private Equity in Review”, February 2008. 7 BBC News, “Music giant EMI agrees takeover”, May 2007. 2 Mergermarket-Browne, “European Private Equity in Review”, February 2008. 8 Preqin through RREEF Research, “The Outlook for Private Equity: First Quarter 2008”, April 2008. 3 Limited Partners contribute capital and do not play any role in management of companies acquired by PE firms; they however have first rights in case of liquidation. 9 BusinessWeek, “IPOs: Top 10 U.S. Mega-Deals”, March 2008. ” 48 49 TIMES OF CRISES Figure 4: Average large LBO Leverage Multiples (Debt / EBITDA), 1997-2007 Grasp new deal opportunities The new context in the PE industry also brings new opportunities for need not necessarily be funds to venture out of their traditional model and look for “detrimental to the growth innovative ways to gain returns. Shift focus towards Small/Mid-cap of the PE industry and Minority Transactions Small and mid-market transactions— with lower enterprise value and requiring minimal debt funding compared to large buy-out deals—are billions of debt commitments which PE companies finance a large part of Recommendations for PE still active. Due to the current softness they have not been able to syndicate. LBO deals with debt, the typical players in the global capital markets, listed small- and mid-cap companies that For instance, at the end of Q1 2008, valuation ratio” used is the leverage Faced with this situation, PE players have been impacted by the bearish it is estimated that American banks multiple, which shows the ratio of net need to adapt their strategies to 11 market offer opportunities for Public had an exposure of over $197bn in debt to EBITDA . These multiples for continue to deliver high returns to to Private (P-to-P) transactions. leveraged loans still on their balance LBO transactions which rose from 4.0 investors. sheets10. As a result, these banks in 2002 up to a historic high of 6.2 in Source: Carlyle Group Presentation from S&P Leveraged Buy-out Review, February 2008 At the same time, PE funds need to drastically tightened their credit 2007, have now declined as banks Keep the Long Term Perspective realize that newer opportunities lie in allowance conditions leading to the become more conservative (see PE firms typically manage funds over acquiring non-control investments. current credit crunch, thereby Figure 4). Consequently, PE firms a 5 to 10 year horizon. As such, they Such transactions, whilst not giving contributing to a rising cost of debt. now have to structure deals in a way have a long term perspective and can and 1990s, the stock market crash of Value opportunities that arise during complete control to the PE firm, can so they have a higher equity afford not to invest for 12 to 24 1987 and the depression in the periods of economic slowdown have help the firm acquire a footing in Lower Deal Flow from H2 2007 component. However, this is likely to months if short term market technology sector in March 2000. shown to have significantly better certain sectors or specific geographies. The credit crunch in the world depress the returns when they divest conditions are not favorable. Indeed, times of crises need not be returns on investment. PE firms need Figure 6 shows the rise in minority economies, led by the US, has affected the investment. This also has the risk Moreover, the current crisis is not the necessarily detrimental to the growth to act decisively in identifying and non-control investments in 2007 from PE players, preventing many LBO that PE firms will not be as attractive first one and comes after a long list of of the PE industry. In fact, there is taking advantage of such the first half to the second half. funds from making new investments an option compared to other industry economic and financial uncertainties strong evidence to the contrary that opportunities. or recapitalizing existing ones. Even buyers. such as the recessions of early 1980s during times of economic and some mega deals initiated in 2007 financial slowdown, a lot of PE firms Figure 5: Net IRRs to Investors Grouped By Vintage Years from Inception to 31- such as Harman International, Sallie have generated very good returns. Dec-2007, 1980-2007, Europe (%) Figure 5 shows the returns from PE Mae, and Home Depot Supply had to Figure 3: PE LBO, 2003-2007, North America & Europe ($bn) be renegotiated before closing, or investments in the three most recent were simply cancelled. global meltdowns. The first of the crises was the debt crisis of 1980- As a result, the PE industry 1982, which was largely triggered by experienced a slowdown in the size “Petrodollar Recycling” and the and number of transactions from H2 increasing inability of developing 2007 to Q1 2008. This slowdown has economies to repay their foreign been pronounced both across North debt12. The recession of the 1990s America and Europe. Figure 3 shows was the next major period of turmoil, the growth in PE buy-outs from 2003 while the bursting of the dot-com to H1 2007 and the subsequent fall in bubble and meltdown in deal value as well as the number of communication companies was largely deals during H2 2007. responsible for the third major crisis. During all these periods, it is 13 Reduction of Leverage Multiple from interesting to note that the IRRs of H2 2007 PE investments, across Europe, have PE firms typically value companies as actually been quite strong. a multiple of their cash flows. Since

Source: Mergermarket-Browne, “North American Private Equity in Review”, Feb 2008; Mergermarket-Browne, “European Source: EVCA, “Performance Benchmarks 2007 European Private Equity”, March 2008 Private Equity in Review”, Feb 2008

10 Oppenheimer & Co, through Wall Street Journal, “Leveraged Loans: The Hangover Wasn’t Worth the Buzz”, February 2008. 12 The University of Iowa Center for International Finance and Development, “The 1980s: The Debt Crisis & The Lost Decade”. 11 Leverage Multiple: It is the ratio of net debt to Earnings Before Income, Tax, Depreciation, and Amortization (EBITDA). 13 IRR — Internal Rate of Return: It the annualized effective compounded return rate which can be earned on the invested capital.

50 51 PE FUNDS NEED TO REALIZE that fresh Figure 7: Fundraising Focussed on Emerging Markets, 2003-2007 ($bn) “opportunities lie in acquiring non-control investments

Some private equity firms have $130mn in Q1 2008, while Suniva Solution at a price of 95 pence in cash appears to be good in Nordic already started to recognize the Inc., a maker of solar-cell technology, for each Northgate share. This valued countries like Sweden in 2008. Banks inherent growth of firms that are not raised over $50mn17. ” Northgate at approximately £593mn provide relevant debt financing, even available for acquisition. For instance, in issued share capital to KKR19. Such with lower debt multiples, assisting in the case of PE investments in Even large LBO funds have recently debtless transactions are likely to yield deal flows. companies like Bharti Infratel (a undertaken investments with no debt. maximum results when they are telecom infrastructure company in US-based leveraged buy-out firm TPG focused on high growth companies. The investment environment also India) and Moneygram International, has bought 50% stake of SIA looks promising in Eastern Europe, the respective PE firms have decided International Ltd., the largest Investment in Growing Economies where economic growth is forecasted to go in for minor stakes. In the year pharmaceutical distributor in Russia, and Select Developed Markets to be in the 4% to 9% range. The to April 9th, PE firms have made over for $800mn in cash18. Leading PE While macroeconomic conditions are region has not been affected by the 245 minority investments worth over firm Kohlberg Kravis Roberts & Co. expected to weaken in many parts of subprime mortgage crisis and the $12.1bn. This compares with 204 (KKR) acquired Northgate Information Western Europe, the environment banks have taken a proactive role in such deals worth over $10.9bn in the maintaining a favorable debt market. same period in 200714. By doing so, Figure 7 shows funds raised in PE firms stand to be a partner in high- emerging markets between 2003 and growth companies, as well as gaining Figure 6: Minority investments by PE firms, 2007, ($bn) 2007 with the specific purpose of understanding in the space for future investing in these geographies. investment opportunities. In a recent survey, Asia Pacific buy- Investment with No Debt: VC & outs and venture capital ranked first Expansion funds and third respectively as the preferred The current low market values also areas for investment over the next one offer opportunities for Venture Capital year. Proof of this is the fact that mid- and Expansion Capital funds that market deals in developing countries perform transactions on fast growing are on the rise with 31% of all companies which do not involve a investments in 2007 in the $10-25mn debt component. A recent case in category20. point can be found when, in April 2008, the venture capital firm 3i A recent trend of large buy-out firms invested €125mn in Unión Radio, a like KKR and Blackstone is to actively conglomerate of radio stations in invest in developing countries like Spain and Latin America, out of total India and China. For instance, KKR commitments of €225mn15. acquired a minority stake in China's Tianrui Group Cement Co. for In Q1 2008, venture capitalists $115mn—its first investment in invested over $7.1bn in 922 deals16 mainland China21. with clean technology garnering some of the greatest interest from venture Meanwhile in India, Blackstone has Source: Dealogic, through Carlyle Group Presentation, “Ten Key Questions Facing the Private Equity World”, capitalists. Range Fuels Inc., an February 2008 invested $150mn and $165mn in Source: EMPEA, “Emerging Markets Private Equity Funds Raise US$59 billion in 2007”, February 2008 ethanol production firm, raised over

14 Financial Week, “Leverage gone, PE vultures must settle for smaller bites. Beats sitting on all that cash”, April 2008. 20 Coller Capital Private Equity Barometer through RREEF Research, “The Outlook for Private Equity: First Quarter 2008”, April 2008. 15 The Deal, “3i invests $356M in Union Radio”, April 2008. 21 AltAssets, “KKR leads $450mn financing for Chinese cement producer Tianrui Cement”, September 2007. 16 Financial Times, “VCs pull back from funding start-ups”, April 2008. 17 Domain-B, “VC investments slow down in 2008”, April 2008. 18 AltAssets, “TPG to invest $800m in Russian pharmaceutical company SIA International”, April 2008. 19 Reuters, “KKR to buy Northgate Info for $1.2 billion”.

52 53 Nagarjuna Construction Company Apax Partners, Blackstone Group, market monitoring—especially in Consider the case of Netherlands- Interestingly enough, in March 2008, Limited22, a leading Indian KKR, Permira and Providence Equity. complex sectors requiring strong based mobile operator Telfort. In Bain Capital closed a €3.5bn fund, construction company, and Gokaldas After the buy-out, in order to reduce industry knowledge such as Telecom, 2003, Telfort was making losses and which was well over its €2.5bn target Exports Limited23, India’s largest costs, TDC announced annual 5-7% Media, Energy or Life sciences. It is was sold to Greenfield Capital and more than triple the size of Bain’s garment manufacturer and exporter. job cuts. It also outsourced the full essential to understand the business Partners, a PE firm, for €25mn28. The last €1bn fund. In the same month, Blackstone has also agreed to invest range of IT infrastructure services and competitive scenario thoroughly, PE firm changed Telfort’s strategy and Warburg Pincus announced the $61.1mn in Mumbai-based Allcargo using a seven-year contract and and take a long term view of started offering low-cost wholesale closure of its $15bn fund, which Global Logistics Limited24. transferred around 150 employees to investments. Therefore, this strategy is services in addition to its retail mobile garnered over $3bn in excess of its a third-party services provider. not as common as the employment of services, through two distinct business initial goal. The manner in which PE Focus on Value Creation Furthermore, a decision was made to cost efficiency measures; however, units. The increased focus on firms have successfully closed new Many PE firms have constructed focus only on the Nordic region, with several PE firms have used it very wholesale services made Telfort very funds since last summer are sure signs massive portfolios during favorable TDC’s non-Nordic assets considered successfully. In 2007, 12.9% of PE successful in attracting MVNOs to its that investors are strongly confident market conditions. Given the current non-strategic resulting in a sale at a investment volume representing network. Telfort’s total subscriber base that the PE industry will keep economic environment and the lack of good price. 35.6% of the total number of increased and it became profitable bringing strong returns on their mega deals, PE players need to investments in Europe accounted for within a couple of years. On the other investments in the future. intensify their work on generating While immediate gains can be made financing long term growth and hand, incumbent KPN felt pressure appropriate returns from their existing through cost efficiencies and the expansion of portfolio companies25. from MVNOs who launched price- Stanislas Pilot is the leader of portfolio. Since low cost debt is not divestiture of assets, investors also competition backed by Telfort’s low Capgemini’s TME Private Equity available, it is all the more pertinent need to look at medium and long For instance, leading PE firm Apax wholesale prices. Faced with falling practice. Stanislas has more than 10 that PE firms focus on value creation term prospects for value creation. Partners and OMERS Capital Partners ARPUs and increased customer churn, years’ experience in strategic analysis, through a variety of means. provided equity funding of $125mn KPN decided to buy Telfort for nearly M&A and shareholder value creation Consolidation to its portfolio company Cengage €1bn in June 2005, thereby in the telecom and media sectors. Prior Build Cost Efficiency For certain sectors, the best strategy of Learning to acquire Houghton Mifflin generating significant returns for its to joining Capgemini, Stanislas was a After a buy-out, PE players need to adding value and thereby creating College Assets for $750mn26. PE owners29. principal with APAX Partners. He is focus on extracting significant value potential for enhanced return on Previously, Apax Partners and OMERS based in Paris. through operational improvements investment is by focusing on Capital Partners had acquired In conclusion, the PE industry is around cost savings, outsourcing and consolidation; this strategy is based on Thomson learning for $7.75bn during subject to growth cycles, in ways Thomas Bouton is a managing the divestment of select assets. increasing the scale of operations H1 2007 under favorable market similar to the global economy itself. consultant in the Capgemini's Telecom through mergers and acquisitions. conditions27. The current slowdown is due to a Media & Entertainment strategy Some PE firms have very successfully This entails more risk than extraction credit crisis, not to an equity crisis. consulting practice. He has more than achieved cost efficiencies in acquired of simple cost efficiencies, as it By consolidating companies, investors, Thus, transactions with no or minimal 8 years' experience in the telco firms. A case in point is the €10.3bn involves further infusion of capital therefore, can potentially their debt leverage are still occurring and industry, and has recently been focused buy-out of Denmark’s incumbent and expert operational management returns by selling the new, larger the LBO activity will restart as the on private equity within the operator TDC in February 2006 by a to create value. It also requires the PE entity at higher multiples than credit situation improves. During this telcommunications sector. He is based consortium of PE players including players to undertake comprehensive originally purchased, thereby phase, the PE industry will need to in Paris. benefiting from synergies. re-focus on its core activity, which is creating value for firms that are Subrahmanyam KVJ is a consultant in Strategic Course Correction already part of their portfolio by the TME Strategy Lab. His recent At times, to turn around the fortunes improving their operational work focused on the converging Limited availability of the acquired company, a PE player efficiencies. Besides, emerging markets telecom and media markets, and the will need to correct the course of its and some selected high performing mobile industry. Prior to joining the of low-cost debt MAKES IT strategic direction. This needs small/mid-caps will still offer good lab, he worked with a leading extensive industry expertise and opportunities to PE funds. Some electronics manufacturing services firm ALL THE MORE IMPORTANT FOR foresight on the evolving dynamics of players will also take advantage of the in a project management role. He is “ consumer behavior, industry current credit crunch and the based in Mumbai. competition and regulatory changes; economic slowdown by acquiring PE FIRMS TO FOCUS ON VALUE but, if implemented correctly, the firms with low enterprise value or benefits can be extremely high. even purchase LBO loans that banks CREATION are selling at deep discounts to clear their balance sheets.

22 Business Standard, “Blackstone to invest $150mn in Nagarjuna Const”, August 2007. 28 Telecom Paper, “Greenfield Capital buys O2 Netherlands for EUR 25 mln”, April 2003. 23 LiveMint, “Blackstone buys 50% in Gokaldas”, August 2007. 29 Red Herring, “KPN Snaps Up Telfort”, Jun 2005. 24 LiveMint, “Blackstone picks up 10% in Allcargo Global”, February 2008. 25 EVCA Barometer, March 2008. 26 Reuters, “Cengage to buy Houghton” college unit for $750 mln”, December 2007. 27 Forbes, “Thomson to sell Learning Assets to Apax and OMERS funds for 7.75 bln usd”, May 2007.

54 55 Representing 23% of the world’s remaining non-mobile phone users, ~440 MILLION AFRICANS Africa should be considered alongside live China and India as an engine of future 2 in markets demonstrating growth for mobile services. “ The opportunity presented by Africa constrained growth at a continental level is considerable, but Africa is a highly heterogeneous continent in terms of socio-economic Undeveloped Markets Constrained Markets Telecoms in Africa: development, with corresponding These markets include nations like These nations generally have high differences in mobile market maturity. Zimbabwe, Somalia and Rwanda— populations, with widespread poverty. countries with a history of political The GDP ”per capita of $1,6054 is much Reaching Consumers in Constrained Markets At a high level, we can characterize African markets into three segments; instability leading to low international lower than that of leading markets, as a Jawad Shaikh, Ashish Sidhra and James Henderson leading, undeveloped and constrained investment and little development in result of which foreign investments were markets. These are outlined in Figures the domestic private sector. These slower to reach these nations. Mobile Abstract: With approximately 700 million non-mobile users1 and low fixed line penetration, Africa is attracting widespread attention from 2 and 3. difficulties are reflected in the national penetration is growing but remains between 10 and 30%.3 Our experience Western, Middle Eastern and Asian operators looking for new subscriber growth. Whilst growth in some markets has been strong, Capgemini has GDP, with an average of only $986 per capita4 and mobile penetration is that mobile growth in these markets identified a large segment of African markets, spread across twenty countries, where growth has been constrained by usage barriers that Leading Markets The leading markets of Africa have rates which are less than 10%3. The is constrained by significant usage operators can address. The key barriers to mobile usage remain poor market regulation leading to high tariff prices, unaffordable handsets, lack shown rapid development with constraints on mobile uptake are barriers, such as handset cost and of network coverage and product distribution constraints. The risk for established operators who fail to address these constraints rapidly is average mobile penetration of 55%.1 intrinsic in nature, with wider service availability. considerable, as operators with expertise in low ARPU markets, such as Bharti or Reliance, continue to be attracted to large unaddressed These markets are concentrated in development needed before operators populations. Northern and Southern Africa, and can develop the communications In this paper, we focus on the generally constitute the wealthier market. opportunity presented by these African nations; their average GDP of $7,500 per capita contrasts with a Saturation of mobile markets in the which boasts over 900 million people positioned for growth, and discuss continental average of $2,822.4 Figure 2: Mobile Phone Penetration, Africa, 2000-2007, % US and Europe coupled with experiencing a subscriber CAGR of strategies for operators to remove Investors entered these markets early, declining revenue growth in these 47% over the last five years, which present growth barriers and unlock as Northern Africa attracted Middle regions has brought emerging has now driven penetration from the latent market potential. Eastern and European operators, economies to the forefront of operator approximately 2% to 27% since the while the Southern African markets 1 attention. Among emerging markets, turn of the century. African Market Segmentation benefited from proximity to the African continent is generating With mobile services universally comparatively developed areas of particular interest, as shown by recent Given the rapid development of these predominant over fixed line, African South Africa—home to industry speculation surrounding the markets, operators have a shortening subscriber growth has been dramatic, leaders MTN and Vodacom. Due to acquisition of MTN by key Indian window of opportunity. In this article, reaching 265 million mobile phone their high state of development and players, Bharti and Reliance. we segment the African countries, subscribers in 2007. Despite this maturity, it is our understanding that Operators are attracted by a continent identifying those markets which are growth, 700 million Africans remain the window of opportunity is ending without a mobile phone in 2007, for operators to achieve further super- Figure 1: Population and Mobile Penetration Across Selected Markets, June 2007 presenting many investment nominal subscriber growth in these Source: ITU World Telecommunication ICT Indicators 2007, World Bank 2006, Capgemini Analysis 1 opportunities (see Figure 1). markets.

Figure 3: Geographic Distribution of African Market Segments, 2007 23% of the world’s “non-mobile users are in Africa

Source: Capgemini TME Strategy Lab analysis. Telecom Regulatory Authority of India (TRAI). GSM World Web-site. Merrill Lynch, “Global Wireless Matrix Q2-2007”, October 2007 Source: ITU World Telecommunication ICT Indicators 2007, Capgemini Analysis

1 ITU World Telecommunication ICT Indicators 2007, Capgemini analysis. 2 ITU World Telecommunication ICT Indicators 2007, Capgemini analysis. 3 ITU World Telecommunication ICT Indicators 2007, Capgemini analysis. 4 World Bank GDP/Capita data 2008; www.worldbank.org. ” 5 World bank 2006 Population estimates, Capgemini analysis. 56 57 Unlocking Value in Constrained In constrained markets, lack of DESPITE WIDESPREAD Markets regulation is limiting the ability of Whilst poverty is doubtless the most players to replicate the Algerian POVERTY, African mobile costs significant barrier to market experience and pursue disruptive development, it does not in itself price strategies. Interconnection “ explain the low mobile penetration agreements are often negotiated are amongst the world’s of constrained markets. Figure 4 directly between participants in demonstrates that whilst countries markets like DRC, Zambia and highest 9 such as Angola and Cape Verde have Uganda , leading to very high Figure 6: $50 Handset cost as a percentage of average annual consumption per similar levels of wealth to Albania and interconnect floors; in India, the individual in constrained markets, 2005, % Moldova, they have much lower interconnect rate is mandated at penetration. $0.0075 10, whilst in the Democratic 6 Figure 4: Mobile Penetration and GDP/capita, % and USD$ (PPP) Republic of Congo it sits between We believe there are four common $0.15 and $0.20 11, leading to prices ” usage barriers that explain the that are 550% greater. discrepancy of low service penetration: service affordability, Established players with large device costs, service availability and customer bases lobby regulators technological literacy. By addressing heavily to maintain the status quo and these usage constraints we believe operators can unlock value and grow protect themselves from the damage the size of the addressed markets. of a price war. Whilst interconnection agreements between operators must Effective regulation can facilitate be ratified by the regulator, the lack of price declines a clear mandate to drive down Across the constrained markets, prices interconnect rates leaves the Source: World Bank 2005 Household spend survey, Capgemini Analysis charged for basic voice and SMS negotiating power of incumbent services remain at a premium operators unchecked. compared to other regions; for Improving Handset Affordability should still play an active role in Source: IMF 2008; ITU 2007 example, whilst 41% of the An example of an African market Whilst we anticipate that call prices addressing this barrier. For example, population in Sub-Saharan Africa live where regulation has been successful will decline as markets mature and African consumers have a high on less than 50 US cents per day, is Tanzania, where the interconnect competition intensifies, handset acceptance of second-hand handsets, Figure 5: Mobile Call Costs in Select Countries, February 2008, US cents and PPP rate is relatively low at approximately US cents average calling rates vary between 15 affordability constraints will continue which implies that operators who to 30 US cents per minute.7 $0.078; tariff price declines have to be the single greatest limitation on invest in importing refurbished driven an ARPU decline of usage growth. handsets can often reach new Figure 5 demonstrates the poor approximately 70% from 2003 to consumers rather than waiting for the affordability of mobile calls in Africa. 2007, with subscriber penetration The difficulty for operators is that in prices of new handsets to reach In our view, African markets are like growing from 5% to 20%. In this these low ARPU environments, favorable lows. any other nascent mobile market in context, the decline in ARPU handset subsidization cannot be that they exhibit high usage elasticity; demonstrates the addition of many widely justified due to the risk of Given the importance of low cost 12 i.e. a decline in price will result in low income consumers. subscriber churn and widely handsets, it is our view that there are increases to both average minutes of unavailable credit structures. opportunities for some operators to use and subscriber numbers. The failure of many African operators collaborate in handset procurement. to reach poorer consumers is Operators are increasingly supported For example, if second-tier players An example of stimulated growth is confirmed by the relatively high by the efforts of handset vendors who collaborate to combine their spend Algeria, where the second entrant, ARPUs seen in constrained markets have recognized the need for new and supply chain expertise, they Orascom, secured a market share of such as Nigeria ($15), Zambia ($11) ultra low cost handsets, which will would benefit from economies of scale 70% after only one year of operations. and DRC ($12) compared to Asian continue to be introduced into the and access to shared assets, allowing This strategy was based on aggressive countries like India ($9) or Russia market at lower price points. them to threaten the hegemony of Source: Company Reports; ITU 2007, Capgemini Analysis 13 price cutting, causing a staggering ($9.1) . However, in our view, operators leading players. effect on mobile penetration—from “constrained markets” as we believe players are already driving market 2000 to 2002, market penetration was that operators can remove some of maturation. below 2%; however, following HANDSET COSTS are the these usage barriers and accelerate Orascom’s launch, penetration subscriber growth. This is in contrast The constrained market size is huge, reached 4.5% in the first year, to “undeveloped markets,” where with 440 million potential climbing to 63% in 2007.8 single greatest barrier to socio-political problems are too severe subscribers, constituting “ to be addressed profitably, and approximately 50% of Africa’s total mobile uptake “leading markets” where established population.5

6 Leading Markets (20 Countries): Algeria, Botswana, Congo, Cote d’Ivoire, Egypt, Equatorial Guinea, Gabon, Gambia, Ghana, Kenya, Libya, Mauritania, Mauritius, Morocco, Namibia, 9 Capgemini experience, regulatory statements; www.caz.gov.zm/, www.ucc.co.ug/. Senegal, Seychelles, South Africa, Swaziland, Tunisia. Constrained market (21 Countries): Angola, Benin, Burkina Faso, Cameroon, Cape Verde, Democratic Republic of Congo, 10 Indian Telecommunications Regulator; http://www.trai.gov.in/. Guinea-Bissau, Lesotho, Liberia, Madagascar, Mali, Mayotte, Mozambique, Nigeria, Sao Tome & Principe, Sierra Leone, Sudan, Tanzania, Togo, Uganda, Zambia. Undeveloped Markets 11 Operator Interconnection Agreements, DRC Regulator; Capgemini research. (13 Countries): Burundi, Central African Republic, Chad, Comorros, Djibouti, Eritrea, Ethiopia, Guinea, Malawi, Niger, Rwanda, Somalia, Zimbabwe. 12 Capgemini analysis, various sources; Operator annual reports, regulatory documentation. 7 Department for International Development, UK, Report on Africa, April 2008; Capgemini Analysis (Figure 5). 13 Company Reports; Telecom Regulatory Authority of India (TRAI). Merrill Lynch, “Global Wireless Matrix Q2-2007”, October 2007. 8 Orascom Annual reports, ITU 2007, Capgemini Analysis. 58 ”59 Expanding Network Coverage Figure 7: Capex Investments of the four leading Pan-African mobile operators, New Entrants Given the low population densities in In conclusion, despite the high Many African countries have very low excluding South Africa, US dollars (millions), 2005-07 Entry Options rural areas and the high cost of number of operators already active in population densities outside of the With around 50 single country backhaul to connect them to the core many countries, the window of major urban conurbations. While the players in Africa accounting for network, “Greenfield” consumers are opportunity for new entrants to build costs of providing universal coverage approximately 55 Million subscribers, difficult to address profitably. an African presence remains are too high in many countries, we acquisition opportunities for inorganic Operators should first establish a considerable as mobile penetration is believe that network sharing will growth remain widespread.16 presence in the profitable urban areas, low. In response, operators established become an increasing necessity to However, deal sizes to acquire before switching investment focus to in constrained markets must adapt their reach rural areas. For example, in operations at a pan-African level have the latent opportunity of the rural strategies to drive market maturity not India all major operators participate in become high on a cost per subscriber market. only as a path to increase profitability, network sharing on a one-for-one basis. In 2005, MTC beat rival bidders but also to reduce the risk of basis which has led to 30-40% of sites to acquire Celtel at a cost of US$680 The importance of rural coverage is competitive disruption. If this is not now being shared.14 African regulators per subscriber, while in 2006 MTN emphasized by the high internal addressed, new entrants will continue have an important role to play in went on to pay over $1000 per migration to cities, which is typical of to lead in the reduction of adoption facilitating these agreements as subscriber to acquire Investcom.17 Africa, resulting in strong demand for barriers as they recognize the need to without faith in regulatory support, Premiums are being paid as operators calls home to rural friends and family. be aggressive in disturbing the status Includes 2005-2007 Capex for MTN, Vodacom, Orascom and MTC. these agreements are commercially risky. Source: Annual reports 2005, 2006, 2007, Company websites, Integrated Business Report 2005; Capgemini analysis become increasingly aware of the Hence, an operator providing quo to gain market share. potential of the “Greenfield” market coverage to a rural area is likely to With the sharing of infrastructure and recharge voucher sales, which operators must close the window of and face increasing competition for attract both significant interconnect We anticipate the next 2-3 years will proving to be a complex arrangement, causes sale channel proliferation as opportunity for new entrants by acquisition targets as players look to revenue and net subscriber churn as be key in determining which national roaming agreements are a more distributors are easily motivated to rapidly acquiring subscribers—an consolidate. The success of players urban users move “on-net” with their companies become dominant in common alternative. New entrants in push a higher margin product. objective that can be achieved by exiting African markets at substantial rural contacts. pan-African mobile communications, particular can benefit from these addressing the usage barriers profit only serves to encourage as growth in currently constrained agreements as they are able to reach Recommendations previously discussed. The result is a investments from other operators. Technology Choices markets is accelerated. commercial launch much quicker. In A constrained market operator can reduction in the non-addressed New entrants must carefully consider 2005, Zantel signed an agreement with accelerate market growth by market, which is inviting disruption Market entrance options can be the network technology they employ. Jawad Shaikh is a vice president in Vodacom to extend their coverage from addressing the barriers discussed but players need to carefully model limited by the viability of acquisition Differentiation through costly, high Capgemini's Telecom Media & Zanzibar into mainland Tanzania; this previously. However, to establish or the risk of cannibalization to existing targets and availability of spectrum speed networks can be risky; Entertainment consulting practice. allowed Zantel to confidently acquire maintain a market presence in these business before adopting these licenses. Where both options are operators must not lose focus on the He has more than 10 years' experience subscribers without having to worry dynamic markets, other strategic strategies. open, Capgemini recommends that fact that these are predominately in the telecommunications market. He about poor service quality during the elements must be considered. companies be pragmatic in need-based markets, and whilst a is based in London. early stages of network roll out. Lean Operations considering both the level of consumer demand for high speed Established Players As operators adopt strategies aimed competition already present in the connections may exist, the value Ashish Sidhra is a managing Extending Distribution channels Anticipating Disruption at subscriber growth, the decline in market and the impact that can be remains in offering standard mobile consultant in Capgemini’s Telecom Limited infrastructure and poor rail Global giants already have a heavy ARPU can place operating margins achieved within the company’s voice and SMS services. Media & Entertainment consulting and road connectivity make presence in Africa, with MTN, under pressure. To maintain financial constraints. Profitability is practice with more than 7 years of establishing robust product Vodacom, Orascom, MTC, Vodafone profitability, lean operations and strongly correlated to scale and there WiMax is especially hyped as a experience in the industry. He has led distribution networks a huge and Orange accounting for more than operational excellence become are numerous examples of African disruptive threat to mobile markets. strategy projects for a range of telecom challenge. In countries like Liberia, 60% of subscribers through 57 essential. market entrants attempting network However, with the availability of and media clients and has recently the operators’ role in product operating companies.15 A second tier roll outs despite being underfinanced cheap handsets key to mass market focused on the emerging markets of distribution does not extend beyond of pan-African multinationals has also Global companies such as Vodacom, and struggling to achieve profitability penetration, operators pursuing Asia, Africa and the Middle East. He is the capital city—i.e. further formed including Etisalat, Millicom MTN and Etisalat have a wide beyond the anticipated investment technology leadership strategies will based out of London. distribution is the responsibility of and Portuguese Telecom. The presence in the region and are hence window. lack the economies of scale offered by franchise owners and resellers. strategies of these players vary, but able to centralize functions across established GSM technologies, and James Henderson is a consultant in appetites for geographic expansion are countries. Areas such as IT, Greenfield vs. Brownfield Market thus will often be limited to the richer the TME Strategy Lab. His current Whilst major urban areas are often generally strong. procurement and network As constrained markets have such low segments of society. In addition, research focuses on analyzing the saturated with product outlets, management can be centralized to penetration, operators are presented African consumers would be converging telecom and media operators can still differentiate in rural The entrance of Warid and Bharti are achieve synergy savings as local with a choice of strategic focus—i.e. particularly sensitive to the technical industries, and emerging business areas where credit recharge availability widely anticipated further increasing functions are downsized. In product either competing for existing issues expected from immature models centered on collaboration. Prior is low. In order to improve product competition. These players are global distribution, flagship stores are subscribers or targeting new technologies like mobile WiMax, such to joining the Lab; he worked on a availability, operators should fully experts at operating in low ARPU generally cost effective for urban consumers. Existing subscribers are as poor battery life. For these reasons, variety of projects across the TME leverage the country’s informal market environments and driving mobile centers, but operators should look to often concentrated in major urban constrained markets have a degree of sector with recent focus on emerging structures—i.e. ensuring products phone usage. reduce OPEX and expand their conurbations, whilst “Greenfield” protection from the threat of mobile market strategies and the entrance of reach street sellers and rural market footprint in rural areas by relying on consumers are generally located in WiMax. WiMax to developed markets. James is stalls. To drive this, operators can To protect market share and prevent small 3rd party distributors instead. more rural regions. based in London. become more generous in the further market fragmentation, commission fees paid for SIM card

14 GSM World, Infrastructure Sharing Report 2007. 16 WCIS (World Cellular Information Service), 2006. 15 WCIS (World Cellular Information Service), 2006. 17 http://www.arabianbusiness.com/12348-lost-in-valuation?ln=en.

61 60 Three key decisions in global sourcing concern OWNERSHIP, LOCATION AND THE “LEVEL OF HANDS-ON MANAGEMENT REQUIRED TO ENSURE SERVICE DELIVERY Better Global Sourcing of Services:

Frameworks for TME players Global Sourcing Options for TME Players by George Yip and Kaushal Vaidya Three key decisions in global sourcing Figure 1: The Global Sourcing Cube ” concern ownership (in-house or outsourced), location (onshore or Abstract: Making decisions on global sourcing is challenging due to the large number of alternatives available. Key offshore) and the level of hands-on decisions in global sourcing concern ownership (in-house or outsourced), location (onshore or offshore) and the management required to ensure that level of hands-on management to ensure delivery performance. These choices can be made by analyzing five the service delivers as per the characteristics: the nature of the service under consideration, customer demand issues, the sourcing organization’s business’ needs. The first two experience and capabilities in sourcing as well as collaborating with other organizations, competitors’ best practices parameters are fairly well-known, but as well as threats, and the depth of the supply market of potential providers. The analysis of the above characteristics our research indicates that the third as well as the selection of the appropriate sourcing mode can be carried out in a qualitative manner by responding parameter also needs to be examined to the various questions in the Global Sourcing Framework. Corresponding to each response is a suggested carefully, particularly for services. The approach regarding choice of ownership, location or management style. Once all the questions have been addressed, “level of management” parameter the suggested alternatives can be combined to identify the optimal sourcing options. Through use of a business case assesses whether the service providers variant of the Global Sourcing Framework, it can also be applied in a quantitative manner. Qualitative or would require ongoing day-to-day, quantitative application of the framework—accompanied by an in-depth investigation and analysis of the issues hands-on supervision, or whether they can be held at arm’s length after involved—can help TME players identify the right sourcing modes for various services and thereby optimize their service transition without excessive overall operating models. hands-on supervision, and driven primarily by Service Level Agreements Source: Capgemini TME Strategy Lab analysis. George Yip, Yacine Chibane, and Melanie Knight, “Better Global Sourcing (SLAs). The former case is referred to of Services”, 2007 as tight management and the latter as criteria. Therefore, carefully evaluating The wave of global sourcing that However, global sourcing of “services” light management. started in the 1980s with the is far more complex than that of the feasibility of a particular service for global sourcing becomes necessary outsourced and offshored “products,” as the delivered services For each service sourced by TME before initiating the process of vendor manufacturing of physical products happen in real time, are harder to players, the three parameters can be and/or geography selection. now also includes services sourced define accurately, need constant plotted along a “global sourcing cube” culturally closer than one outsourced Each of the choices imply a trade-off from around the world. TME players monitoring, and are affected by (see Figure 1). to Poland. Similarly, some French in the levels of cost, innovation and In this study1, the Capgemini TME have also joined their counterparts frequent service quality variations. companies offshore to Mauritius, risk. Moving from the sourcing mode Strategy Lab describes an approach from other industries to leverage the Consequently, the sourcing of services The Global Sourcing Cube has two thousands of kilometers away, but at the front-lower-left of the cube to and supporting model that can help benefits of improved costs and higher presents a number of special choices on each of the three closer in language than other modes at the back-upper-right side TME players make sourcing decisions efficiencies that typically accrue from challenges, which result from the need dimensions, although there are geographically closer locations. For generally reflect movement to less more effectively. The paper offers a global sourcing of services. to intercept requirements from a intermediate points on each. For management, the tightness of controlled modes but potentially to systematic approach towards broader range of stakeholders, manage ownership, there is a spectrum from supervision is determined by the higher levels of cost reduction. The identifying the right mode in which a knowledge effectively, and define as 0% to 100%, including partial extent to which the players seek to right place on the cube for a particular service can be sourced. This well as continuously manage ownership or joint venture. For retain control over the services particular service depends on the will help decision makers identify the performance against service level location, there are nearshore locations delivered. characteristics of the environment that right options for their unique (e.g. Poland), and some offshore the sourcing organization finds itself circumstances. locations (e.g. India) which are further The use of two choices for the three in. The subsequent sections are aimed than others in terms of both parameters helps to arrive at eight at aiding TME players in identifying geography and dissimilarity—such as simplified choices, represented by the right box on the Global Sourcing in culture. It does not necessarily eight smaller cubes (see Figure 2). Cube for the services under imply that the nearer the location, the Each of the eight modes have been consideration for global sourcing. better the fit. By way of illustration, assigned a label to help increase consider a UK-based business—a understanding in an intuitive fashion service offshored to Australia will be (see Figure 2).

1 This study has been adapted from the paper “Better Global Sourcing of Services” written by George Yip, Yacine Chibane and Melanie Knight in 2007 for Capgemini Consulting.

62 63 Figure 2: Eight Global Sourcing Modes THE APPROPRIATE SOURCING MODE CAN BE

“Back of House” “Under My Nose” SELECTED BY EVALUATING nature of the service, • Close but not at the forefront of attention; light • Keeping the most control; tight management of management of an in-house, onshore process an in-house, onshore process customer“ demand, organization

“Hand Over the Car Keys” “Trust but Verify” • It stays in the family but the “car” is driven away; • Tight management of an in-house, offshore capabilities, competition light management of an in-house, offshore process process and supply market

“Someone Else’s Problem” “Cohabitation” • The process cannot be completely ignored but an • Tight management of an outsourced, onshore outsourced, onshore mode can minimize the process results in the two independent amount of attention paid organizations collaborating closely

Characteristics Affecting the between easy to outsource and offshore services. For instance, in November Choice of Global Sourcing services such as internal IT 2007, O2 UK set up a customer “Move and Forget” “Gold Frequent Flyer” ” • Keeping the least control; light management of • Lots of travel for tight management of the Modes maintenance, and difficult ones closer service department in the UK itself to an outsourced, offshore process outsourced, offshore process The selection of the appropriate to core operations such as new product offer technical and operational advice sourcing mode for various services is a development and R&D activities. to customers for the new Apple significant challenge for TME iPhone2. Similarly, SunRocket, a

I = In-house O = Outsourced managers. Our research suggests that Customer demand former pure play VoIP operator and N = Onshore F = Offshore the decision can be made by evaluating Customer demand characteristics of a now a part of Packet8, had to bring L = Light Management T = Tight Management five key characteristics, which include service include issues such as the back its outsourced and off-shored the nature of service under needs of the internal customer to customer service activities due to the consideration, customer demand in reduce the costs, and external increased need for brand Source: Capgemini TME Strategy Lab analysis. George Yip, Yacine Chibane, and Melanie Knight, “Better Global Sourcing of Services”, 2007 relation to that service, the sourcing customer impact in terms of the enhancement and differentiation organization’s experience and service enhancing brand image or through customer service3. capabilities in sourcing, competitors’ differentiation of the firm in its best practices as well as threats, and competitive landscape. The related Organizational experience and Figure 3: Effects of Service Characteristics On Choice of Sourcing Mode the supply market of potential questions (see Figure 4) also address capabilities providers. the need to keep services onshore or The questions on organizational nearshore to ensure language and characteristics (see Figure 5) cover the ability of the sourcing organization to Comments If “highly agree”, then favors Managers can analyze each of the five cultural compatibility of the sourced characteristics in detail as well as assess perform the process itself and also its 1. Can the service be standardized and Outsourced, Offshore the appropriate sourcing mode by procedures easily documented? Low cost to standardize and document the responding to a set of questions for each process before sending outside Figure 4: Effects of Customer Demand Characteristics on Choice of Sourcing Mode characteristic (refer to Figures 3-7). For 2. Can the requirements for performing this Light Management each service under consideration for process be easily specified and effectively Easy to monitor with minimal oversight Comments If “highly agree”, then favors monitored? global sourcing, managers’ response to 3. Will mistakes in this process have a In-house, Onshore, Tight Management these questions can vary from “highly 8. Are internal customers convinced that Outsourced significant business impact from a legal, If send out, then need to restructure and outsourcing will be beneficial? Satisfies internal customers regulatory or financial point of view? reengineer process, and train outside staff agree” to “highly disagree”. Associated carefully. with each question is the suggested 9. Are internal customers more concerned Outsourced, Offshore, Light Management about the cost of the service rather than Go for the modes with the maximum savings 4. Does the process involve direct contact with In-house, Onshore, Tight Management sourcing approach in case the response service excellence? the organization’s clients (e.g., external If sent out, runs risk of poor process is “highly agree”. The responses to the clients, suppliers)? performance causing loss of reputation and In-house, Onshore, Tight Management customer satisfaction, which in turn leads to 30 questions, taken together, can help 10. Does the process in scope have significant Play safe, or if do send out, then need to train loss of business brand impact? outside staff carefully and manage relationship managers in identifying the most tightly 5. Can the service be delivered remotely Outsourced, Offshore without internal staff or customers’ Easy to send out suitable mode for sourcing of a 11. Does the process in scope differentiate the In-house Service Characteristics involvement? particular service. organization in its competitive landscape Keep in-house if the organization has distinctive competence, but outsource if the provider can 6. Can decisions within the process be based Light Management provide a superior process that also protects the on standard specified criteria? Once the process is documented, little organization’s differentiation. monitoring needed The nature of the service The nature of the service addresses the 12. Is process success’ independent of local Offshore 7. Can responsibility for performance of this Light Management cultural influences? Can go to countries that are quite dissimilar in process be clearly defined? Easy to monitor performance extent to which the service can be Customer Demand Characteristics culture and language standardized and easily sent outside the organization and home country. Source: Capgemini TME Strategy Lab analysis. George Yip, Yacine Chibane, and Melanie Knight, “Better Global Sourcing Source: Capgemini TME Strategy Lab analysis. George Yip, Yacine Chibane, and Melanie Knight, “Better Global Sourcing of Services”, 2007 of Services”, 2007 The related questions (see Figure 3) can help TME players distinguish

2 The Herald, “iPhone boost for 02's Scottish workforce”, 29. February 2008. UK Business Park (ukbusinesspark.co.uk), “UK Activity Report - Computers and Electronics”, November 2007. 3 Company websites. 64 65 experience and ability in managing Nokia-Siemens Networks, as this Figure 5: Effects of Organization Characteristics on Choice of Sourcing Mode Figure 7: Effects of Supply Market Characteristics on Choice of Sourcing Mode vendors. These questions directly collection of vendors possess the address the choice of ownership, necessary skill-sets6. Comments If “highly agree”, then favors location, and management mode. Comments If “highly agree”, then favors 24. Is the supply market of service providers Outsourced The 30 questions discussed above (vendors) mature? Start-up investment is minimal 13. In this specific process, are most Outsourced SFR, a leading mobile operator in “generalist” employees capable of Little specialisation involved, so makes it easy to (refer to Figures 3-7) are both generic performing other employees’ jobs? find outsourced providers 25. Can this organization leverage vendors’ Outsourced France and an affiliated operating (not specific to a particular service) economies of scale for this process? Can enjoy cheaper provision company of Vodafone Group, decided 14. Are the current in-house processes best in In-house and detailed enough (about particular class? Or invest to bring outside provider up to best in In-house, Tight Management to adopt the “Vodafone live!” content class. aspects of the sourcing situation) to 26. Does an external vendor or service provider Keep in-house or avoid high threat providers. If portal as the backbone to its mobile, address a sourcing decision about any have the potential to become a competitor outsourced, then manage tightly to avoid In-house, Onshore within the next five years? leakage of proprietary know-how data and content services. In order to 15. Is there potential for industrial unrest if jobs Hard to send jobs out of organization or service. Typically, by responding to the are lost? offshore. 27. Are the key skills required in this process all Outsourced, Light Management optimize time-to-market and costs, set of 30 questions under the five available in the vendor supply base? Providers will not have to acquire skills at 16. Is the organization evolving and are In-house, Onshore additional cost, and need less management SFR decided to outsource activities requirements changing quickly? If sent out, will incur regular extra costs to characteristics, managers can get a related to the integration of its content reengineer processes good idea of the appropriate sourcing 28. Is the capacity of skills required all available Outsourced in the vendor supply base? Wide choice of effective suppliers services with those of its partner4. mode to select. TME managers are 17. Are contracts with service providers or Tight Management vendors reviewed frequently and actively Will need regular management involvement encouraged to use these questions as a 29. Is the labor attrition rate low offshore? Offshore managed? Reduces potential costs of recruitment, Competitor characteristics checklist to stimulate their own induction and retention.

Supply Market Characteristics Competitor characteristics (see Figure 6) 18. Does the organization have the capability to In-house deliver the process or service in-house? Provides a real choice, depending on thinking, support their own detailed 30. Is the supply market able to provide this Offshore cover the extent to which competitors Organization Characteristics effectiveness and cost of outsourced analyses and cross-validate their process at maintained service levels and at Savings are highly likely alternatives lower cost? have set precedents or pose threats in decisions. The following section 19. Does the organization have experience of Offshore global sourcing. In many cases, describes in detail the qualitative and Source: Capgemini TME Strategy Lab analysis. George Yip, Yacine Chibane, and Melanie Knight, “Better Global Sourcing cross-border activity? Makes offshoring less risky companies need to utilize global quantitative approaches towards use of Services”, 2007 sourcing in order to match a Source: Capgemini TME Strategy Lab analysis. George Yip, Yacine Chibane, and Melanie Knight, “Better Global Sourcing of Services”, 2007 of the 30 question framework. competitor’s level of costs or service. Qualitative and Quantitative For instance, three of the four largest Approaches to Sourcing Mode Identifying the appropriate mode by The examples of KPN and Bharti players in Netherlands—Orange, Figure 6: Effects of Competitor Characteristics on Choice of Sourcing Mode Selection using qualitative responses to Airtel indicate that the decision to Vodafone and Deutsche Telecom— The 30-question global sourcing Comments If “highly agree”, then favors pertinent questions outsource network services is driven outsourced their network operations framework can be used to aid The following examples show how the primarily by favorable service, in 2006. The associated cost savings 20. Are competitors offshoring this service successfully? Offshore decision-making regarding the customer demand, competition and Competitors have shown that offshoring works Global Sourcing of Services gave them a competitive advantage for this service in this industry sourcing of services. For a particular Framework and its associated supply market characteristics. In this compared to the incumbent, KPN. As 21. Do competitors have long-term relationships with Light Management service, qualitative or quantitative questions can lead to the appropriate case, the choice of outsourcing as an a result, KPN was also encouraged to their service providers or vendors and is re- Can have similar long term relationship that application of the framework can tendering, therefore, infrequent? requires only light management sourcing decision. Although the appropriate ownership mode is driven follow its competitors in order to stay indicate the feasible global sourcing decisions described here were made by the maturity of supplier markets Outsource, Light Management competitive and protect its position as 22. Do competitors have distant relationships with their Costs are not expected to increase hugely as modes, which can be investigated without application of the framework, and the importance of cost-saving. the market leader. service providers? competitor behavior suggests that processes further by a thorough discussion and have settled down the associated discussions The choice of location is driven by the investigation of the issues involved. demonstrate how the framework can need to provide services from 23. How unacceptable is it if competitors were to gain In-house A similar story unfolded in the Indian access to detailed knowledge about the process in Any sourcing decision is constrained by the The qualitative and quantitative be used to arrive at the actual onshore. Further, service Competitor Characteristics scope (e.g., via a service provider or vendor)? mobile market, one of the largest in threat of a loss of competitive advantage approaches are discussed in detail in decisions made. The illustrative characteristics influence light the world. In 2004, its leading the subsequent paragraphs. example used here is the sourcing of management mode as the process operator Bharti Airtel decided to Source: Capgemini TME Strategy Lab analysis. George Yip, Yacine Chibane, and Melanie Knight, “Better Global Sourcing of Services”, 2007 network infrastructure services. We delivery requirements can be easily outsource its network, IT and have analyzed the relevant decisions specified and monitored. This customer contact center operations to (see Figure 8) made by KPN combination of outsourced, onshore global majors such as Ericsson, (Netherlands) and Bharti Airtel and light management mode is Nokia-Siemens Networks, IBM and (India), two leading operators in their referred to as “Someone Else’s IBM-Daksh (this decision has been Supply market characteristics For instance, it is relatively easy to respective geographies, using the Problem7” and is now used analyzed in detail using the sourcing Supply market characteristics (see decide about outsourcing an IT or framework discussed earlier. increasingly by telcos in sourcing of framework in the subsequent Figure 7) address the availability, customer contact process because of network services. sections). Once Bharti Airtel maturity and cost-saving potential of the extensive supply market that has outsourced its operations and started vendors. A well-developed, mature developed in India, and increasingly achieving significant cost benefits, collection of vendors with necessary in other countries such as China. other operators, such as Vodafone skills typically encourages outsourcing Similarly, more than 90% of all Essar (then Hutchison Essar) and Idea coupled with light management. network outsourcing deals are Cellular were encouraged to follow awarded to equipment suppliers such Bharti Airtel to match its cost-levels5. as Alcatel-Lucent, Ericsson and

4 Company websites. 6 Capgemini TME Strategy Lab, “Network Outsourcing”, 2007. 5 Capgemini TME Strategy Lab analysis. Company websites. 7 Someone Else’s Problem” refers to a process that cannot be completely ignored but an outsourced, onshore mode can minimize the amount of attention paid. For more details and other sourcing modes, please see Figure 2. 66 67 Figure 8: Application of the Global Sourcing Model to Identify the Optimal Mode for Figure 9: Key Elements of the Global Sourcing Business Case Model Dr. George Yip is Dean of the Sourcing Network Infrastructure Services Rotterdam School of Management, Elements of Erasmus University, and Professor of Operators Global Rationale the Business Description Usage in the Business Case Global Strategy and Management. He (Service) Sourcing Model has also taught at Harvard, Stanford, Mode Highly Relevant Questions Response Indicated Expected Value • EV is the bottom-line value of the business Oxford and Cambridge. His extensive from the Framework Approach a (EV) case (as % of current total costs for the activity) business experience includes being

Service Characteristics: Potential Value • PV is the possible gross savings from using Gross Savings (% of Costs of an Onshore, In- Director of Research & Innovation at Q-2: “Can the requirements for (PV) a particular global sourcing mode (as % of house Process) performing this process be easily current total costs for the activity) • Offshoring and Outsourcing: 35% Capgemini Consulting. He is one of the Highly Agree Light Management • Offshoring and In-house: 30% specified and effectively • Onshoring and Outsourcing: 20% world's leading authorities on global monitored?” strategy and marketing, managing Organization Characteristics: Cost Impact • CI is the maximum cost to create the • One-Time Costs - Search and Contract: 4%, Q-19: “Does the organization have (CI) capability for a particular service or Restructuring: 5%, Process Changes: 10%, global customers, and internationalization. (Network experience of cross-border Disagree Onshore process (as % of current total costs for the Transitioning Work: 3% Outsourcing) activity?” activity) • Ongoing Costs – Lost Productivity/Cultural His latest book is Managing Global Ownership: Issues: 10%, Governance – 10% Outsourced Customers (Oxford University Press, Location: Competitor Characteristics: Q-20: “Do competitors have Outsource, Light Probability • Pr represents the likelihood of incurring the • Pr ranges from 0% to 100% 2007). He is based in Rotterdam. Onshore Agree Management (Pr) costs discussed above in Cost Impact (CI) Management distant relationships with their service providers?”b • It is determined by responses to the 30 Mode: Light questions: Kaushal Vaidya is a senior consultant Supply Market Characteristics: I For instance, if the supply market is Q-24: “Is the supply market of quite mature, the probability of in the TME Strategy Lab. His recent Highly Agree Outsourced incurring various costs is very low service providers mature?” work includes analyzing trends in Collaboration • A CM of Tight Management reduces the • Tight collaboration mode halves the Cost Mode Cost Impact (CI) by making more effective Impact (CI) relative to a Light collaboration online advertising and assessing Q-25: “Can this organization coordination between the customer and mode leverage vendors’ economies of Highly Agree Outsourced (CM) the provider growth as well as profitability drivers scale for this process?” of players in emerging markets. Prior Cost of • CC occurs when tight management is used • CC increases by 10% for outsourced, Note: a. Indicated approach is the same as that suggested by the framework (see figures 3-7) if the response is “agree” or “highly agree”, and Collaboration for better coordination with vendors offshore, tight management vis-à-vis in- to joining the Lab, Kaushal has opposite to that suggested by the framework in case the response is “disagree” or “highly disagree” (CC) • In-house, onshore, light management house, onshore, light management b. This question (Q-20) is more relevant for the KPN example, as Bharti lead the way in outsourcing in India. incurs no extra costs, but other sourcing worked as a management consultant modes increase CC with the consulting arm of India’s Source: Capgemini TME Strategy Lab analysis. Company websites and press releases premier business house. He is based in Source: Capgemini TME Strategy Lab analysis. George Yip, Yacine Chibane, and Melanie Knight, “Better Global Sourcing of Services”, 2007 Mumbai.

Quantitative business case For each of the eight possible global can help TME players in making modeling using the 30 question sourcing modes, the model calculates appropriate decisions on ownership, framework the Expected Value (EV) based on the location and management mode for The set of 30 questions, discussed in responses to each of the 30 questions sourcing of various services. The section 4, can also be used to drive a in the framework discussed interactive nature of the model can decision support model that helps in previously. The model then calculates also help TME managers in assessing identifying the appropriate global the average EV for each global the impact of changing assumptions, sourcing mode. The model focuses on sourcing mode and eventually ranks running alternative scenarios and three critical factors—benefit from the eight sourcing modes based on the comparing the model’s output with global sourcing in terms of potential average values. These ranks (from 1st internal views on strategy. Thus, The Global Sourcing Framework cost savings, costs of sourcing as well to 8th) are the model’s recommendation systematic application of the model as implementation, and factors such for the priority in which to consider along with in-depth investigation of as collaboration that can mitigate the the possible global sourcing modes. issues can help TME players optimize can help optimize an organization’s potential cost. The key elements of their sourcing model for existing as the business case model are described In conclusion, the Global Sourcing well as new services. “ BY IDENTIFYING in Figure 9. Framework is a decision support tool operating model that can help optimize an The above elements come together in organization’s operating model by THE APPROPRIATE SOURCING MODES the following equation, which identifying the appropriate sourcing calculates the expected savings (as % modes for various services. Qualitative of original costs) for a specific or quantitative application of the 30- combination of ownership, location question global sourcing framework and management mode: EV = PV – (Pr * CI / CM) - CC ”

68 69 Paying for Mobile Data

A Vodafone user in the UK received a £27,000 bill for exceeding fair-usage limits, after he inadvertently used his mobile phone as a modem to download full television episodes. In another similar incident, a Bell Canada subscriber received an $85,000 bill after he used his mobile phone as a modem.

Source: PC Pro, “£27,000 phone bill for Vodafone customer”, Jan 2008; BBC, “Shock at $85k mobile phone bill”, December 2007 An iPhone user from Pittsburgh (US) received a 300-page bill from AT&T, delivered in a box, detailing every text message and Internet use over a period of one month. The user put up a video of the massive bill on YouTube, which received over 3 million views in the first ten days.

Source: NY Times, “AT&T’s Overstuffed iPhone Bills Annoy Customers”, Aug 2007 Research conducted by the University of Leicester indicates that the cost of sending a megabyte of SMS works out to £374.49, assuming the average size of a text message to be 140 bytes. In comparison, NASA provided a figure of £8.85 per megabyte for the transmission of data from the Hubble Space Telescope to Earth. This means that SMS usage costs more than sending messages from space through the Hubble!

Source: University of Leicester Going Online

YouTube is estimated to consume 1,000 gigabytes of traffic every second or nearly 300 billion gigabytes each month. In 2007, YouTube alone consumed as much capacity as the entire Internet took up in 2000. YouTube spends approximately $1 million a day on bandwidth costs, and YouTube downloads are estimated to consume 3% of Google’s $11.5 billion in operating costs for 2007.

Source: CNN Money, “YouTube looks for the money clip”, March 2008; Telegraph UK, “Web could collapse as video demand soars”, April 2008 Somalia has the fastest growing Internet user base in the world, growing from 200 in December 2000 to 90,000 in 2007, an increase of 44,000%. Iceland has the highest Internet reach with over 86% of residents using the Internet.

Source: Internet World Stats, 2007 and PC World

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The most common tone played when an SMS (text message) is received on Insights is published by Capgemini’s Telecom, Media & Entertainment (TME) consulting practice. many Nokia handsets is actually the Morse code for “SMS”. We are the leading global management consulting group dedicated to helping CEOs and senior executives Source: http://www.textually.org/ringtonia/archives/2006/08/013361.htm in the converging communications industries address their most critical strategic and operational challenges.

A Singaporean student has set a world record for texting speed. She typed the For further information visit: www.capgemini.com/tmeconsulting official sentence for world record attempts, “The razor-toothed piranhas of the genera Serrasalmus and Pygocentrus are the most ferocious freshwater fish in Editorial Team: Benjamin Braunschvig Jerome Buvat Bobby Ngai the world. In reality they seldom attack a human” in 41.52 seconds. Design: Elisabeth Tahar Source: http://www.theregister.co.uk/2006/11/13/worlds_fastest_sms/ Helen Williams Some companies have introduced ringtones that are audible only to the youth. Atlanta•Bangalore•Düsseldorf•Helsinki•Lisbon•London•Madrid•Milan•Mumbai•New York•Oslo•Paris•Rome•Shanghai•Stockholm•Sydney•Utrecht While they were introduced to help store owners drive away loitering youth, This publication has been printed with vegetable-based inks on 100% recycled paper. many youngsters have innovatively used the same in their classrooms, since these ringtones are inaudible to older people, namely their professors. © 2008 Capgemini. No part of this document may be modified, deleted or expanded by any process or means without prior written permission from Capgemini. Source: http://www.nytimes.com/2006/06/12/technology/12ring.html 70