volume 6 : winter/spring.09 The killer application is the experience C a p g
“ e Capgemini’s telecom, media & entertainment journal m i n i ’ —Sol Trujillo, CEO Telstra s t e l e c o m
” , m e d i a & e n t e r t a i n m e n t j o u r
n Beyond 3G a l MVNOs in India Content Strategies for Telcos First Person Interview: Sol Trujillo, Telstra v
o Future of Broadcasting l u m e 6
: Flexible Innovation w i n t e r / s p r i n g . 0 9 CONTENTS
industry insights
10 Content Strategy for Telcos: Venturing into Content Production
18 Beyond 3G: 4G Strategies for Operators in Europe
26 Virtually Mobile: Assessing the Opportunity for MVNOs in India
36 Anticipating Internet Growth in Africa
44 Future of Broadcasting : A New Model for Profitability
52 Targeted Advertising: Processes and Systems to Deliver Relevant Ads management insights
60 Quest for Growth in Turbulent Times: Revenue Stimulation Strategies for TME Players
68 Flexible Innovation Management: Increasing the Returns on New Product Portfolios lite bytes
76 ARPU Enhancers, Gender & Technology and Work Life Balance editorial
Welcome to the latest edition of Insights.
We are in the midst of difficult times. The ongoing recession is likely to exacerbate the slowdown in the TME industry as consumer spending declines further. Moreover, the next few years are likely to witness a re-distribution of value within the TME sector as content services grow at the expense of delivery and devices segments of the value chain. In such challenging and dynamic times, it will be necessary for operators to not only defend their existing territory but also focus on growth opportunities in adjacent areas of the value chain and emerging markets.
Australia’s leading telecommunications firm, Telstra, exemplifies an operator that is successfully negotiating the challenges faced by operators in developed markets. For our First Person interview, I recently had the opportunity to speak with Sol Trujillo , CEO of Telstra. Sol has had a distinguished career in telecom and is now spearheading a five-year end-to-end strategy to transform Telstra into an integrated, fully converged media-telecommunications company. We discussed some of the key challenges currently faced by telcos, including deployment and monetization of 3G, the search for growth in declining markets and the shift towards offering content services.
We begin our Industry Insights section by discussing content strategies for telcos , wherein we assess the rationale for telcos to venture into content production. In our second article, we discuss the increasing pressure on mobile networks arising from the significant usage growth of data services and recommend 4G strategies for operators in Europe in terms of technology (LTE vs WiMAX) and rollout. Our next two studies deal with emerging markets. In the article on MVNOs in India , we assess the opportunity for companies to use the MVNO route to enter the Indian mobile market, already the second largest in the world and growing robustly. We go on to assess the potential of Internet in Africa and suggest a framework that can be used by operators to identify growth opportunities. We subsequently examine longer-term structural changes in the TV industry in developed markets in the article Future of Broadcasting . Finally, we close the section by discussing the processes and systems required for gaining customer intelligence and delivering targeted ad vertising , a rapidly growing opportunity for telcos.
We begin our Management Insights section with a discussion on convergence as an enabler of growth . Apart from leveraging convergence, product and service innovations remain an effective way of stimulating revenue growth. However, identifying the most promising development projects remains a ‘dark art’ for most TME firms. The next paper discusses flexible innovation management and offers suggestions to bring product innovation process management in line with the uncertainty in the telecom markets and increase success rates.
I hope you find this edition of Insights thought-provoking and enriching. If you have any comments or would like to discuss any of the issues further, please feel free to get in touch.
Didier Bonnet Managing Director & Global Head, Capgemini Consulting Telecom, Media & Entertainment
3 d INSIGHTS
Content Strategy for Telcos: Venturing into Content Production 10
Beyond 3G: 4G Strategies for Operators in Europe 18
Virtually Mobile: Assessing the Opportunity for MVNOs in India 26
Anticipating Internet Growth in Africa: Identifying Market Opportunities 36
Future of Broadcasting: A New Model for Profitability 44
Targeted Advertising: Processes and Systems to Deliver Relevant Ads 52 Figure 2: Select Telcos’ Moves into Content Production Effectively competing with Pay TV players in these markets will require telcos to firm up a content strategy Content Content that includes access to exclusive Content Production Aggregation Distribution content and even content production
Launched its own Orange Sports TV features sports capabilities. Content Strategies for Telcos: production unit TV news and broadcast content on mobile and IPTV The importance of exclusive content Content repurposed for mobile platform h t Formed separate media company that owns “La7” and “ MTV Italia” in the successful uptake of operator w
Venturing into Content Production o r driven services has been vindicated by G
c by Jerome Buvat , Kaushal Vaidya and Varun Saxena i Launched Ad supported Content reformatting to suit mobile platform n
a in- house TV channel for Content slotting within TV channel early successes in the mobile TV g r
O mobile TV in June 2008 Abstract: Content is expected to constitute a significant share of consumer spend on TME services in the next five years. Recognizing Italia space. For instance, consider the case of mobile operator 3 Italia. The its importance, multiple telcos have ventured into producing content in-house either by organically building capabilities or acquiring In September 2008. Telstra rebranded its ISP, operator launched its mobile TV content companies selectively. While operators have always exhibited an interest in having a strong content portfolio, many of them Bigpond as Telstra Media and entered content service, La3, in June 2006 with a production have been acquiring it through other means such as partnerships or rights acquisition. However, the rising costs of acquiring variety of themed channels across Acquired production house premium content rights, and the constraints of revenue sharing agreements will require operators to look at content production as Adlabs in June 2005 various genres as well as exclusive n o
i Invested in multiple content t a viable alternative. Capgemini believes that investments in content production are essential for telcos to become serious contenders i s production companies i rights to football content in Italy. u q in the Pay TV space over the long-term. Producing certain types of content does not entail huge investments – Capgemini analysis c In March 2005, SKT bought 21.7% of Consumer uptake of the service A IHQ, producer of movies and TV suggests that an IPTV operator, producing its own movies and monetizing them solely through subscriber revenues on a pay-per-view programs for mobile TV services reflected its strength and in just over basis, can expect to break-even by the fourth year. However, producing content in-house is likely to present various challenges and two years from launch, by July 2008, risks that telecom operators will have to work around to succeed. Telcos will need to have sizable scales of operation, and significant Source: Capgemini TME Strategy Lab Analysis; Digital Media, “BigPond dismembered, reborn as Telstra Media”, over 10% of 3 Italia’s subscriber base September 2008; Orange, “Orange and TV”, April 2007; Variety, “India's Reliance grabbing Adlabs”, June 2005; France subscriber bases in order to break-even on the investments in producing content solely for distribution on their own platforms. Telcos Telecom, “Orange Content Strategy”, April 2008; Company websites and news releases signed up for the service and part of will also need to build up marketing prowess similar to leading content producers to effectively monetize their own content across the success can be attributed to a multiple platforms. We recommend leading telcos gradually build a portfolio of their content over a period of time, starting with strong content strategy at launch. general entertainment that is cheaper to produce and attracts wide audiences. Telcos should steer clear of making large acquisitions, but should consider selective acquisitions to bolster the gaps in their content production portfolio.
In this paper, we analyze whether complement their core services. This The advent of multiple content types Total consumer spend on content in Consequently, the next five years will telcos should move into content research focuses on linear TV content and advanced digital devices is rapidly the UK has grown from £10.4 billion see a value shift from other TME areas production, the benefits that can and on-demand video content, since changing the consumer basket spend in 2003 to over £11.5 billion in 2007. to content, as consumers continue to accrue, and challenges whilst these constitute over 90% of digital on TME services. This is expected to continue growing spend more on content at the cost of diversifying into this area. content revenues in Western Europe 2. at a rate of 3.5% from 2008-2012, delivery and devices. The absolute even as expenditure on overall TME growth in consumer spend, in real Rationale for Telcos to Enter Importance of Content to slows down to less than 1% 1. terms, on content in the UK is Content Production Differentiate expected to grow from £1.2 billion Content offerings are increasingly an Content has always played a key role CONSUMER during 2003-07 to about £1.7 billion important constituent of telco in influencing consumer interest in Figure 1: Absolute Growth in TME Consumer Expenditure, UK, 2003-2012E, during 2008-2012 (see Figure 1). services. With an objective to gain a Pay TV. A consumer survey conducted Real 2003 £bn larger share of consumer spend, and by Ofcom indicates that over 85% of SPEND is 2003 - 2007 2008 - 2012 TME players, including many telcos, make up for slow growth in their core consumers cite availability of content + £ 4.7bn have begun to recognize this shift and “ communication and Internet access as the key factor for selecting Pay TV the rising importance of content in services, telcos have ventured into services, compared with only 53% of rapidly Devices their service portfolios. Consequently, linear TV broadcasting, Video-on- users choosing price as the most + £2.5 bn a few telcos have forayed into content Demand, and online, as well as important reason 3. Pay TV providers + £1 .4bn production, either by organically mobile portals. In this section, have recognized this and are shifting to Content Devices building content production + £1.2 bn + £0.7 bn Capgemini assesses the key factors integrating backwards to gain content capabilities in-house or by acquiring that make a case for telcos to own exclusivity, including access to content Content content production companies (see content production capabilities to production capabilities (see Figure 3). Delivery + £1.7bn + £1.0 bn Figure 2).
Delivery (£1.0 bn)
Source: Capgemini TME Strategy Lab Analysis ”
1 Capgemini Analysis based on company reports, analyst forecasts and data from regulators/industry bodies. 2 Data from Ovum, Screen Digest, Strategy Analytics, France Telecom, April 2008. 10 3 Ofcom’s Pay TV consultation documents. 11 are keenly contested among large Content production is not an Figure 3: Position of Pay TV Players in France and Spain Figure 5: Average Annual Increase in Costs for Procuring Exclusive Movie and global Pay TV players. This has led to extremely expensive proposition for Sports Rights, Select Western European Countries, CAGR FY2004- a steep increase in the costs involved leading telcos with significant scales FY2008 (a) Aggregation Distribution in acquiring such content. For of operation. As an example, average Content Production (TV Channels) (Retail Service) instance, the cost of la Ligue football costs for producing a movie in Europe rights in France has been steadily are not very high, and usually total Subsidiary studio Canal is a major Produces over 20 special Satellite € studio producing movie content interest channels Operator increasing over the last five years at a less than 10 million for marketing Compound Annual Growth Rate and producing a movie (see Figure 6). Minority stake in Some in- house production through a Owns 11 thematic channels (CAGR) of 18%. Similarly, the cost of This implies a production cost of less e satellite operator
c subsidiary e -TF1
n Canal
a €
r procuring movie content has been than 100 million for 10-12 movies. F rising significantly in the last few These costs and associated risks are Has recently launched Studio 37 for 2 new movies and sports IPTV 56% producing movies channels Operator years. In Italy, the cost of acquiring comparable to a mid-size telecom pay-per-view movie rights has risen at initiative; for instance, rolling out a a CAGR of over 56% in the period countrywide DVB-H mobile TV 37% Produces and distributes movies 22 Digital Only Satellite through subsidiaries, Sogecine and channels Operator 2004-2008 (see Figure 5). network in Italy or the UK, would 25% Sogepaq 23% 23% cost over € 350 million 4. 20% 18% 20% Telecom operators are faced with the 13%
n Investment in ‘ Teuve’ , production 11 thematic channels Cable i
a company Operator p additional burden of trying to For most large telcos, the expense of S Italy Germany France Spain UK Partially owns Canal+ monetize this content over a limited movie production would constitute IPTV bouquet through 16.7% stake Operator in Sogecable subscriber base. While media players only a small proportion of their Pay-per-View Movie Rights Football Rights are free to release content across overall costs and as such, does not multiple platforms and markets, require them to risk significant Note: (a) CAGR of PPV movie rights has been calculated from 2004 to 2006 Source: Capgemini Analysis; Ofcom Pay TV consultation, September 2008; Vivendi, “Creation of Canal Plus France”, January 2007; WorldScreen, “They Aim To Please”, April 2008; Advanced Television, “Telefonica and Walt Disney in a VoD telecom operators are constrained to investments. In the next section, deal”, September 2006; PaidContent, “French TV Companies Marathon and TF1 In Digital Content Creation Deal”, Source: Capgemini TME Strategy Lab Analysis; Exane BNP Paribas, “Telecom Operators: In the Eye of the Telecom-Media October 2007; Company websites first release it to their subscriber Capgemini evaluates whether this Storm”, February 2008; Ofcom, “Summary Profiles of Pay TV in France, Germany, Italy, Spain, Sweden and United States”, December 2007 bases, and then target the larger alternative presents a viable business market for a possible future release. case that offers tangible results. Significant Revenue Shares money in acquiring these rights. Involved in External Partnerships While offering attractive off-the-shelf Relatively Low Investments A traditional route for acquiring exclusivity for telecom operators, Required for Content Production content has been that of partnering however, acquiring rights for Telecom operators will have to work with third-party content owners. This premium content poses two around these limitations that are has been the preferred way for both significant challenges for telecom involved in partnering with content Pay TV and IPTV providers. However, operators: cost of procurement and providers or acquiring content rights. these agreements have the potential to monetization. In the search for an alternative to these modes of content sourcing, significantly reduce the revenues that Figure 6: Costs of Movie Production in Europe, (€m) can be retained by the operators as Over recent years, the rapid content production presents itself as they will have to contend with proliferation of media outlets has an alternative with strong potential for complex revenue-sharing agreements meant that rights to premium events large telcos. Cost of movies produced by France Telecom’ s Studio with multiple parties in the content Marketing Production value chain (see Figure 4). These Figure 4: Distribution of Revenues across the Value Chain in Partnerships revenue-sharing agreements severely limit the upside for telecom operators Content Content Content Consumer Production Aggregation Distribution Spending in delivering content. Moreover, operators will usually be required to 2.0
n e o i
u 10% 100% s n negotiate separate revenue-sharing i v e v e l s e
e 90% 8.0 p R i
T Telco retains agreements for each platform. t h n 23%3% 23% s
e only 1 0% r t 20% e n 118%8% n o t e r C
u 13%1 a n D
P Various e Rising Cost of Exclusive Content o 4.8 v V Studios 30% 100% e Rights R 35% 35% Telco retains 2.7 Another traditional route of acquiring only ~30% exclusive content has been through acquisition of content rights. This n European Average Totally Spies Les Lascars t o i n t No multi- party Consumer e Content Production, Aggregation and c route is most preferred when it comes t Cost (2008) (2007) u Spending n Distribution by Telcos revenue split d o o C r
to acquiring rights for popular P sporting events. Given the high consumer interest in sports, Pay TV Source: Capgemini TME Strategy Lab analysis. Ofcom, "Movie Markets in the UK", December 2007. Company websites Source: Company Websites; Arab Times, “Totally Spies: TV Hit Going Big”, May 2008. Variety; “Orange, Millimages team operators have been at the forefront of on 'Lascars'”, May 2007; Variety, “Orange outlines six co-productions”, May 2007 spending significant amounts of
4 World Digital Media Broadcasting, “Europe Risks Impeding Growth of Mobile TV Market”, July 2007. 12 13 THE ACQUISITION COST OF
The Economic Case for Content By producing movies in-house, PREMIUM CONTENT Figure 9: Average Time Involved in Making and Releasing a Movie Production telecom operators gain the advantages In this section, Capgemini research of exclusivity and choice to release “ 1- 2 months 9- 14 months looked at the costs incurred and the has been rising significantly movies on their own VoD platforms potential revenue upsides from a initially. However, telecom operators 2- 3 months telco’s chosen venture into movie can subsequently monetize these content production. This content IN THE LAST FEW YEARS movies through a wider-reaching category was chosen for analysis since theatrical release, DVD sales, online 4- 6 months a significant proportion of consumer distribution, merchandising and sale expenditure on content is spent on (see Figure 8). Telcos can generate up Telcos with considerable scale, and a of third-party distribution rights. movies. For instance, in the US, to € 180 million in revenues from large captive subscriber base can movies comprise almost 80% of all Pay-per-View assuming an average recover their investment in Challenges and Risks Involved IPTV transactions; in France, Orange spend of € 6 per month per subscriber production solely ”through distributing While the upside of content 2- 3 months has reported that over 70% of all its on telco-produced VoD content from a movies through their own platform; production in-house presents a case VoD transactions are for movies 5. 2.5 million strong subscriber base, and revenues from multi-platform for telecom operators to consider such assuming that 30% telco-produced distribution will only add to the an investments, operators will also Pre- Post- Context and Assumptions movies turn out to be popular. potential upside. need to tackle some of the challenges Production Marketing Total Capgemini assessed a mock scenario and risks that are inherent in production production to understand what it would take for venturing into content production. Source: Capgemini TME Strategy Lab Analysis; Company websites; “Variety,” Marathon, Studio 37 team on “Spies”, May a telco to build a library of about Figure 7: Break-even Analysis of Movie Production by Telcos 2008; “Variety,” Orange, Millimages team on “Lascars”, May 2007; “Variety,” Orange outlines six co-productions, May 2007 twelve movies for distribution through Break-even Lack of Prior Experience its video-on-demand platform, on a Telecom operators will need to 177 pay-per-view or subscription basis. contend with what could be their content production venture will Release for first 147 Production of an average movie set of 12 movies biggest stumbling block in venturing depend on the number of captive 117 R A by telcos e v typically takes around one year until it n IPTV subscribers, consumer interest
e into content production: lack of n n u u 78 a e is ready for release, and the research l experience. Operators will have to in telco produced movies, success s assumed a project initiation rate of rapidly scale up their understanding rates and movie budgets, and telcos 36 one movie every month. The analysis of the media space, and the inherent will need to carefully consider these assumed that about 50% of the telco’s risks that are involved in producing aspects while firming up the case for
Y0 Y1 Y2 Y3 Y4 Y5 A T C IPTV subscriber base is likely to use n content. While traditional media investments. o n o t u s a a t the PPV service, with around 90% of l
l players have established partners and
(60) (71) (74) the overall PPV subscribers viewing (77) processes, telecom operators will need Integration and Management Risks (80) (84) Integrating movie content. Cumulative EBITDA to build their media divisions from The management of the content the ground up. Building up production business, and its The average budget for producing one Production comparable marketing prowess as integration with the core telecom telecom and commences for 12 movie in Europe is considered to be movies by telcos leading content producers will require business can be a difficult task to €5 million growing at 4% every year, some time, and can be a formidable achieve, and can result in the failure “ and sales and marketing costs are task for many telcos. of the telco to reap benefits. This is content business Source: Capgemini TME Strategy Lab Analysis assumed to be 15% of production particularly true with acquisition of costs. Gestation Period large content production houses, WILL BE A key challenge for telecom operators, which can be difficult to manage and Payback and Revenue Uplift Figure 8: IPTV, VoD and PPV Revenue for Telco in the Fifth Year of Entry into particularly when it comes to integrate. Capgemini analysis suggests that an Content Production, (€ bn) producing content such as movies, A SIGNIFICANT IPTV operator with a sizable IPTV will be to manage the timelines A prominent example in the telecom subscriber base, producing its own +8.4% involved. Starting with the pre- space is Telefonica’s acquisition of the CHALLENGE movies and monetizing them solely 1.50 production stage, the typical time for television programming production through subscriber fees on a pay-per- 1.38 a a movie to hit the screens could go up company, Endemol. Telefonica -0.06 view basis can expect to break-even +0.18 to 9-14 months (see Figure 9). acquired the company at a valuation by the fourth year from the of € 5.5 billion in 2000. However, conception of the movie pipeline (see Moreover, there exists no guarantee lack of synergies between the telco Figure 7). that a movie will appeal to consumer business and the content production taste and interest, thereby offering no house meant that Telefonica could ” Movies offer telecom operators assurance of return on investment. accrue no clear benefits from the potential by opening up the options Movie releases need to be managed acquisition. The cultural differences Revenues Revenues Loss of revenues Revenues of differentiation, multiple revenue assuming from in- house due to reduction in assuming within a tight timeline that includes between the two organizations streams and removing the need for no in-house produced consumer uptake content prevented successful integration or produced movies sold of non- telco- production holiday seasons. Telecom operators revenue-sharing. Moreover, telcos can content through VoD produced movies will have to manage these constraints cross-fertilization between the expect an increase of 8% in IPTV Note: (a) Revenues include sales of in-house produced movies over the VoD platform. (b) Costs include movie production around time if they are to reap the businesses, culminating in Telefonica’s and marketing expenses. revenues within five years of launch of benefits of their investments in exit from the business in 2007 for a an in-house produced movie library Source: Capgemini TME Strategy Lab Analysis content production. Returns on the valuation of about € 2.6 billion 6.
5 Capgemini TME Strategy Lab Analysis; Pyramid Research, “Can Video on Demand Save IPTV?” June 2007. 6 Company websites and press releases. 14 15 Recommendations for Telcos Figure 10: Cost of Production and Target Audiences for Select Content Genres build a content production business. In conclusion, gaining content Jerome Buvat is the Global Head of the The research shows that for telcos Telcos should maintain their content production capabilities will be an TME Strategy Lab. He has more than ten looking at a long-term play in the 500 production units as separate entities imperative for most large telcos years’ of experience in strategy consulting media space, it makes sense to invest 450 Drama/Comedy and selectively acquire companies that looking at a long-term play in the Pay in the telecom and media sectors. He is in content production capabilities; can plug-in select capabilities. TV space. Telcos will need to based in London. diversification into this space will help 400 Moreover, telcos will need to clearly consolidate their content production telcos gain long-term differentiation as 350 define the responsibilities of the capabilities, preferably under a Kaushal Vaidya is a senior consultant in )
well as improve returns from content r content unit and the parent telco dedicated media unit whilst the TME Strategy Lab. His recent work
u 300 o H
services. In this section, Capgemini / organization in each area of the continuing to build new capabilities includes analyzing trends in online £ (
s 250 recommends what kind of content ’ Current Affairs content value chain (see Figure 11). or reinforce existing ones through advertising and assessing growth as well 0 0 0
telcos should look at producing. The t Entertainment select acquisitions. In order to avoid as profitability drivers of players in
s 200
o Documentries/ acquisition of content production C Factual Sport Shows/Game Telcos should provide the content unit risks with integration and emerging markets. Prior to joining the companies is an important route for 150 Learning Shows autonomy with respect to subject management of content units, telcos Lab, Kaushal worked as a management Films News entry and Capgemini proposes how 100 Childrens selection and execution whilst should clearly demarcate the areas consultant with the consulting arm of telcos can leverage acquisitions to Music providing inputs in terms of data on where they provide autonomy to the India’s premier business house. He is jumpstart their content production 50 consumer interests; however, telcos content unit, and retain control on based in Mumbai. businesses, and how they can manage 0 should also continue to retain control key functions such as budgeting and integration issues. 0 5 10 15 20 25 30 on planning and budgeting, as well as deciding the business model. Varun Saxena is a senior consultant in Viewers who like the genre (%) deciding the release schedule and the TME Strategy Lab. His recent work Gradually Build a Portfolio of Own Source: Capgemini TME Strategy Lab Analysis; BBC and ITV Annual Reports monetization models. focused on advising a leading converged Content operator in Europe on its online Capgemini recommends that telcos advertising business. He is based in with significant scale and large captive Figure 11: Management of Acquired Content Production Firms Mumbai. subscriber bases build a comprehensive bouquet of channels Planning and Execution (Production Revenue Subject Selection over a period, gradually relying on Budgeting & Post-productio n) Maximization
internal production expertise to n o i t c supply content to these channels. u Should take the Should plan the Should be Minimum Telcos may consider d
o lead in short- production completely involvement t r i P n
listing subjects pipeline and prepare responsible for U
Leading Pay TV players have over the d
e the estimated doing the delivery r i
u budget required years built a strong portfolio of q c
A TO GAIN channels, the scale of which telcos small acquisitions should strive to match. As an “ example, in France, most Pay TV SELECT CAPABILITY operators heavily rely on the Canal+ Should feed data Should be the Shall seek to Should decide on consumer one to finalise the keep an update the release
o interests budget on the progress schedule,
wholesale packages to supply content c l
e distribution to their Pay TV services, and France T Should prepare partners, etc the business Telecom is positioning Orange TV as case an alternative to popular channel Telco Responsibilities Content Unit Responsibilities bouquets. ” Source: Capgemini Analysis Telcos should look at gradually relying on own production capabilities to supply content to their channels; Selectively Acquire Small Firms to good acquisition targets. As an they could start with popular content Gain Capabilities example, ITV’s acquisition of 12 Yard 9 such as movies, reality TV and general Acquiring existing content production is valued at £35m, and provided the entertainment, which have large houses can help telcos enter the company with popular gaming audiences and are relatively cheap to market and scale up quickly. Telcos in content programs such as “Who Dares produce (see Figure 10). Asia have made small-ticket Wins”, while its acquisition of acquisitions to slowly build content Silverback, another content As observed earlier in the paper, production capabilities. As an production firm, is valued at £14m 10 . movie production in Europe does not example, in March 2005, SKT bought entail huge costs, and telcos should 21.7% of IHQ 7—producer of movies The acquisition and integration of consider acquiring movie production and TV programs—for € 11 million large content production businesses capabilities and producing their own while KT acquired a 51% stake in will entail a significant amount of content for distribution through their South Korea's leading movie maker, challenge for telcos. Capgemini own VoD platforms and linear SidusFNH for € 22 million 8. Typically, believes telcos should steer clear of channels. smaller production firms with valued large acquisitions and look at content can be available at relatively acquiring small units selectively in conservative valuations and can be specific capability areas to gradually
7 IHT,” Softbank warms up to buy baseball team“, October 2004. 8 Company news releases. 9 Reuters, “ITV acquires 12 Yard”, December 2007. 10 Guardian, “ITV buys Silverback in £14m deal”, May 2008. 16 17 With an eye on keeping up with this section, we discuss the factors are forecasted to grow strongly, from increased capacity requirement, operators must examine to 8.9 million units in 2007 to 49 operators have started looking at understand how strong the case really million units in 2013 8. upgrading their networks using 4G is for 4G. technologies. Offering superior Available data indicates that mobile spectral efficiency and hence higher Demand-Side Factors Internet access through PCs already capacity, 4G promises to provide There are a series of industry trends constitutes the bulk of mobile data significantly greater download speeds. that are driving higher data usage on traffic; in Finland, traffic from these With spectrum auctions scheduled in mobile networks, with profound devices grew at 1300% from 2006 to Beyond 3G: some key European markets soon 3, impacts on network planning. 2007, accounting for 92% of the total operators need to have a clearly traffic on the network 9. Similarly, data defined vision for their transition Proliferation of Mobile Broadband for PCs card-induced traffic has caused the 4G Strategies for Operators in Europe toward 4G. The popularity of mobile broadband load on H3G UK’s network to increase by Tushar Rao and Sayak Basu devices such as 3G data cards and from under 50,000 GB in October Yet, observers are questioning whether USB dongles continues to drive 2007 to 500,000 GB in June 2008 10 . Abstract: Recent increase in mobile data traffic is being driven by the growing popularity of mobile broadband-enabled embedded devices, operators should be considering the consumers from traditional This suggests that once the user base massive investment necessary for the connections (WiFi, DSL, etc.) to 3G for this access technology broadens, it increasing consumer interest in data-intensive applications, and flat-rate pricing of mobile data. This usage growth is likely to continue, and will proposed transition to 4G (Capgemini networks. In Austria for example, will be the largest contributor to exert significant pressure on mobile network performance, compelling operators to consider the deployment of 4G access technologies. The estimates indicate a CAPEX of almost mobile broadband subscriptions network traffic, resulting in a capacity improved network characteristics of 4G technologies promise to solve network congestion issues and facilitate the rollout of new services and €100 million for a city the size of accounted for more than 75% of new demand which will make the transition 1 applications through higher access speeds. Of the 4G standards, LTE is the most likely to achieve widespread operator deployment in Europe and London 4), especially given the history broadband additions in Q2 and Q3 to 4G networks an imperative. other developed mobile markets. Capgemini anticipates that LTE’s chief competitor, mobile WiMAX, will find some adoption as a complementary of poor returns on capacity 2007 (see Figure 2), and in Q2 2008, platform to LTE, albeit only in niche market provisions. Our assessment of the economic viability of 4G deployments indicates that operators will investments. The poor adoption of 3G about 30% of all broadband Increased Consumption of struggle to find a business rationale for deployment in rural and suburban areas, and should instead focus on urban areas which promise services, which even by February subscribers in the country used Bandwidth-Intensive Applications sufficient monetizable data traffic. 2008 (after five years of their launch) mobile devices to access broadband 6. The growing popularity and usage of had reached a penetration level of bandwidth-intensive mobile only 24.2% in the UK and 25.5% in The popularity of these devices has applications is likely to create a case for USA 5, is often cited to support this been aided by recent HSDPA/HSUPA deployment of 4G. For example, in During 2007, an inflection point was 2007 and 2012 vary from 40% to argument. However, the fact that such network upgrades, and pricing which April 2008, approximately 31% of UK reached on WCDMA networks as 65% 2. While this increased adoption a small percentage of the total users is increasingly comparable to fixed mobile users had shared video or volume of data traffic exceeded that of of data services is encouraging (as have been able to generate such large broadband 7. In Europe, sales of photographs through their mobile voice traffic for the first time, as operators need to realize returns on volumes of traffic has made operators mobile broadband-enabled notebooks phones, while almost 10% watched exhibited in Figure 1. Driven by data their existing network investment), examine their network capacity plans usage, further rise in traffic volumes uncertainty surrounds the ability of as they try to further increase the are anticipated; estimates of operators to meet future capacity Figure 2: Mobile Datacard and ADSL Net Additions in Austria, ('000), Q1 2005 – Q3 adoption of data services. Compound Annual Growth Rate demands. 2007 (CAGR) of mobile data traffic between In this paper, we review the 60 30% developments compelling operators to Figure 1: Relative Voice and Data Traffic in WCDMA Networks Worldwide a consider the transition to 4G and 50 25% 6 assess the merits of the various 4G 40 20% technologies available. Following an Packet Data analysis of the business case for 4G 30 15% 5 d
a Voice deployments, recommendations are o 20 10% L
k made for operator strategies. r
o 10 w 4 5% t e N
The Case for 4G e 0 0% v i t Operators need to carefully evaluate Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 a l
e 3 2005 2006 2007
R the case for deploying 4G, in light of
demand from consumers as well as Mobile Datacard Net Adds Retail ADSL Net Adds 2 the benefits which might accrue to Data as % of Mobile Revenues them in terms of better spectrum utilization and higher ARPUs. In this 1 Source: Analysys Report for Ofcom, “Assessment of the UK Mobile Sector,” August 2008 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07
(a) Relative network load refers to the present volume of traffic relative to traffic at a historic date.
Source: Ericsson, “Long Term Evolution (LTE): an Introduction,” October 2007; Capgemini Analysis 3 UK and German auctions are likely to occur in 2009. 4 CAPEX for active components such as base stations and core network components; assumes reuse of passive infrastructure. 5 eMarketer, “3G and Smartphone Penetration (% of mobile subscribers) in the US and Select Countries in Western Europe in February 2008”, April 2008 . 6 Deutsche Bank, “Mobile Broadband”, October 2008. 7 Capgemini Analysis. 1 LTE: Long Term Evolution. 8 Berg Insight, "HSPA Broadband Europe" as cited in press release, June 18 2008. 2 ABN-AMRO: “Mobile CAPEX Trends—Slowing Down”, January 2008; Informa Telecom and Media, “Mobile Networks Forecasts: Future Mobile Traffic, Base Stations & Revenues” June 9 Antero Kivi, Helsinki University of technology, “Mobile Data Service Usage Measurements, Results-2005-2007”, August 2008. 2008; Cisco, “Approaching the Zettabyte Era” June 2008. 10 Enders Analysis, “H3G H1 2008 results and data economics”, September 2008.
18 19 11 video clips . The popularity of such The increasing popularity of mobile Figure 3: Worldwide Mobile Data Traffic and Installed Capacity data-intensive applications has broadband through USB dongles and contributed heavily to the growing PC cards, as well as the growing 350 0 traffic on mobile networks. Estimates consumption of bandwidth-intensive indicate that while only 9% of the total applications through smartphones are 300 0
traffic in 2007 was generated by resulting in an exponential increase in 250 0
s e t
videos, the share is likely to grow to mobile data traffic. This traffic is y Inflection point where b a t capacity shortage is 12 e 200 0 Lapto p Users P 23% by 2012 . Survey results also expected to continue growing at a likely to set in n i
, c i f show that of the top ten data rapid pace, leading to an imminent Competitive Pressure As evident from Figure 6, the three f a 150 0 r T
a applications that consumers are capacity shortage on mobile networks Beyond the industry fundamentals standards provide similar theoretical t Smartphone Users a interested in, four are of bandwidth- in the medium term (See Figure 3). discussed in previous sections, performance. As a result, it is likely D 100 0 intensive nature 13 . It is anticipated that operators must also consider how 4G that other commercial and operational 50 0 further uptake of applications such as Supply-Side Factors will change the competitive dynamic attributes will define technology Simple Phone Users Mobile TV, Location-Based Services Network Performance in their markets. For example, should choice for operators. LTE is likely to 0 200 5 200 6 200 7 200 8 200 9 201 0 201 1 201 2 and Multiplayer Gaming will continue Much interest in 4G stems from the a competitor pursue an aggressive be the overwhelming favorite amongst to increase data traffic in future. opportunity these technologies early rollout, the incumbent operator mobile operators as the technology Source: Capgemini Analysis; ABN AMRO, “Mobile CAPEX Trends-Slowing Down”, January 2008; JP Morgan, “The Power present to improve access network faces a risk of subscriber churn that choice for 4G, with WiMAX finding of Mobile Broadband”, May 2008 A key usage driver for mobile data performance. Improved spectral must be carefully considered. some adoption for rolling out services in the last couple of years has efficiency will allow networks to carry Accordingly, some players in the broadband services, especially in been the evolution of price plans— a greater amount of data over a given market might need to look at 4G under-served markets. Figure 4: Comparison of Spectral Efficiency and Number of Users Supported per European consumers are now paying amount of spectrum, and improved technologies as a defensive approach Cell for 3G and 4G Networks a much lesser per Mb of data. For voice efficiency will allow networks to to hold on to their existing In this section, we evaluate the three Spectral efficiency (bps/Hz/sector) Number of Supported Users Per Cell example, in the UK, Vodafone carry a greater number of active voice customers. evolution paths towards 4G, and 5+5 MHz* 10+10 MHz* 475 customers paid 0.07 € /Mb in 2005- users for each cell (see Figure 4). This assess which is the most likely path 2006, which has reduced to will allow the operators to upgrade Assessment of 4G Standards for European operators to adopt. 370 0.01 €/Mb in 2008 14 . In addition, a their network capacity without having A critical decision for operators as 2.4 significant usage barrier was removed to invest further in new base stations. they formulate their strategy for 4G LTE (Long Term Evolution) .7 when plans switched to flat-rate “all networks is the technology they We believe that LTE is the most likely x 2 220 you can eat” pricing, especially as Enabler of Service Innovation decide to adopt for their network. 4G evolution standard for existing 200 mobile data had earlier been Applications like High Definition TV, Earlier, upgrade decisions were mobile operators in Europe who have 0.9 0.7 perceived to be expensive. Further, which requires 5 to 8 Mbps, and straightforward and constrained by WCDMA and HSDPA-based networks. 0.25 the proliferation of smartphones and Video Presence, which requires whether the operator had a GSM or a It provides a natural evolution path 3G Network 4G Network HSPA EVDO Mobile 4G Networks Rev B WiMAX handsets with enhanced features, has around 10 Mbps, are currently CDMA network. However, since 4G for GSM operators via interim Download Upload (802.16e) underpinned increased consumer constrained by insufficient end-user requires core network as well as radio HSDPA/HSPA networks. Once 4G Networks includes LTE, Mobile (802.16m) and UMB interest in data services. The success access speeds. 4G networks promise network upgrades from 3G, operators finalized, LTE is expected to be (a) Spectral efficiency expressed in bits per second per Hertz per sector. * Indicates spectrum allocated to upload and download streams. of the iPhone demonstrates this—it is greatly improved access speeds, with can consider all possible technology backward interoperable with the estimated that almost 60% of iPhone expected end-user speeds up to 18 Source: 3GPP TR25.913-V7.3.0; “Reduced HS-SCCH-DL VoIP Capacity Gain”; September 2007 Raysavy Research and platforms as migration options. LTE, existing UMTS networks, which is 3G Americas “EDGE, HSPA, LTE: The Mobile Broadband Advantage” September 2007 users access Web-search, compared to 17Mbps 16 . These new access speeds Mobile WiMAX 802.16m and UMB 17 the dominant platform in Europe, only 6.1% of total mobile users 15 . enable the launch of a host of services are the three standards vying for giving it a huge advantage vis-à-vis which operators hope to monetize in adoption in the 4G space. other standards. the coming years. As illustrated in Figure 5, LTE and LTE has been able to successfully Figure 5: Migration Path to 4G for Various Wireless Access Technology Standards UMB are natural evolution paths of build up a strong ecosystem of chipset established GSM and CDMA and equipment vendors committed THERE IS A CASE FOR platforms, while the WiMAX standard toward supporting the standard. 2G 3G 4G 802.16m is distinct in being an These includes prominent equipment GSM GPRS WCDMA HSDPA/HSUPA LTE evolution from a fixed wireless vendors like Ericsson, Alcatel-Lucent, EDGE HSPA+ DEPLOYING OF 4G NETWORKS broadband standard. The current Motorola and Nokia-Siemens deployments of mobile WiMAX are Networks. More importantly, the CDMA 2000 EV - DO EV - DO in “dense urban markets on 802.16e standard, which precedes significant operator commitment this CDMA One EV - DO Rev0 Rev A Rev B UMB upcoming 4G standards. technology will provide is the biggest impetus to this standard. Three of the Fixed WiMAX Mobile WiMAX Mobile WiMAX top ten operators in the world by Main logical path IEEE 802.16e IEEE 802.16m Possible migration number of subscribers—namely Existing Current Future China Mobile, Vodafone and T- Networks Deployments Deployments Mobile—have already committed to 11 eMarketer, “Mobile Content and Application Activities of Mobile Subscribers in the US and Select Western European Countries, April 2008”. ” Source: Capgemini TME Strategy Lab Analysis; Company Websites 12 Informa Telecoms and Media, “Mobile Networks Forecast”, 2008. the standard, with a number of others 13 European Technographics Online Consumer Technology Survey, Q4 2007. 14 Capgemini Analysis; Company Websites; Enders Analysis, “Vodafone UK data pricing: free for £5 a month “, May 2008. 15 M:Metrics, as quoted in a press release on March 18, 2008. 16 Vodafone, “Challenges in Future Wireless Broadband Access networks”, February 2008. 17 LTE: Long Term Evolution; WiMAX: Worldwide Interoperability for Microwave Access; UMB: Ultra Mobile Broadband.
18 UMTS: Universal Mobile Telecommunications System.
20 21 engaged in pilots. Additionally, there Cost of Network Deployment and LTE is the most likely Figure 7: Estimated Adoption Rate of LTE Services in Western Europe (% of Total are also some operators with the Operations Mobile Subscriptions) CDMA technology platform who have We have estimated the CAPEX and indicated a preference for LTE. The OPEX of LTE deployments based on TO ACHIEVE Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Comments: strong operator ecosystem is likely to 4G standard the assumption that the rollout of the 65% YoY growth from translate into economies of scale in network will be completed by the Pessimistic 0% 2% 3% 5% 9% 15% 24% “ Scenario second year onwards the future, prompting other operators WIDESPREAD DEPLOYMENT third year of operation. As no new Moderate 75% YoY growth from 0% 3% 5% 9% 16% 28% 49% to back this standard. base stations would need to be Scenario second year onwards constructed, operators are assumed to Optimistic 78% YoY growth from 0% 4% 7% 13% 23% 40% 71% WiMAX 802.16m reuse their existing base station sites. Scenario second year onwards
The WiMAX 802.16m standard is still building their LTE portfolio. However, any standard being promoted by it. As The other major CAPEX cost 3G Penetration 0% 0.4% 4% 7% 11% 22% .... being finalized and is not likely to be WiMAX is likely to continue to see a result, Capgemini does not foresee components include core network Levels in UK ready for commercial deployment deployments in under-served regions UMB gaining any traction in t”he 4G cost and spectrum cost. Subscriber before 2010. The standard faces the for broadband services 19 . market. acquisition costs, backhaul costs and Capgemini TME Strategy Lab Analysis; Ofcom; M:Metrics, Inc. serious challenge of not being customer support costs are the largest interoperable with any of the existing UMB (Ultra Mobile Broadband) LTE Deployment Economics OPEX cost components. mobile operator networks. However, a UMB is the third contender in the In our assessment of the economic number of 802.16e networks are standards race for 4G. However, it has viability of 4G deployments, we have Revenue accruing to the network These conclusions indicate that to only profitable areas. The high being deployed worldwide, albeit not been able to gain any significant modelled the deployment of services In this analysis, Capgemini considered operators are unlikely to have a CAPEX requirement and perceived primarily for mobile broadband access traction in the market. Verizon, Alltel in the Western European market. As both mobile data and voice services business rationale for nationwide risks in the business case will limit the and not for mobile phone and MetroPCS, CDMA operators from the most likely 4G technology, LTE revenues. Additionally, we included rollout of 4G services in the near ability of smaller operators to communication. It is expected that the US, have indicated that they was considered for deployment in revenues from broadband Internet future. While Capgemini anticipates respond. current 802.16e deployment by would abandon their natural three different types of markets— services through devices like USB 4G rollouts in denser urban areas, the operators would pave the way for migration path towards UMB and urban, suburban and rural 20 . dongles, data cards, etc. less expensive option of 3/3.5G Second or Third-Tier Operators in eventual 802.16m WiMAX deploy LTE instead. network upgrades is more viable for Developed Markets deployments. Adoption rate for the technology Capgemini forecasts voice ARPU to other regions. For smaller operators, 4G can either The vendor and chipset ecosystem for Capgemini’s has modelled three steadily decline at around 8% CAGR present an opportunity to make a play Operators are increasingly weighing this standard is weak, with different uptake scenarios for 4G and data revenues to grow at around Recommendations for Operators at becoming more significant in the the benefits of 802.16e deployments Qualcomm as the only major vendor services amongst the total user base of 10% CAGR (see Figure 8). The rise of There is no one-size-fits-all strategy market, or can be used to carve out a vis-à-vis HSPA deployments. With the to support it. Part of the mobile operators—pessimistic, data ARPU is attributed to revenues for operators. Decisions on the timing market niche. Smaller players should gradual maturing of the HSPA apprehension regarding the standard moderate and optimistic. The from new services enabled by these of network upgrades, rollout strategies consider the potential of 4G to target ecosystem, the time-to-market is a result of Qualcomm being its adoption rates in the moderate and networks, such as high-definition and technology selection are heavily particular market segments such as advantage for WiMAX is diminishing major proponent owning significant optimistic scenarios, given in video, multiplayer gaming and video dependant on market circumstances. SMEs; by carefully targeting rapidly. This has influenced intellectual property rights. Figure 7, have been modelled to ramp presence. Results indicate that revenues propositions, 4G could help a small equipment manufacturers like Nortel Qualcomm’s track record of legal up more quickly as well as become from broadband access itself will be First-Tier Operators in Developed player differentiate towards particular to re-evaluate their WiMAX strategy challenges over intellectual property higher than what has been achieved significant, contributing up to 20% of Markets market segments. and devote more resources toward rights makes operators nervous about for 3G technologies. Capgemini the total revenues (see Figure 8). Capgemini recommends that first-tier believes that a more mature 4G operators consider 4G as an ecosystem, greater user awareness of Payback period and conclusions opportunity to differentiate from Figure 6: Comparison of LTE, WiMAX and UMB Standards mobile data services, greater content from the business case competitors. As LTE spectrum availability and more compelling end- In the scenarios outlined, our model auctions do not generally carry rollout LTEWiMAX (802.16m) UMB user devices will result in this scenario indicates that the payback period for obligations, a targeted approach can Frequency Band 700, 850, 900,1800 Under 6GHz 450, 700, 850, 900, 17 00 in the Western European market. LTE deployments in urban areas is just easily be adopted, providing services of Operation (in MHz) 1900, 2100, 2500 1900, 2100, 2500 over four years for moderate levels of Spectral Efficiency ~2.4 bps/Hz/Sector ~2.4 bps/Hz/Sector ~2.4 bps/Hz/Sector (5+5 MHz, 4x4 MIMO) (5+5 MHz, 4x4 MIMO) (5+5 MHz, 4x4 MIMO) Network dimensions based on service uptake (see Figure 9).
Channel DL: 277 Mbps DL: 288 Mbps DL: > 350 Mbps (4x4 MIMO) projected network traffic Throughput UL: 75 Mbps UL: 50 Mbps UL: > 200 Mbps (2x4 MIMO) (Theoretical) (20MHZ bandwidth, (20MHZ bandwidth, Capgemini’s estimation of network By comparison, the business case for 4x4 MIMO) 4x4 MIMO) traffic considers a mean average of deployments in suburban and rural Latency ~10ms ~10ms ~14.3 ms 50% CAGR in network traffic over the areas appears a lot weaker, with Backward No Interoperability with Interoperable with CDMA Interoperable with UMTS THE TIME-TO-MARKET ADVANTAGE Interoperability existing networks networks six-year time frame, based on analyst operators unable to break-even within Network estimates which estimate CAGR of the first six years of operations. Even Equipment 2009 2010 2009 Availability 40% to 65% between 2008 and 2012 with an optimistic prediction of FOR W iMAX Affordable Handset 2011 2012 Post 2013 for mobile traffic. In our estimates, the technology adoption, suburban areas Availability number of base stations required to take nearly the entire six-year period, Weakness Strength “ cater to the increased traffic load has while rural areas take even longer. is diminishing rapidly Source: Capgemini TME Strategy Lab Analysis; Websites of the WiMAX Forum, Qualcomm and IEEE; Various Analyst Reports been modelled to be similar to that of This is primarily a result of the fact earlier 3G networks 21 . that the CAPEX spreads amongst a larger user base in the case of urban areas.
19 FierceWireless, “Nortel teams with Alvarion on WiMAX, Focus Moves to LTE”, June 11 2008. 20 Rural: Population density of 31 per square km; Suburban: Population density of 400 per square km; Urban: Population density of 4800 per square km. 21 ABN-AMRO: “Mobile CAPEX Trends-Slowing Down”, January 2008; Informa Telecom and Media, “Mobile Networks Forecasts: Future Mobile Traffic, Base Stations & Revenues”; Cisco, “ Approaching the Zettabyte Era” June 2008. ”
22 23 Technology Migration Operators are advised to migrate to Figure 8: Estimated ARPU for 4G Mobile Services, (€) 4G networks in a phased manner, so as to gradually transition to an all-IP environment. A radical transition to 4G skipping the 3.5G networks would Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 be ill-advised, especially since the ARPU Estimation SKIPPING 3.5G NETWORKS movement from 3G to 3.5G is a much Voice ( €) 0.00 21.00 19.50 18.12 16.83 15.64 14.53 simpler software upgrade. Operators are advised to implement the interim FOR A RADICAL TRANSITION TO 4G 3.5G networks to cater to their Data ( ) € 0.00 11.80 12.90 12.90 15.40 16.84 18.40 immediate capacity requirements. “ Tushar Rao is a manager in the TME would be ill-advised Total ARPU ( €) 0.00 32.80 32.40 32.40 32.24 32.48 32.93 Early adopters too appear to be taking Strategy Lab. His research interests an evolutionary approach to 4G. include analyzing disruptive technologies AT&T, Verizon and Vodafone are the in the broadcasting and mobile segments. Source: Capgemini TME Strategy Lab Analysis earliest to announce their 4G Recent work involved an analysis of the strategies and have chosen to migrate emerging open ecosystem in the mobile to 4G LTE via interim 3.5G networks. industry and assessment of its impact on ” operators. Prior to joining the Lab, In conclusion, Capgemini believes Tushar worked with a leading telco in Figure 9: Cumulative Profit/Loss for Deployments Under Moderate Uptake (€m) that there is a case for the deployment India. He is based in Mumbai. of 4G networks in urban and
400 suburban markets in developed Sayak Basu is a senior consultant in the geographies, although the case for TME Strategy Lab. His research interests Urban Deployment 350 universal deployment of 4G networks include next generation mobile networks 300 ) is poor. The evolution to new network and market entry strategies in emerging n o i l l i 250 technologies is likely to be phased, markets. Prior to joining the Lab, Sayak m (
w both at a country and a global level. worked for a leading satellite o l 200 f n I
In general, we anticipate a cautious communications provider. He is based in e v i 150 t a approach to future network Mumbai. l u m 100 investments, with accurate predictions u C of future network demands being a 50 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 serious challenge for operators. 0 Suburban Deployment -50 Interestingly, the movement to 4G will Rural Deployment -100 have strategic repercussions beyond the availability of higher network -150 speeds. With LTE taking precedence
Source: Capgemini TME Strategy Lab Analysis over other 4G technologies, groups such as Vodafone and T-Mobile which are divided between GSM and CDMA standards, have an opportunity to harmonize their technology paths. This is of huge significance, as economies of scale can then be leveraged across all operations.
In 2007, volume of data traffic “ exceeded that OF VOICE TRAFFIC ON WCDMA NETWORKS
24 ” 25 Figure 2: Key Foreign Investments in the Indian Mobile Communications Space Virtually Mobile: Operator Status at Point of Investment Investor Timeframe Deal Size
Aircel had operations in 6 circles • Investment: US$800m Assessing the Opportunity Dec-05 Licenses for 6 additional circles were pending for 74% stake
for MVNOs in India Spice operated in two circles with a total • Investment: subscriber base of over 1.8m Apr-06 US$179m by Jerome Buvat, Sayak Basu and Varun Raj • Enterprise Value: Hutchison Essar was the fourth largest player Feb-07 US$ 18.8 billion with 24m subscribers • Investment: US$ 11.1bn Abstract: Recent reforms by the Indian telecom regulator are likely to result in the • Investment: US$11.4m Shyam Telelink offered basic telephony Sep-07 for 10% s take introduction of MVNOs into this market. Despite the high level of competition and low services in one circle. It had applied May-08 • Investment: US$45m tariffs prevalent in the country, an MVNO can be a relatively low-risk entry option for for unied access licenses in 22 other states for 21% stake players. The economic viability of MVNOs will hinge to a very large extent on the • Investment: US$900m Swan Telecom Swan had UASL licenses for 13 circles in India Sep-08 wholesale rates that the business manages to negotiate. The youth, enterprise, It is expected to launch services in 2009 for 45% stake premium services and heavy data usage segments should be immediate opportunities Unitech had UASL licenses for 22 circles in India • Investment: US$1.2bn Oct-08 which the MVNOs can target. Capgemini recommends a thin operating model for It is expected to launch services in 2009 for 60% stake MVNOs commencing operations—unless dictated otherwise by the value 1 Tata Teleservices had a presence in 20 circles • Investment US$ 2.7bn proposition—so as to be able to break-even at a lower subscriber base. MNOs should Nov-08 view the introduction of MVNOs as an opportunity to reach out to segments they are with a subscriber base of 25m for 26% stake presently unable to address. Due to a large number of players in the market, MNOs will need to have comprehensive wholesale strategies in place to attract MVNOs onto their Source: Company Press Releases; News Reports; Tata Indicom & NT Do Co Mo examples network. These operators should provide deep discounts on wholesale rates to remain competitive, and garner additional revenues through other network resources and in- house MVNEs 2. Against this backdrop, the recent recommendations by the Telecom Regulatory Authority of India (TRAI) MVNO s COULD BE A RELATIVELY on allowing MVNOs to operate in the market, presents another entry opportunity for new players. In this LOW-RISK, low-cost option to paper, Capgemini analyzes whether The Indian mobile telephony market MVNOs are likely to succeed in India, “ Figure 1: Mobile Telephony Subscribers and ARPU in India, (Millions, $ per Month), is now the second largest in the world and identifies the most attractive enter the Indian market 2004-2008 after China, with over 300 million market segments that such players subscribers 3 (see Figure 1). The could target. 11.4 subscriber base for mobile services 30 5.70 10.75 has been growing at a rapid pace, MVNO as a Market Entry Option offer mobile services to the youth Indian mobile market have also have with some analysts forecasting the 26 1.07 Regulatory Developments segment. Under this arrangement, expressed positive views on the In August 2008, the TRAI number to reach over 500 million by 8.45 Tata sells “Virgin” branded mobile prospect of MVNOs in” the market. In 2010. 7.67 recommended the introduction of handsets and services, as well as owns comparison, some MNOs such as MVNOs, and proposed a regulatory and bills the subscriber, while Virgin Bharti Airtel and BPL Mobile have This phenomenal growth has piqued 7.01 framework governing the entry and brings in expertise in brand expressed sentiments against the the interest of foreign players, who 16 5.11 operations of such players. These management, offer development and introduction of MVNOs in the market have either entered or are planning to recommendations are expected to content services. Many other players (see Figure 4), citing that the market make their foray into the Indian result in the issue of MVNO licenses in have announced their intent to enter is already very competitive and that mobile market (see Figure 2). 98.77 the near future. An early analysis the market through the MVNO route, the current spectrum crunch will Operators such as Vodafone, Maxis, indicates that the proposed regulations notably the Indian retail giant Future make it difficult to accommodate are likely to facilitate the easy Group, and the Mfonex group from more players. Etisalat and Telenor have already 52.22 acquired stakes in existing players, 33.69 introduction of MVNOs into the the UK. while others have expressed their market, although the exit conditions MVNO as an Entry Option in the interest in entering the market Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Sep 08 are relatively stringent (see Figure 3). Player responses to the proposed Indian Market through acquisition, or by MVNO policy have largely been The introduction of MVNOs can participating in license auctions. Mobile Subscriber Base, in Millions Current MVNO Activity positive, with most existing mobile provide an attractive opportunity for ARPU, in $ per Month While there are no MVNO launches network operators indicating that they those wishing to enter the market. yet, Virgin Mobile has entered into a will be supportive of MVNOs once The relatively relaxed licensing terms Source: TRAI, “Indian Telecom Services, Performance Indicators, January-March 2008”; Merill Lynch, “Global Wireless “brand franchisee” agreement with they are introduced. Leading global along with lower license costs ($1.6 Matrix”, October 2007 existing MNO Tata Teleservices to telcos with no current presence in the million 4 for a nationwide license)
1 MNO: Mobile Network Operator. 2 MVNE: Mobile Virtual Network Enabler. 3 Dailywireless.org: “India 2nd Largest Mobile Market”, April 2008. 4 Exchange rate assumed: 1 USD= 45 INR. 26 27 Figure 3: Summary of Recommendations by the Indian Regulator on MVNOs such, MVNOs should carefully plan Figure 5: Assessment of Different Market Entry Options in India their launch and identify target segments, so as to ride on the wave of Regulatory Parameters Current Regulations Implication for MVNOs growth before the market saturates
• MVNOs to own individual license with service area same as that of the parent MNO MVNOs are free to have selective and competition intensifies. License rollout within the licensed circle of Greenfield Acquisition MVNO • No rollout obligations the parent MNO • Liberty to enter as a full, intermediate or thin MVNO Business Reduced rollout costs for MVNOs Drivers for the MVNO Model Model • Scope of service is the same as an MNO while regulation, licensing and entry fee Ease of Availing Availing a 3G license in the Existing players possess 2G The process for getting requisite requirements are much lower auction in late 2008 is expected licenses However, getting licenses is less challenging for MVNOs free to decide on their pricing There has been some amount of License Service • Parent MNO to have no bearing on prices to be challenging a 3G license is not guaranteed MVNOs Obligations structure • MVNOs to be directly responsible for customer service, QoS, etc. skepticism expressed about the & Tariffs MVNO will need to push Services can be rolled out for comprehensive SLAs with MNO Speed of Service Existing operations of acquired With ready operations, services feasibility of the MVNO model in the through green - field rollout or company can be leveraged can be rolled out quickly • No limit to the number of MVNOs attached to a MNO Rollout tower - s haring agreements MNO - MVNO MNOs will have higher bargaining • An MVNO can get attached only to one MNO in the same service area Indian market. Some have questioned Relationship power as MVNOs will be locked- in • MVNO license subject to continuing relationship with MNO to the host operator Greenfield rollout would involve Acquisition would involve high Targeted rollouts depending on the economic viability and positioning Investment Level • 6- months notice to be given to MNO, customers, DoT and TRAI high CAPEX/OPEX to set up investments as candidates are the investment level can be MVNOs will need to be selective network and distribution Exit Clause • MVNO will be disqualified from obtaining fresh licenses in the same service area about regions of service rollout of MVNOs, given the rock-bottom currently priced at a premium carried out • PBG shall be forfeited and FBG to be returned after dues are settleda end-user tariffs and the high levels of The high level of investment Risk is limited by the possibility Acquisition target can be Risk required, rollout obligations and of scaling up operations as per competition in the market. However, overpriced MVNO Friendly Neutral to MVNOs Disadvantageous to MVNOs exit barriers would be a source of risk requirement Capgemini believes that there are a Overseas entrants can fully Overseas entrants can fully Overseas entrants can fully leverage Note: (a) PBG=Performance Bank Guarantee; FBG=Financial Bank Guarantee number of market factors that are Control Over leverage their brand and leverage their brand and their brand, however network Operations operational expertise operational expertise control is limited by operator Source: Capgemini analysis based on TRAI data likely to make the MVNO model viable in India. Overall Attractiveness Healthy Profit Margins Comparable with Leading Global Players
In spite of operating in a low ARPU Low Attractiveness High Attractiveness market, most Indian mobile operators Figure 4: Operator Opinions on MVNOs in the Indian Market enjoy healthy EBITDA margins, which Source: Capgemini Analysis based on regulatory data are comparable to other operators globally (see Figure 6). This will Players Attitude towards MVNOs provide the necessary buffer to Reliance operators to host MVNOs on their networks by offering attractive terms
s BSNL t and conditions. Competitive n e
b Tata Teleservices agreements with operators will in turn m
u allow MVNOs to offer attractive value c Bharti Airtel n I propositions to their customers. Figure 6: Comparison of Operator EBITDA Margins (%), Selected Operators, BPL Mobile 4Q 2007 New Players Desiring to Expand Orange - France Telecom Group Market Share Rapidly s r
e New 2G licenses have been allocated y
a 48.0 l Verizon Business to at least four pan-India players, and P
n more players will be added to the 44.0 g
i BT Global Communications e
r market after the 3G license auctions.
o 39.7 F Lyca Mobile 38.8 This takes the number of operators in 37.7 37.5 37.1 some circles beyond ten. For example, 33.4 Favors MVNOs in the market Against MVNOs in the market it is expected that after the issue of 3G 31.7 licenses, there will be around fourteen Source: Responses to TRAI consultation paper; Various news articles players in every metro circle, with around ten of them with less than 15% market share 5. Many of these
new players, in an attempt to rapidly a S ti n a a w r m o c A e T g U a o z i S d & n L h C ri n e I T facilitate easy entry. Additionally, the However, the introduction of new gain market share are likely to u E B e fo g A h T R V le n C e ra absence of rollout obligations or any players through fresh 2G and 3G encourage MVNOs on their networks. T O mandates on coverage will allow licenses is likely to intensify Examples from other markets indicate “cherry-picking” of the markets and competition, thereby making new that new entrants tend to attract Indian Operators International Operators target segments by the players. These subscriber acquisition more difficult MVNOs in an attempt to maximize considerations present MVNOs as a and expensive. Moreover, with the subscriber additions; Germany is a relatively low-risk, low-cost option to market growth expected to plateau case in point where E-Plus, the last enter the market compared with after 2010, MVNOs will have to rely operator to enter the market, adopted Source: Fitch Ratings, “Global Wireless Review”, May 2008. Macquarie Research, “India Telecom, GSM Subs”, July 2008 acquiring 2G or 3G licenses (see exclusively on churn from other an MVNO strategy to grab a sizeable Figure 5). networks for customer acquisition. As chunk of the market.
5 ABN Amro, “Wireless Telco Services”, July 2008. 28 29 The entry of new operators through a brand franchisee model the business and professional In the youth segment, the biggest with Tata Teleservices. Additionally, segment, and provide additional challenge for MVNOs would be the WILL MAKE IT EASIER FOR MVNOS they could provide customized voice enterprise services for differentiation. differentiation of services vis-à-vis the and data plans, tailoring them to Particularly, global telcos present in competition. Incumbents have already “ specific youth calling patterns and India in the enterprise ICT services identified the segment as an attractive TO FIND HOST NETWORKS their inclination to use data services. space could expand their service one and launched specific schemes These MVNOs can also look at portfolio by offering enterprise such as Vodafone’s “Campus Pack”, bundling trendy handsets with their mobility services as MVNOs. Airtel’s “Mobile Campus” and Idea’s offers, as the bundled handsets “Spice Gang” geared towards this Geographical Variation in to try and differentiate through group, stands at about 224 million currently in the market are fairly basic Heavy Data Usage Segment segment. Performance of MNOs services which might otherwise not be and is expected to grow further to with limited functionality. The data and content market in India ”10 is still in the process of maturing. As As far as the premium segment is There is a vast regional variation in supported by 2G networks. around 238 million by year 2015 . the performance of operators. For With more than 27 million youth Premium Segment of Q2 07, only 8% of the total concerned, the Indian market is example, Vodafone Essar has a leading Potential Target Market Segments belonging to households with an Operators in India have positioned revenues came from data services in currently not mature enough, with market share in certain Class A and B for MVNOs average annual income of $15,000 and themselves as mass market players, India, while the corresponding figures consumers largely unaware of such circles like Gujarat and Haryana, Attractive Segments above 11 , this is likely to be a segment thereby depriving potentially high-end for the more mature UK and US offerings. Consequently, the players where they have 43% and 31% Capgemini evaluated various market which MVNOs can target aggressively. customers from any sense of markets were 25% and 14% would need to educate customers market share respectively 6. However, segments that MVNOs could Capgemini estimates show that the exclusiveness. The services currently respectively 18 . However, the market is about their services in parallel with the operator has a minority share in potentially target. The analysis market for mobile services for youth offered lack premium offerings such expected to grow at around 44% building a premium brand. Class C circles like Assam and North indicates that the youth, lifestyle, is likely to be a US$15.4 billion as preferential customer care, higher CAGR between 2007 and 2010, to East, where they account for less than enterprise and data-driven segments opportunity by 2010 12 . guarantees on QoS 13 , premium become worth around US$2.7 For the enterprise and heavy data 1% of the subscriber base 7, having emerge as the most attractive bundled handsets and other billion 19 . usage segments, a significant barrier commenced operations relatively late. opportunities. While some of the Capgemini believes that MVNOs can personalized services. which will limit the number of It is probable that to address the other opportunities such as mass- potentially adopt a three-pronged The current Indian market for data is potential players will be the domain- opportunities in circles where they market and ILD 9 and roaming services strategy for this segment: creating There is a sizable population in India constrained by the absence of 3G specific expertise that is required to have not been performing well, such are substantial in terms of size, they brand appeal amongst the youth, which could potentially be targeted services. However, the auction of 3G serve and differentiate the offerings. operators will try to have regional are characterized by relatively high subsidizing trendy handsets and with such premium services. There licenses in early 2009 is likely to Additionally, for the enterprise MVNOs in their fold to challenge the entry barriers (see Figure 7). offering customized tariff plans. are currently more than 7 million alleviate the problem. MVNOs segment, existing relationships of leaders. Similarly, there might be MVNOs should try and create brands people in households with annual targeting this segment can look at incumbents with enterprises will also certain smaller, less lucrative circles, Youth Segment targeted specifically at the youth income between US$23,000 and addressing the current shortcomings serve as a major entry barrier. where incumbents might not want to The youth population in India, segment, similar to what Virgin US$45,000 14 . This segment is likely which have been holding the content invest heavily in subscriber comprised of the 15-24 year age Mobile is currently attempting to do to be attractive for the higher ARPU it market back. Potential MVNOs could However, these constraints also give acquisition and distribution, and promises. For example, the ARPU look at providing attractive data rise to opportunities for potential prefer to have MVNOs on the from the more expensive PDA users in access plans bundled with customized players who are able to successfully network instead. Figure 7: MVNO Opportunity “Clusters” the country is 11 times the ARPU handsets. They can also consider bring down the entry barriers. For from a CDMA user 15 . Capgemini offering dual-mode Internet access example, while complexity of offerings Introduction of Mobile Number Opportunity Size in 2010 estimates the market for this segment plans wherein users could consume and importance of existing client Portability and 3G 25 to be worth around US$2.5 billion by their data usage credits over cellular relationships will act as deterrents for 16 There are a number of proposed Mass Market 2010 . and Wi-Fi networks. most players in entering the enterprise segment, there are players such as regulatory reforms which are likely to Lucrative directly and indirectly help potential 20 Enterprise Segment Entry Barriers for MVNOs system integrators and mobile MVNOs. A prominent factor is the High risk, high return The spending on mobile They are entry barriers for different application providers, who have introduction of mobile number Youth communication for enterprises in the MVNO opportunities (see Figure 8). existing strengths which successfully portability in mid-2009 8. Portability 15 Indian market is expected to grow to bring down these very barriers. n
b US$2.7 billion by the year 2010 17 . A would aid MVNOs to wean away $ S customers, especially high-ARPU U number of these enterprises have 10 requirements in the telecom space THE YOUTH, ENTERPRISE, AND long-term contract subscribers, from Attractive the incumbents. Challenging that are not core operator skill sets, ILD and such as managed mobility, M2M 5 Heavy Data Roaming PREMIUM SERVICE SEGMENTS Similarly, the 3G auctions slated for Users Premium services and mobile enterprise are M- Transaction applications. ICT service providers late 2008 are expected to partly Typical Enterprise Regional could launch MVNOs on similar lines “ resolve the current spectrum crunch 0 Low immediate opportunities for which could otherwise have High as Embarq and Earthlink, which target constrained the operators from having Entry Barrier MVNOs on their networks. 3G Attractive Opportunities Less Attractive Opportunities MVNOs in India networks will also enable the MVNOs Source: Capgemini Analysis
13 QoS: Quality of Service. 14 Euromonitor International. 6&7 COAI data for September 2008. 15 findarticles.com: “Reliance attempts higher ARPU through high-end wireless data services”, 2006. 8 The Hindu Business Line, “TRAI for Mobile Number Portability by June 2009”, April 2008. 16 Capgemini Analysis. 9 ILD: International Long Distance. 17 Thehindubusinessline.com, “Zooming in on new game”, April 2008. 10&11 Euromonitor International from National Statistics, August 2008. 18 Merrill Lynch, “Emerging Markets Wireless-Now it is an ARPU Story”, 2007. 19 Capgemini Analysis. ” 12 Capgemini Analysis. 30 31 wireless connections, the handset Figure 8: Entry Barriers for Different MVNO Opportunities subsidies have been modeled to Selection of MNO support and long-term cooperation increase from € 20 per new subscriber MVNOs will need to select their MNO from the operators. This can be € Wholesale partners carefully, as regulations make achieved by providing equity stakes to Existing Complexity of Ease of Maturity Existing Overall to 26 per subscriber in the seven Competition Offering Differentiation of market Relationships Barriers year period. it difficult for MVNOs to change their the MNO or by negotiating payment of Competitors price of MNO partner once they have entered terms depending on the MVNO into an agreement. With regulation performance. Youth Market Sizing “ mandating that MVNOs will have to In the business case, it is assumed minutes will Premium that the MVNO manages to have a maintain required levels of QoS, MNO Strategies subscriber base of around 0.8 million network coverage and availability of Comprehensive Wholesale Strategies Enterprise users by the seventh year of its define THE spectrum will be the prime criteria for Because of the number of players in operation, which translates to around MNO selection. Additionally, the the market, Capgemini foresees a lot Heavy Data MVNO should ideally look at of competition in the wholesale Usage 5% of its target customer segment (see LONG-TERM Figure 9). partnering with operators with whom market as well. The new entrants into High Barrier Low Barrier there is minimum overlap of offerings, the market are likely to be the most Revenue SUSTAINABILITY so as to have a long-term sustainable aggressive in this respect, with their relationship. However, Capgemini wholesale strategies geared towards Source: Capgemini TME Strategy Lab Analysis In line with the trend in the market, the average revenue has been modeled OF THE MVNO believes that wholesale rates will be quickly gaining market share and to decrease by 5% every year for the critical in the choice of MNO partners increasing network utilization through first five years, after which it as they will define the long-term the MVNO model. stabilizes. The upside in the revenue MODEL profitability of the MVNO venture. potential comes from the greater However, Capgemini believes that minutes of usage of the subscriber IN INDIA Although proposed regulations allow operators can still strike financially base, assumed to be 50% higher than for different MVNO relationships in lucrative deals in spite of having to the current market figure. With the different circles, due to cost and give deep discounts of up to 50% of Business Case for a Youth MVNO Cost Components maturing of the market, data revenue operational issues it is likely that retail prices for their wholesale MVNOs would want the same partner segments 21 . Operators should attempt Capgemini assessed the business case As a “thin” MVNO, the predominant as a percentage of voice revenue is Recommendations for an MVNO to profit in the Indian cost component is the wholesale price expected to grow from 8% to 12%. across all circles they operate in. to sell other network resources such MVNO Strategies as HLR 22 at higher margins and market. For the sake of analysis, the of minutes, which accounts for as Selection of Opera”ting Model most potentially attractive of all much as 45% of the total costs by the Results and Conclusion Since regulations are likely to result in provide in-house MVNE solutions, so Operating models would largely be lock-in with an MNO, MVNOs should as to capture a greater share of the opportunities was considered—an sixth year of operation. Typical to an Capgemini’s business case shows that defined by the services and 20 attempt to negotiate deals in which value created in the system. MVNO launched in 10 cities across MVNO, the CAPEX component is such a youth-focused MVNO is applications being provided by the the country targeting the youth modelled to be at a high of around indeed viable. The business model operators have a stake in the success MVNO. For example, an MVNO of the MVNO. This will ensure better segment. This analysis assumed that 18% of total costs in the first year, indicates that the MVNO should be providing ILD and international the MVNO adopts a “thin” operating subsequently falling to less than 10% able to break even around the fourth roaming services might be compelled model, wherein it undertakes by the fifth year of operation. year of operation (see Figure 10). to go for a full MVNO model, as it branding and distribution activities However, the break-even period will would need to negotiate independent without owning any network As the value proposition relies heavily heavily depend on the wholesale rates termination and carrier charges and elements. on bundling attractive handsets with that the business manages to also route its calls differently from its Figure 10: Revenue and Payback Period for Youth-Based MVNO in India negotiate. host operator.
Figure 9: Subscriber Base for a Youth-Focused MVNO in India Nevertheless, Capgemini believes that 57.58 5.3 4.5 MVNOs should try and maintain lean 3.7 2.9 operations by outsourcing most 2.2 44.61 0.8 1.5 824 functions to MVNEs, while continuing to build capabilities such as 683 distribution and customer care, which 33.39 could enable them to differentiate 24.72 550 their services. By opting for the “thin” model the players would be able to 16.65 425 break-even with a lower subscriber base. However, for higher NPV, they 9.30 304 should have necessary agreements in 2.90 place with their host operator 191 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 allowing them to move to an 88 intermediate/full MVNO model, once they have achieved a critical mass and Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Revenue (€m) Cumulative pro!t/Loss (€m) are confident about the long-term Subscriber Base ( '000s) Market Share (%) sustainability of their venture.
Source: Capgemini analysis Source: Capgemini Analysis
20 Cities for launch of services include Mumbai, Kolkata, Chennai, Delhi, Pune, Ahemedabad, Bengaluru, Hyderabad, 21 Capgemini Analysis Chandigarh and Lucknow. 32 22 HLR: Home Location Register. 33 OPERATORS SHOULD VIEW THE INTRO“DUCTION OF MVNOS as an opportunity to unlock additional revenue streams” In conclusion, the introduction of the Jerome Buvat is the Global Head of the Figure 11: MVNO Partner Selection MVNO model in India will be an TME Strategy Lab. He has more than ten opportunity for new players as well as years’ of experience in strategy consulting Key Parameters to Consider Level of Impact existing operators. MVNO prospects in the telecom and media sectors. He is Key Points While Selecting MVNOs on Partner Selection that target the correct market based in London. segments, leveraging capabilities in
l
s MNOs would want MVNOs in circles a
r service development, distribution and Sayak Basu is a senior consultant in n Network Capacity e t o where they have excess capacity i e t brand will be able to build up viable the TME Strategy Lab. His research a m r a e r Control over MVNO operations will allow operators p Level of Control over
a businesses. For long-term interests include next generation mobile O P MVNO Operations to maintain competitive advantage sustainability of these MVNOs, networks and market entry strategies in Ability to Target MNOs would want MVNO partners to target segments strategic decisions pertaining to the emerging markets. Prior to joining the
t t n Complementary Segments they are unable to serve competitively
e selection of MNO partners and Lab, Sayak worked for a leading e g r m a g negotiation of price for wholesale satellite communications provider. He is T e Ability to Serve Segments MNOs are likely to be keen to have MVNOs on the network S Requiring Specific Expertise which cater to segments which require specific expertise minutes will be critical. MNOs too based in Mumbai. should view the development as an Additional Revenue MVNOs might provide operators with additional revenue s l r a e i stream by subscribing to additional services opportunity to unlock additional Varun Raj is a consultant in the TME
t Opportunities from MVNO c e n a m revenue streams through the sale of Strategy Lab. His recent work includes a n i r Long Term Financial Operators are likely to be favorable to only those MVNOs F a wholesale minutes and the provision an analysis of the evolution of mobile P Viability which they believe have long-term financial viability of a range of complementary services networks to 4G. Prior to joining the Lab, to these players. Varun worked for a boutique research Low Impact High Impact and consulting firm in its telecom Source: Capgemini Analysis vertical. He is based in Mumbai.
MVNO Partner Selection However, in the Indian context, The key parameter for the selection of MNOs should not restrict their partner MVNOs will be their ability to MVNO relationships only to players effectively target customer segments with vastly different propositions, as that the operator is unable to serve prospective MVNOs would always be efficiently. Additionally there will be able to find partners who provide operational and financial parameters competitive offers. Instead, they such as spare network capacity and should try and build up a multi- long term financial viability which are proposition MVNO portfolio, so that also likely to be important churn in their target segment results considerations (see Figure 11). in customer acquisition on a partner MVNO, allowing customers to be retained on the network.
34 35 AVERAGE INTERNET USER PENETRATION ACROSS AFRICAN NATIONS IS ONLY 5%, “ compared with 18% in Latin America
through continuing investments in 3G, DSL and WiMAX. Telkom SA Figure 2: Internet User Penetration Compared with GDP/Capita (Nominal Terms, Anticipating Internet Growth in Africa: expanded from 26 to 71 WiMAX sites US$), Selected African and Emerging Markets, 2006 in 2008 alone 7. In less developed 20 Vietnam” Identifying Market Opportunities markets such as Tanzania, Internet 18 growth is being led by mobile by Tushar Rao, Kaushal Vaidya and James Henderson 16 operators who are increasingly 14 extending their voice offerings to data. Internet User Abstract: Internet access in Africa is amongst the least affordable in the world. Our analysis shows that poverty is not a barrier to Vodacom’s HSDPA-based Internet café Penetration 12 initiative is typical of such attempts to (Users per Mongolia further development of the market and extension of Internet penetration beyond current levels. High prices, however, are a major 100 People) 10 Kyrgyzstan reach new communities 8. Georgia factor, driven by low availability of international bandwidth, poorly structured markets, lack of existing infrastructure and low 8 population densities. In this paper, we present a framework for the analysis of markets based on the key constraints of international Haiti 6 bandwidth connectivity, PC penetration and government regulation. Application of this framework can help operators to identify However, both new investors and Nigeria Senegal regions where the constraints are not too strong or are expected to ease out in the near future. Initially, these regions are in the more active operators are presented with 4 the same challenge of profitably developed areas of Northern and Southern African countries. However, operators that enter or invest in these markets and try to 2 reaching out to a wide consumer base. Mali Chad Congo stimulate demand too soon could fail as the usage constraints are too significant at the moment to be profitable. The lowest risk On one hand, usage barriers such as 0 400 600 800 1000 1200 1400 1600 strategy for operators is to enter these markets as integrated service providers, with mobile voice supporting infrastructure that is inaccessibility, lack of affordability and extended to data products. computer illiteracy continue to exist GDP/Capita (Nominal Terms, US$) in many regions and adversely impact Source: Capgemini TME Strategy Lab Analysis; ITU 2006 Average Internet user penetration 1 market potential. On the other hand, Figure 1: Internet Users per 100 People, African Nations, 2007 across African nations is only around there have been some positive 5% 2, compared with around 18% in developments that signal potential Latin America and around 19% in improvement in market conditions. Constraints to Growth of Internet 2007, Libya, with a GDP per capita of 3 Europe and Central Asia . Moreover, GDP growth has been strong across Penetration in Africa around US$7,300, had Internet user there are distinct variations in Internet the region (5.4% average GDP growth In 2003, it was estimated that around penetration of only around 4.4%. In usage across the continent (see Figure 1). from 1997 to 2007 9) and the 90% of sub-Saharan Africans and 30% contrast, Tunisia had less than half the investment pipeline is also seen to be 1 or less of North Africans live on US$2 a day GDP per capita of Libya at around Internet usage is beginning to flourish robust with many actors increasing or less 12 . The presence of widespread US$3,000, but had Internet user in the more prosperous regions of their interest in the region. And the poverty makes it easy to attribute low penetration of around 16.7% 13 . 1-5 Northern and Southern Africa with World Bank Group has committed Internet usage to the perceived lack of South Africa, Tunisia and Morocco US$2billion over five years, from affordability of Internet services having Internet penetrations above 2007 to 2012, towards the among the masses. 4 THE KEY GROWTH 5-10 10% , with rates of 11, 13, and 20% development of ICT 10 in Africa 11 . respectively 5. However, the However, our analysis shows that the penetrations in central African In this paper, Capgemini’s TME affordability argument does not hold CONSTRAINT IS NOT 10-15 markets remain largely under 5% 6. Strategy Lab analyzes the reasons for strongly for both the rich and the not- low Internet penetration in Africa and so-rich countries (see Figure 2). For “THE POVERTY OF THE Such low Internet penetration in also presents an analytical framework example, while Nigeria has higher Africa has attracted widespread to help assess the expected market GDP per capita than Vietnam, it has POPULATIONS , interest from a variety of players, evolution. The study then suggests less than a third of the Internet but the including conventional fixed-line recommendations for companies that penetration. operators, pure-play Internet Service are developing or reviewing their prohibitively Providers (ISPs), wholesale providers strategies for the African Internet In addition to discrepancies observed Source: Capgemini TME Strategy Lab Analysis; International Telecommunication Union, “Telecommunication/ICT Markets and 3G operators. For example, in market. while comparing African nations with high Internet and Trends in Africa 2007”, October 2007 South Africa, several companies are their international counterparts, there already competing for consumers are differences within Africa itself. In pricing
1 This indicator reflects the percentage of people that regularly access the worldwide network through individual or shared dial-up, leased or broadband connections. 7 http://www.wimaxday.net/site/2008/06/09/telkom-sa-expands-wimax-network/. 2 Capgemini TME Strategy Lab Analysis; International Telecommunication Union, “Telecommunication/ICT Markets and Trends in Africa 2007”, October 2007. 8 http://www.itnewsafrica.com/?p=1456. 3 Regional Fact-sheets from the World Development Indicators 2008. 9 African Development Indicators 2007, World Bank. 4 Capgemini TME Strategy Lab Analysis; International Telecommunication Union, “Telecommunication/ICT Markets and Trends in Africa 2007”, October 2007. 10 Information and Communications Technologies. 5&6 Ibid. 11 UN Chronicle Online Edition, “Connect Africa Summit Commits to Bridging the Digital Divide”, 2006. 12 Figures in PPP terms. Source: ILO 2004c, UN Economic Report on Africa 2007. ” 13 Capgemini TME Strategy Lab Analysis; International Telecommunication Union, “African Telecommunications/ICT Indicators 2008: At Crossroads”, May 2008. 36 37 THE SINGLE GREATEST BARRIER TO PRICE REDUCTION IN AFRICA is the This de-correlation of Internet “ Lack of National Backbones Figure 4: International Bandwidth per Capita, Bits, Select African and non-African penetration from GDP per capita unavailability of sufficient Few African countries have a reliable Countries, 2007 indicates that the key growth national backbone that provides the 13,061 constraint is not the poverty of the necessary capacity and reach, with populations. Low Internet penetration international bandwidth even wealthier countries such as in Africa is due to the existence of Nigeria still significantly deficient. In usage barriers that are created by high regions where national backbones are 3,285 pricing of Internet services vis-à-vis absent, service providers are forced to income levels, and exacerbated by income, a price point that limits the estimated that Ireland, an island with develop their own infrastructure, unfavorable demand conditions such addressable market to very niche only six million people, has greater increasing operator costs and 488 as adult illiteracy. We now examine segments. international fiber ban”dwidth than the resulting in higher price points. This 405 the usage barriers in detail. entire continent of 990 million also leads to areas of parallel 137.7 65.0 We now discuss the issues that have 14 46.6 people . Africa was left behind in infrastructure in major urban areas 28.5 22.6 21.6 High Pricing led to high Internet tariffs in Africa. international connectivity (see and the absence of any infrastructure Affordability is not a function of Figure 4) as the opportunity for in regions where the business cases UK France Columbia Turkey Senegal Djibouti African Mauritania Ghana Kenya wealth alone, but also of pricing. International Bandwidth companies laying cable was not as are weaker. Average Internet pricing in Africa is The single greatest barrier to price pronounced as in Europe, Asia and Source: Capgemini TME Strategy Lab Analysis; International Telecommunication Union, “African Telecommunication/ICT Indicators 2008: At Crossroads”, May 2008 prohibitively high (see Figure 3), reduction in Africa is the the Americas, where enterprise Low Regional Population Density adversely impacting affordability for unavailability of sufficient segments and relatively affluent Another constraining factor is that even countries with higher per-capita international bandwidth. Africa has consumers would guarantee demand. Africa has an average density of fewer incomes. For example, the lowest around 13% of the world’s population than 28 people per km 2 compared monthly broadband tariff in Burundi but only 0.2% of international International capacity constraints with densities of over 100 per km 2 in annual income in Western Europe, usage increases, this can be a difficult is over 7,000% of average monthly bandwidth. In fact, it has been create wholesale price competition at many European countries. Population but accounts for more than 15% of initial barrier to overcome for a national level, increasing the cost density is a very powerful component annual income for the majority of operators trying to reach new base of Internet providers in a manner of business cases for both fixed and African consumers 17 . In poorer populations. Figure 3: Monthly Internet Tariffs and Broadband Cost as % of Monthly Income no longer experienced in other mobile infrastructure, pushing countries such as Zimbabwe, the cost (Nominal Terms, GNI) per Capita, Select African and non-African continents. providers to premium pricing to offset is more than an entire year’s income. Countries, 2007 Anticipating Market Evolution Broadband these infrastructure costs. African markets are highly dynamic, Cost as % 7756% 1544% 286% 192% 167% 0.6% 0.5% 21% Monopolistic Market Structures Adult Literacy and Absence of Local with a great many factors making it of Monthly The second factor driving high prices GNI/Capita 1,655 However, population densities in Content difficult to gauge an accurate picture Broadband Tariff (US$) is the lack of open market urban areas are likely to rise Africa is home to over 2,000 spoken of the market opportunity for African Dial-Up Tariff (US$) competition in many African nations. continuously over the next few years languages, with approximately 100 of broadband investments. Predicting the Across Africa, only 56% of incumbent as a result of urbanization, making them used widely across ethnic evolution of these markets requires operators were privatized in 2007, this an issue primarily faced by groups. There are over 300 million the identification of constraining compared to 76% in Europe and 74% operators that are obligated by speakers of the three dominant non- factors and an appreciation of the 681 in the Americas 15 . As many countries licensing terms to rollout services to European languages: Swahili, Arabic international, governmental and 403 have retained their nationalized less populated areas. and Hausa. Beyond these the private sector initiatives that are likely 238 225 operators, governments have not population becomes heavily to impact these constraints. We now 86 64 79 introduced the strong regulations 15 21 23 23 2012 17 12 Exacerbating Demand Constraints fragmented in terms of regional discuss a framework that can help needed for fair competition with PC Affordability languages. The unavailability of local operators to identify regions where Burundi Ethiopia Comoros Kenya Zambia UK US India private investors. The lack of free PC penetration remains under 10% content significantly limits the appeal the constraints are not too strong or Note: Dial-up cost is based on 20 hours of use. UK Internet consumers are assumed to subscribe to Internet plans that market competition discourages across Africa 16 . Cost is a major of Internet services to large groups of are expected to ease out in the near include access calls. US Internet consumers are assumed to subscribe to unlimited calling plans that include local calls made for Internet usage. Broadband connection refers to a speed of at least 256kbps. private investors, allowing the status barrier. An entry level PC costs less African consumers. While local future. quo to continue unchallenged and than 0.5% of an average person’s content tends to grows as Internet Source: Capgemini TME Strategy Lab Analysis; International Telecommunication Union, “African Telecommunication/ICT hampering the introduction of Indicators 2008: At Crossroads”, May 2008; Websites of BT (UK), Verizon (US) and MTNL (India); World Bank, World Development Indicators Database, October 2008 innovative pricing models, necessary for stimulating growth. An entry-level PC costs more than 15% of annual “income FOR THE MAJORITY OF AFRICAN CONSUMERS
14 IEEE Spectrum 2004. 16 World Bank, “ICT at a Glance”, 2008. 15 ITU World Telecommunication Regulatory Database 2007; International Telecommunication Union, “Ten Years of Regulatory Trends”, February 2008. 17 Capgemini TME Strategy Lab Analysis; International Telecommunication Union, “African Telecommunication/ICT Indicators 2008: At Crossroads”, May 2008. 38 ” 39 Framework for Identifying Growth Figure 5: Market Screening Framework for Assessing Fundamental Constraints short time-frame, Internet cafés and Figure 6: Illustration of African Countries Poised for Mass Market Internet Regions other community offerings become Penetration Figure 5 represents a model for key elements of operator strategies. assessing markets based on the key Optimal conditions for market growth Significant Reduction constraints of international Regional Development Patterns of Constraints Already Achieved bandwidth, PC penetration and On application of the market government regulation. G Ra I a a Ba dd screening framework (see Figure 5), we can identify markets that are likely 1. Weak regulation, 1. Severely constricted By screening markets for availability monopolistic market structure bandwidth, reliance on satellite to witness significant growth of 3 Significant Reduction of international bandwidth, maturity 2. Limited regulation, 2. Significant fiber deployment, services in the near to medium term of Constraints Expected to be oligopolistic market structure complemented by satellite of regulation and PC penetration, we 2 due to the relaxation of constraints Achieved within 2-3 Years can identify countries where operators 3. Effective control of market 3. Direct fiber connection with (see Figure 6). forces, allowing use of 1 excess capacity shared infrastructure 1 will be able to drive further 2 development. 3 The immediate opportunities in Africa 1 2 3 PC P a are centered in the regions of Developments Influencing 1. <2% Northern and Southern Africa. These Source: Capgemini TME Lab Analysis; World Bank 2006; International Telecommunication Union, “African Telecommunication/ICT Indicators 2008: At Crossroads”, May 2008; World Bank, World Development Indicators Database, Framework Variables 2. 2-10% are markets where constraints have October 2008 We now try to understand how the 3. >10% already been eroded significantly. In market is likely to shape up by Tunisia, the PC penetration has risen applying the above framework and Source: Capgemini TME Strategy Lab Analysis more than three-fold from 2.15 in examining the likely evolution of each provide a PC to each household by framework variable. 2010 through affordable pricing, low- independent basis. For instance, Regulations must be assessed at a THE IMMEDIATE OPPORTUNITIES IN cost financing and interest subsidies International Bandwidth Kenya is in the process of initiating its national level, with particular on loans 35 . The most significant current initiative own fiber connection, while Nigeria attention given to the larger political to increase international connectivity and Angola have purchased satellite environment and its probable AFRICA are centered in the It is notable that despite progress to Africa is the US$280 million 18 bandwidth 21 . influence on the countries’ judicial being made in international EASSy (Eastern Africa Submarine system. It is also important to ensure “regions of Northern and bandwidth expansion and often Cable System), which will connect It is estimated that Africa lacks precedents exist regarding the reliable regulatory authorities, East East Africa with the rest of the world. approximately 52,000 km of fiber enforcement of regulations. Without African countries (except Kenya) It is being funded by the World Bank backbone infrastructure, but the issue this support, companies would be Southern Africa, WHERE remain a longer term opportunity. and a consortium of private investors. should be significantly addressed over unwise to share backbone and access Low PC penetration and low average This 8,500km cable will run the the next two to five years as current infrastructure. GROWTH CONSTRAINTS have already incomes are likely to restrict operator length of Africa, from South Africa to projects reach completion 22 . offerings to niche markets such as Sudan, connecting 13 countries en PC Penetration capital-city based enterprise services route with a joint capacity of 320 Government Regulations In areas with electricity grid access, been eased significantly and shared community offerings. Gbits/s. Once East African countries The quality of market regulation in PC affordability is a major barrier to have been reached, the project plans Africa remains highly variable. In individual Internet subscriptions. The Implications for Investors to reach out to central African 2007, around 50% of African fixed- “one laptop per child” initiative, led 2000 to 7.5 in 2007 28 . It has also station in Algeria) is likely to increase Service providers poised for growth countries. As per the International line markets were monopolies, with a by a consortium of leading hardware enabled competition in the mobile its bandwidth capacity by three Mobile versus Fixed Line Telecommunications Union, the further ~25% allowing only partial manufacturers, now provides units for and Internet sectors 29 . Additionally, times 32 during this period. Algeria From 2002 to 2006, the number of anticipation of increased competition competition 23 . However, the trend is as little as US$150, with the intention international bandwidth availability Telecom has also announc”ed that it fixed line broadband operators in has already led to reductions of firmly towards better regulation and of having a cheaper version costing has increased exponentially from 5 will deploy fiber across Algeria to Africa grew from 3 to 30 36 . However, bandwidth prices over the existing market liberalization. In 2007, around US$75 to be available in 2010 26 . bits per capita in 2000 to around 300 improve bandwidth availability to end rollouts have typically focused on SAT3/WASC (South Atlantic 3 / West 80% of African countries had Governmental initiatives 27 exist, but bits per capita in 2007 30 . consumers and offer high speed capital cities and major towns, with Africa Submarine Cable) system 19 . established independent regulatory none have achieved dramatic increases Internet access 33 . Moreover, regulators some extensions made subsequently authorities, with cooperation between in PC penetration due to the size of Algeria is an example of a country are trying to increase competition in to second tier towns. Limited rollout Further initiatives include major regulators increasingly occurring at an the investment required for where the significant reduction of the market by encouraging the of fixed-line services is expected to extensions linking 54 countries across international level 24 . Many West widespread hardware subsidization. constraints is expected to be achieved deployments of WiMAX and 3G 34 . continue over the next few years in the continent through the US$40 African countries have come together Therefore, PC penetration may within a few years. For example, the On the PC penetration front, the view of the high costs of laying million NEPAD (New Partnership for in the ECOWAS (Economic continue to be the key constraint to ongoing upgrade of the SEA-ME-WE- Algerian government has initiated a copper/fiber. Africa’s Development) ICT Broadband Community of West African States) growth in many markets. In areas 431 (an undersea cable with landing family ICT program that aims to Infrastructure network 20 . Some group, which commits members to where a significant increase in PC national governments are also trying harmonize ICT regulation under the penetration cannot be achieved in a to improve their situation on an direction of the ITU 25 .
18 Networkworld: Construction Starts on Africa’s EASSy Cable Network, March 2008. 28 Website of Ministry of Communication Technologies, Republic of Tunisia; International Telecommunication Union, “African Telecommunication/ICT Indicators 2008: At Crossroads”, May 19 Telecommunication/ICT Markets and Trends in Africa 2007. 2008. 20 http://www.itu.int/ITU-D/partners/Events/2007/Nairobi_4-5June07/Presentations/4-2_NEPAD.pdf. 29 World Bank, “ICT at a Glance”, 2008. 21 http://www.eafricacommission.org/projects/126/nepad-ict-broadband-infrastructure-network. 30 International Telecommunication Union, “African Telecommunication/ICT Indicators 2008: At Crossroads”, May 2008; World Bank, “ICT at a Glance”, 2008. 22 Telecommunication/ICT Markets and Trends in Africa 2007. 31 South East Asia – Middle East – Western Europe - 4. 23 International Telecommunication Union, “Telecommunication/ICT Markets and Trends in Africa 2007”, October 2007. 32 Fujitsu.com, “Fujitsu Helps Capacity Upgrade Between Asia and Europe with Sea-Me-We 4”, March 2008. 24 International Telecommunication Union, “Ten Years of Regulatory Trends”, February 2008. 33 Company website. 25 http://www.itu.int/ITU-D/treg/index.phtml. 34 Telegeography, “GTI and Algeria Telecom launch WiMAX”, February 2008; High Beam Research, “Huawei and Algeria Telecom celebrate successful EV-DO launch”, May 2007. 26 International Herald Tribune, “Design Accolades for One Laptop per Child”, May 16, 2008. 35 ICTRegulationToolkit.org, “Programs to boost household PC penetration”, December 2008. 27 Governments, such as Rwanda and Ghana, with the help of the World Bank are investing in ICT sector and promoting its growth. Similarly, Kenya is promoting ICT in schools through a US$1.4 million grant from the US. 41 On the other hand, we expect cellular In general, we anticipate integrated New pure-play ISPs are especially OPERATORS SHOULD WORK PROACTIVELY WITH operators in major African markets to business models to emerge the dependent on accurate market drive mobile broadband through strongest, with operators providing intelligence as they need to time their technologies such as HSDPA. For voice, broadband and community entrance appropriately to significantly GOVERNMENTS , INTERNATIONAL CABLE PLAYERS AND VENDORS instance, in South Africa, the mobile telephony products across a large benefit from a more general market operator MTN uses HSDPA to link section of the population. With the evolution that reduces usage “ Internet cafés at speeds of up to 1.8 demand for voice traffic being constraints (such as the increased to mitigate growth constraints in Mbps. Vodacom (South Africa) also everywhere, businesses supported by availability of international reported that over 10 percent, or voice are less risky than those relying bandwidth). attractive markets almost 150,000, of its 3G subscribers purely on demand for data. Moreover, used data cards for connections to the use of shared infrastructure for Moreover, we urge all operators to laptops in 2007, reflecting the voice and data services results in closely monitor the variables popularity of 3G as a broadband generally higher margins. constricting demand for Internet solutions can all support a company’s One alternative for operators is to Tushar Rao is a manager in the TME access method 37 . High consumer services, as elements of socio- strategy and therefore, partnering with enter the markets when barriers have Strategy Lab. His research interests acceptance of mobile Internet is New Entrants or Existing Players economic, competitive, regulatory and vendors to trial these innovations can been overcome a”nd market conditions include analyzing disruptive technologies highlighted by the fact that in South There are encouraging signs for new infrastructure development are the become a significant differentiator. For have improved. This can be facilitated in the broadcasting and mobile segments. Africa, there were over 1.8 million 3G market entrants. Given that the essential levers that underpin instance, becoming a partner in the by using a detailed assessment Recent work involved an analysis of the subscribers in 2007 compared to development of many African markets commercial success. one-laptop-per-child initiative can framework to analyze markets and emerging open ecosystem in the mobile around 335,000 ADSL connections 38 . will be slow rather than a “big bang” help operators distribute laptops to identify regions where usage industry and assessment of its impact on and the current Internet penetration is Public-Private Partnerships schools as well as homes and drive constraints are likely to reduce in the operators. Prior to joining the Lab, This scenario is expected to be well below 5% in some markets, there For both incumbents and new Internet usage over their networks. near future. Another alternative is to Tushar worked with a leading telco in representative of the situation across remains a wide window of entrants, partnerships with public work proactively with governments, India. He is based in Mumbai. Africa. We expect regional divides in opportunity. However, with the bodies have never been more Conclusion international cable players and access technology with fixed-lines integrated telecommunications model important. Many of the constraints to In conclusion, although Africa holds a vendors to mitigate growth constraints Kaushal Vaidya is a senior consultant in being restricted largely to major cities, likely to become dominant in such Internet usage might not be addressed lot of promise in terms of growth of in selected attractive markets. This the TME Strategy Lab. His recent work and mobile technologies reaching the price sensitive markets, new entrants profitably by private operators in a Internet services, the evolution of can be done by partially funding includes analyzing trends in online mass market in broader regions. need to consider whether to provide a stand-alone manner. Therefore, these services in various African government initiatives, investing in advertising and assessing growth as well wide selection of services (including international development agencies, nations is not likely to happen in enabling infrastructure such as as profitability drivers of players in Pure -Play ISP versus Integrated voice) or identify an exit strategy national governments and parallel. Although the low GDP per international bandwidth and emerging markets. Prior to joining the Communications Providers when this mature market scenario international infrastructure initiatives capita of African nations is a subsidizing consumer equipment such Lab, Kaushal worked as a management Niche or pure-play ISPs operate takes form. also need to play a significant dampener, it is not the key constraint as PCs or 3G-enabled mobiles. consultant with the consulting arm of locally and have a significant presence enabling role. Operators that partner to the growth of Internet services in However, operators need to ensure India’s premier business house. He is in many markets, utilizing either For existing players, the challenge is with these agencies stand to benefit as the continent. The primary challenge that reducing barriers to entry does based in Mumbai. wholesale bandwidth from satellite to improve customer service and barriers to accessibility are reduced. that needs to be overcome is the very not bring in excessive competition providers or operating small regional expand reach to new regions. Industry This strategy can also lead to high pricing of Internet services, and reduce their own upside. James Henderson is a consultant in the networks. There are over 150 ISPs in experts suggest that customer service, competitive advantages through the caused by the lack of international TME Strategy Lab. His current research South Africa, with around 90% of in terms of fault response rates and subsidization of investments, national bandwidth connectivity, monopolistic Thus, succeeding in Africa requires focuses on analyzing the converging these operators reselling bandwidth provisioning times in particular, is a publicity and ensuring friendly market structures, lack of national careful analysis, regulations telecom and media industries, and from larger players such as major issue in the region. Existing regulatory support. backbones and low population management, significant investments emerging business models centered on incumbents and international players need to revamp their density. Companies that enter or re- and a lot of patience to ensure collaboration. Prior to joining the Lab; he operators 39 . However, as markets operations significantly as new Leveraging Vendor Innovation invest in these markets and try to appropriate market timing. worked on a variety of projects across the mature, we anticipate this ‘niche’ operators will try to exploit this Vendors increasingly see Africa as a stimulate demand too soon will often TME sector with recent focus on business model to be the most weakness. key market for revenue growth. As fail as the usage constraints are too emerging market strategies and the threatened as these players lack scale, such, they are competing heavily on significant at the moment to address entrance of WiMAX into developed operate on thin margins and are Critical Success Factors price and investing in the design of profitably. markets. He is based in London. unable to bundle voice services. Market Timing new products that open these Although we are positive about the markets. New low-cost 3G phones, The position of fixed-line incumbents size of the market opportunity, we datacards, community telephony is also far from certain. Our interviews urge caution to both new entrants and products and backhaul network with industry experts suggest that the existing players regarding the timing quality of service provided by fixed- of investments. Operators who invest line players is on average far below heavily in infrastructure without fully that provided by mobile operators. appreciating the market constraints This makes fixed-mobile substitution risk years of poor performance. a serious prospect in the urban areas.
36 South African regulator website, ITU 2007. 37 International Telecommunications Union, “African Telecommunication/ICT Indicators 2008: At Crossroads”, May 2008. 38 Ibid. 39 www.ispa.org.za (South Africa Internet Service Providers’ Association web-site). www.ispmap.org.za. 42 43 Consumers are adopting more viewing such as Personal Video cannibalize linear viewing. However, Future of Broadcasting: A new model for profitability flexible viewing patterns Recorders (PVRs), catch-up TV and linear viewing is likely to decline over by Ari Iso-Rautio , David Candlin and Benjamin Braunschvig Digital distribution drives greater Video On Demand (VoD). By the the same period, dropping to 80% of channel choice and – increasingly – middle of 2008, over 20% of UK TV overall viewing by 2013, down from greater flexibility about how and homes owned a PVR 4; we forecast this 98% in 2007 (see Figure 1). By that Abstract: The TV industry in Europe and the US is facing unprecedented structural and cyclical changes that have profound when to view content. As a result, figure to exceed 70% by 2012. time, PVR and VoD viewing are likely implications for all players in the value chain. The emergence of devices such as personal video recorders, the increasing penetration consumers are watching more TV Another indicator of the increase in to account for 12% and 8% of all of fixed and mobile broadband and proliferation of multiple media platforms are giving TV viewers unlimited flexibility. Consumer programming in catch-up and on- flexibility is the emergence of catch- viewing, respectively. behaviors are undergoing a dramatic move towards time-shifted and on-demand content. A key consequence of these behavioral demand windows, and consuming up services such as the iPlayer from changes has been the impact on TV advertising revenues. With consumers increasingly shifting to online video aggregators and more content on their PC and via the BBC, which gathers forty million As a result of these changes , preferring short-form content, advertising dollars are also making a beeline to the new medium. From the other end, the current mobile devices. views per month, 85% of which are competition in the TV industry will be economic slowdown is starting to have a significant impact on both advertising and TV subscription revenues. The result is a very via a PC 5. harder to predict. TV players have challenging financial outlook with total TV revenues likely to fall by 10% between 2008 and 2010, and not likely to reach 2008 levels Digital TV has increased choice and traditionally competed with other in real terms in the UK until 2014. These developments have far reaching implications for the fundamentals of the TV industry. flexibility People will watch more time-shifted channels in the Electronic Program The first phase of digital TV take-up and on-demand TV Guide. However, entry of competing Traditional models of content commissioning, and exploitation will need to be overhauled in order to maintain profitability and from the mid nineties onwards As more people have access to time- players offering non-linear services develop new revenue streams. TV players will need to sharpen their focus on the commissioning process and explore ways and means removed the bottleneck in analog shifted services, the amount of and online aggregation pose new of exploiting content in non-traditional windows. spectrum capacity and resulted in a viewing allocated to non-linear competition to TV players. Such substantial increase in the number of viewing is increasing. For instance, content will be discovered by viewers TV channels available. In the UK, for year-on-year online video viewing in using web search tools and shared example, the number of channels the UK increased 50% to 85 minutes across broadband networks. This is doubled between 2002 and 2007 3. per person per week between 2007 posing new threats and opportunities and 2008 6. Going forward, Capgemini to established TV players. The television sector has seen better In this paper, we will look at how the We are now entering the second phase estimates that the total time spent on times. Uninterrupted growth, where TV industry can sustain profits in such of digital TV penetration, which is TV viewing could increase slightly in all players in the TV value chain have turbulent times. We start by characterised by the successful launch the UK over the next five years as experienced strong revenue and profit pinpointing the two main trends of new services that enable flexible time-shifted viewing does not entirely increases, could be a thing of the past. affecting the TV landscape: the rise of Over the past 18 months, some TV digital TV and a change in consumer players had to contend with a rising viewing behaviors. We continue the tide of bad news. Revenue growth analysis by giving a five year forecast began to dry up for most free to air of how revenues across the TV value (FTA) broadcasters, resulting in a chain are likely to evolve in light of Figure 1: Breakdown of TV Viewing Time (%), 2007-2013(e), UK sharp decline in their share prices and the worsening economic conditions. 2% the need to make redundancy plans. We then end the paper with a set of 8% VoD
For instance, Channel 4 in the UK is actionable recommendations aimed 12% PVR looking to reduce its workforce by towards sustaining profitability in this 15%, translating to almost 150 jobs, uncertain TV landscape . in an attempt to cut costs by £200 1 million to counter the effects of Our analysis and diagnosis covers the 98% declining advertising revenues. TV industry as a whole but our Linear 80% Similarly, the share price of Britain’s recommendations are targeted largest commercial broadcaster, ITV specifically at commercial broadcasters plc has fallen from their erstwhile in developed countries. highs of over 100p to a low of 39.75p 2 at the end of December 2008, a fall of over 63% from the 20 07 2013 peak of January 2007. Source: Capgemini Analysis
1 Telegraph, “Channel 4 to axe 150 jobs as advertising revenues slide”, September 2008. 3 OFCOM, Communications Market Report. 2 ITV plc investor website. 4 Enders Analysis, PVR+, 2008. 5 Screen Digest, the future of online video, 2008. 44 6 OFCOM, Communications Market Report, 2008. 45 Revenues are falling in real terms Figure 2: Real TV Net Advertising Revenues, Real GDP, Year-on-Year Growth, UK, It is a paradox in broadcasting today 1996-2008(e) that, while consumers enjoy 10% Real GDP Growth TV revenues are likely to fall by 10% between 2008 increasing choice and flexibility in Real TV Advertising Growth their viewing, the money entering the TV value chain is decreasing. Spot 5% and 2010 in the UK and not likely to reach advertising revenue is falling sharply and evidence from the last downturn 0% “ suggests that there will be no bounce- 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2008 levels in real terms until 2014 back when gross domestic product -5% (GDP) starts to recover. This section provides an analysis of the revenue -10% drivers of the TV value chain and proposes a five-year revenue forecast -15% We are entering a new era of slow on Pay TV subscriber numbers. In the The result is a very cha”llenging for the TV industry as a whole. revenue growth UK, some independent surveys are financial outlook, with total real terms Source: Capgemini Analysis; Enders Analysis, “UK TV and Display Advertising Outlook”, November 2008; Revenue growth is beginning to see predicting that over 25% of pay TV revenue likely to fall by 10% between TV advertising revenues are Measuringworth.com significant pressures, on both the customers are considering either 2008 and 2010, and revenues not growing slower than GDP advertising front as well as consumer switching to a cheaper package or likely to recover to 2008 levels in real The relationship between TV net subscriptions. dropping their subscription terms until 2014 (see Figure 4) 13 . advertising revenues (NAR) 7 and GDP Figure 3: Average TV Subscription Revenue per Subscriber per Annum (€), Select altogether 12 . shows that, prior to 2000, advertising Countries, 2002-2007 350 Going forward, structural factors will The past period of expansion in the tended to grow faster than GDP in continue to negatively affect TV NARs. Given these challenging TV industry, driven by growth in both periods of economic expansion and 300 The increase in multi-channel circumstances, whilst forecasting is advertising and pay TV income, has decline more rapidly than GDP in penetration up to the impending difficult in the current environment, been replaced by a much tougher times of recession. Post 2000 250 digital switchover will likely continue Capgemini expects that: climate. Companies are entering a however, the relationship between TV 200 to reduce commercial networks’ new era in which traditional business advertising revenue and GDP no audiences. The audience share of the •TV net advertising revenues are models may no longer work; they longer appears to hold. In the UK, for 150 thematic channels taken as a whole likely to fall by more than 20% in need to adopt radical new approaches example, advertising did not recover will also increase as more households real terms between 2007 and 2011, as top line growth becomes even after GDP growth resumed in 100 migrate to multichannel. Since with an anaemic recovery thereafter. increasingly difficult. Those businesses 2003 and it actually dipped again in 50 advertising minutes per hour are with the sharpest focus on 2006 at a time when GDP was still •Subscription income earned by pay higher on those channels, the supply maintaining profit margins in their growing. In other words, TV 0 TV services is likely to fall in real of commercial impact will increase core business while developing new advertising has been a slow growth 20022003 2004 2005 2006 2007 terms between 2008 and 2010, with substantially in the next few years. revenue streams beyond core activities sector since 2000 (see Figure 2). The France Germany Sweden some recovery afterwards. Lower CPMs on thematics will will be the winners. trend is similar in other geographies Source: Capgemini Analysis, Ofcom, “The International Communications Market 2008”, Nov 2008 contribute to deflationary pressures as well. In the US, TV NAR has been on the price of TV advertising. consistently growing slower than the GDP since 2004. Additionally, competition from online countries like France, for instance, terrestrial services. Similarly, in the Figure 4: Forecast Real TV NAR and Real Pay TV Revenues (£bn), UK, 2008-2014(e) players is likely to prove a significant Pay TV revenue growth is slowing penetration of pay TV households has UK, net additions for digital pay TV challenge to TV operators. Television CAGR (2008-2014) down been decreasing slowly from around subscriptions have been showing clear 8.0 share of overall advertising is falling in 7.4 7.3 In the last decade, Pay TV revenues 35% in 2003 to an estimated 31% in signs of a saturated market. Net 7.1 0% most countries. In Spain for example, 6.7 have been steadily increasing across 2008 8. The reasons for this gradual additions in the first three quarters of the TV share of overall advertising fell markets; however, they now appear to decline are largely attributable to the 2008 are estimated at around 0.3mn, 6.0 )
3 percentage points to 43% between l be reaching saturation levels. In rising popularity of free digital almost replicating the growth that was a 4.2 4.6 1.4% 10 e 2006 and 2007 . In the UK, online r 4.4 ( 4.0 seen in the first three quarters of n
9 advertising is estimated to have b 4.0
2007 . The pressure on subscription £
overtaken TV advertising in 2008 11 . , e
revenues has already been visible in u n
select geographies, which are seeing e v
Furthermore, contrary to past e 2.0 declining average revenues per user R 3.2 (ARPU) (see Figure 3). Increasing recessions, the current slowdown 2.7 2.7 2.8 -2.1% popularity of free digital terrestrial appears to be having a direct impact on overall consumer spending: total 0.0 services, such as Freeview in the UK, 2008 2010 2012 2014 and the pressure on pay TV operators personal expenditure growth reached TV NAR Pay TV Revenues (excluding telephony) to offering a compelling value a 30-year low in the US in Q3 2008 proposition to consumers are leading compared to the previous quarter. Source: Capgemini Analysis to a softening in the ARPUs. This could have a significant impact
7 Net Advertising Revenues (NAR) include both commercial analog and multi-channel revenues. 10 Ofcom, “The International Communications Market 2008”, November 2008. 8 Enders Analysis, “French Pay-TV: Back to Growth”, November 2008. 11 Enders Analysis, “UK TV and Display Advertising Outlook”, November 2008. 9 Ofcom, “Digital TV Market Update”, Q3 2008. 12 Telegraph, “Pay-TV customers to cancel contracts as credit crunch bites”, October 2008. 13 Secondary revenues (not shown) such as international format sales are growing rapidly according to UK Trade and Investment (by 23% in 2007 to £663m) but the growth is insufficient to offset falling domestic revenues.
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C 26 THERE ARE USEFUL LESSONS TO BE DRAWN FOR TV BROADCASTERS
L Mc I d in the way the music industry at first Recorded music was the first sector in the media industry to experience the radical impacts of digital technology, struggled to address structural changes in the accompanied by shifts in consumer behaviors. Recorded music industry revenues declined by 25% between 2004 “ and 2007 a across the US, the UK, France and Germany. At the same time, consumption of music grew by 10% b a year with piracy often cited as the main driver. However, the root causes of revenue decline go beyond piracy and market, AND HOW BUSINESS MODELS ARE NOW BEING RE -INVENTED reflect major structural shifts that have their parallels in today's TV landscape.
Drivers of Change Music Industry TV Industry Creating a new model tuned Figure 5: Structural changes in the broadcasting industry: A new model for Consumer Behaviors Rapid adoption of digital Rise of time-shifted viewing towards profitability formats and short-form content profitability For most commercial TV networks, ” Digital music leadership New online content programming costs typically represent Margin improvement Revenue growth New Players in the taken by Apple, followed by aggregators from outside between 60% and 70% of the overall in core activities outside core activities Value Chain a wide variety of new digital and inside the TV industry, cost base 16 . In an analog world with distributors, e.g. Nokia e.g. YouTube and Hulu few channels, the cost of content Commissioning could be recouped from advertising • Strict financial criteria Commissioning From one dominant revenue behind commissioning decisions • Control of rights source (CD) to several Introduction of new sold in the live broadcast window . • Deals for talent and Business Models smaller revenue flows with platforms and windows for This traditional commissioning model brands Exploitation higher degrees of content consumption may no longer work; but while • Commission for Exploitation uncertainty exploitation across broadcasters are earning lower all platforms • 360º exploitation • International growth revenues from the first broadcast, the opportunities A a ab, a d a range of revenue streams has diversified – with new revenue Enablers There may be useful lessons in the way that the music industry at first struggled to address these fundamental sources from on-demand distribution issues, and how business models are now being re-invented to drive growth and profitability. and download-to-own, strong growth • New capabilities Processes and systems to support the new model in international sales of built • • Culture and mindset change The past: Initial Music Industry Responses programs and formats, and increasing Failure to understand fully the implications of digital: value realized by producers and talent Source: Capgemini Analysis Focus on fighting piracy, which may have shifted attention away from building new outside of the broadcast window. business models to monetize the nascent digital opportunities
Limited investment in understanding consumers at a time when music Broadcasters will need to recognize behaviors started to change significantly that the key to survival in light of the Margin improvement in core program basis and in all distribution Lack of innovation and collaboration: changed dynamics is to adapt. In this activities windows to ensure that they derive • Reliance on the CD-led, mass-marketing-based model while consumer spend was section, Capgemini recommends an Commissioning will need to be driven the maximum margin uplift. shifting to more interactive media integrated approach that responds in a by metrics • Enabling players to whom music was a loss leader to set pricing and experience two-pronged manner. This new model Currently, the bulk of commissioning By having a clear metric-driven (Apple in digital, mass retailers in physical) responds to falling revenues in the is carried out by networks, who may approach on the value of each broadcasters’ core business by produce internally or commission program, broadcasters will be in a improving margins, whilst achieving from external producers. Creative significantly better position to balance The future: Actions to Re-invent the Music Business revenue uplift by focusing on growth considerations are often the main the creative considerations with the Widening scope of agreements with content creators: opportunities outside the core driver of commissioning decisions. In financial contribution of a program, The old model of signing artists with large up-front fees is being balanced with an business. Successful implementation these tough economic conditions, and accordingly decide on the increasing focus on profitability across different monetization windows. 360 degree deals and risk sharing with artists are manifestations of this new approach of such an approach will require some however, there is a need to increase commissions. Furthermore, the key enablers including full alignment focus on profitability in the metrics need to go beyond volume Investing in growing segments of the wider music market: of the organization around the new commissioning process. Networks will indicators – an example from the While the recorded music market is in decline, other sectors of the wider music market such as live performances and merchandising or music gaming are growing. Labels business model and a set of new need to put in place a rigorous music industry would be to track the are building capabilities in these areas through organic growth as well as acquisitions relationships with other players in the financial analysis on a program-by- profitability of a song or album TV value chain (see Figure 5). alongside its chart position. Embracing business model innovation: While innovations such as music games are often driven by players from outside the industry, the potential appears promising, as evidenced by over 18 million copies of Margin focus will need to be the Guitar Hero game being sold since launch extended to all mediums Profitability analysis of the There is a need to increase broadcasters’ programs is still driven too often by performance in the linear a & b Capgemini analysis focus on profitability IN THE window. Increasingly, a significant proportion of revenues will be earned “ COMMISSIONING PROCESS in non-linear distribution. Consequently, broadcasters should look across the whole life cycle of
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Broadcasters should look C 26 across the whole life cycle of M 98 “ J 85 each piece of content TO MAXIMIZE N 24 REVENUE POTENTIAL IN ALL WINDOWS 13 each piece of content that is Likely areas of revenue growth in and a sound structure put in place to In conclusion, Capgemini believes Ari Iso-Rautio is a vice president in Benjamin Braunschvig is a senior commissioned to maximize revenue domestic markets will be targeted ”support the transition to the new that a radical refocus on the content Capgemini's TME consulting practice consultant in Capgemini's media potential in all windows. A similar advertising revenues from on-demand business model. They will need to commissioning and exploitation cycle and head of media consulting in the UK. practice. He has more than 4 years of case in point from the music industry content and consumer payments from recognize and appreciate the is needed to drive margin He works on strategic issues with leading experience working on consulting projects has been the renewed focus of major download-to-own. Capgemini expects importance of collaboration and improvements. Our roadmap for media and telecom companies and has with broadcasters and media groups. His music labels to recognize revenues strong growth in international sales of partnerships in driving future growth. commissioning for profit consists of 14 years of consulting experience in recent work focuses on the impact of through non-traditional mediums built programs and formats to From organizations that have been three steps – a sharp focus on profit Europe and the US. He is based in convergence on the media sector and on such as gaming and music embedded continue. used to organic growth, they will need margin, a holistic approach to London. the monetization of digital content. He is in devices. to morph into agile players that commissioning, and a 360 degree based in London. 360 degree deals might offer a partner with upcoming and approach to capture more of the value David Candlin is a principal in Revenue growth outside core potential new revenue stream established players to ensure they that is created outside the traditional Capgemini's UK TME consulting practice activities Another important way in which maximize the monetization potential. linear window. This is a challenge that with a specialization in broadcasting and Commissioning models will need to commissioning broadcasters can However, the most important enabler broadcasters, with key skills in media. Before joining Capgemini he be redrawn improve margins is by recognizing that will determine the success or understanding their audiences, are worked in a boutique media strategy Monetization of content across that a proportion of the value that failure of TV players in these changing well placed to meet, but they could consultancy and started his career in multiple windows will become a they create is earned outside of the times is that of the mindset. TV find themselves usurped by other political consulting. He is based in necessity in the near future. New broadcast value chain. For example, players will need to effect a change of players if they do not aggressively London. commissioning models will be needed the careers of actors and presenters mindset to shift thinking focused on restructure their current business as it becomes more difficult to recoup can be ‘made’ by appearing in a the primary linear window to a more models to make them fit for purpose. the full cost of production in the successful TV series; they may then go balanced view of the revenue primary window. The challenge for on to earn substantial sums through opportunities across the content life commissioners and producers is to their career. There may be partnership cycle. They will need to clearly identify the business principles on opportunities where broadcasters, understand the trade-offs in terms of which new forms of engagement with their reach to domestic content and spend that may be should be based, and then to work audiences and their international required to maintain margins during together to define the new approach. distribution, can work with new talent this period of declining revenues. The elements of a new business model to develop and exploit commercial are likely to include tighter control of opportunities in a way that is the inputs and outputs in the beneficial to both. In the music TV broadcasters need to morph production process, a greater sharing industry, companies such as Live of the initial investment risk, and a Nation are pioneering this approach partnership approach to maximize by securing access to live concert and into agile companies THAT PARTNER WITH UPCOMING AND exploitation in secondary windows merchandising revenues. “ and internationally. There is unlikely to be a ‘one size fits all’ solution; Key enablers will make the ESTABLISHED PLAYERS to ensure they maximize the instead, new business models will difference between success and need to be flexible to ensure that the failure returns to each player are consistent The transition to new business models monetization potential with the amount of risk that each is will have to be supported by the clear able to take on. In this way, presence of key enablers within the broadcasters and producers can organization. TV players will need to manage their profit margin and share ensure that their operating model, growth opportunities. processes and capabilities are aligned ”
50 51 TARGETED ADVERTISING is a “significant opportunity for operators
Targeted Advertising: Figure 1: Expected Growth in Revenues and Share of Behaviorally Targeted Advertising in Online Ads, US, 2007-2012E ” consumers’ billing and payment Processes and Systems to Deliver Relevant Ads history, which can be used to get an Revenues from Behaviorally Targeted Online Revenues from Behaviorally Targeted Online Ads by Renjish Kumar and Sameer Vaidya Ads, US$ bn, US, 2007-2012E as % of Total Online Ads and Display Ads, US, estimate of their spending 2007-2012E capabilities. CAGR: 53%
8.2% Thus, telcos have multiple strengths Abstract: Targeted advertising is expected to be driven strongly by the popularity of channels such as the Internet, mobile and digital 2007 that can be useful in targeted 2.5% TV, which have feedback paths and the capability required to track consumer behavior. Behavioral targeting, a key constituent, is advertising. However, consumer expected to grow rapidly from $0.53 billion in 2007 to $4.4 billion in 2012 in the US. To effectively tap into this fast growing market, information available to operators has 4.40 traditionally been static in nature. It TME players need to implement processes and systems for managing customer intelligence, identifying appropriate sub-segments 23.4% 2012 does not accurately reflect current and delivering targeted ads. Many implementations of customer intelligence management systems suffer from analysis without real- 8.6% consumer behavior, preferences and time data analysis, inadequate support for new data sources (such as social networks), proprietary data models and fragmented 0.53 interests or changes in them. Moreover, consumer views. Operators need to mitigate these issues by implementing systems that enable support for real-time updates and % of online display ad expenditure customers now use multiple platforms 2007 2012 non-traditional sources through event-driven architecture. The systems should also use Service-Oriented Architecture (SOA) to gather % of total online ad expenditure such as the Internet, mobile and TV to data from multiple disparate sources and create a unified view of the customer through techniques such as data federation and consume content. They also identity management. Additionally, operators need to implement an advanced analytics system and a delivery/reporting system to extensively interact with their peer identify appropriate customer sub-segments and target them with relevant, RoI maximizing ads. Lastly, operators need to adopt a Source: Capgemini TME Analysis; eMarketer, “Behavioral Targeting: Marketing Trends”, June 2008 groups through non-traditional learn-and-adapt approach in their process and system implementations to respond to changing consumer behavior, business models platforms such as social networks, and IT system standards. emails and blogs. Traditionally Initiatives to Gather Customer (BTS). Operators also have information deployed data sources, processes and Intelligence for Targeted Ads regarding consumers’ usage of fixed, systems do not capture consumer Operator Strengths in Gathering mobile and Internet services in terms of behavior on non-traditional 6 or Thus, targeted advertising offers the Advertisers are perennially challenged spending and over 23% of online Customer Intelligence duration and content consumed. Lastly, multiple platforms, hindering the ability to accurately deliver marketing by the need to identify and reach out display ad spending in particular in Due to their existing custome r operators also have access to creation of a unified user profile . to their target segments without messages only to the desired 2012. relationships and control over network wasting advertising dollars on non- consumer sub-segments, thereby infrastructure, operators have inherent responsive consumers. Traditional promising higher effectiveness and This demonstrates that targeted strengths in gathering information on Figure 2: Customer Information Accessible to Telcos media such as analog TV, radio and RoIs to advertisers. For instance, advertising represents a significantly demographics, location, network usage 2 newspapers typically do not enable behavioral targeting currently large opportunity that should not be and periodic billing of their consumers the customization of ads to different commands a superior Click-Through- ignored by telcos. Moreover, by the Customer (see Figure 2). Thus, operators have Information customer segments. However, new Rate (CTR) of 0.72% and Cost-Per- virtue of owning delivery networks, the ability to capture and leverage a media such as the Internet, mobile Mille (CPM) of up to $10, compared telcos can play a key role in serving wide range of customer information Qualified demographic information at the time of service Demographic activation and during customer lifecycle and IPTV allow dynamic insertion of with 0.20% CTR and up to $2.50 targeted ads and grab a share of the available to them . ad messages into content units 1 based CPM for non-targeted ads. revenue pie. on information about consumer Demographic information can be Address information Location IP address demographics, location, behavior and Although targeted advertising is In this paper, Capgemini assesses the ascertained during service activation by Tagging to Base Transceiver Stations (BTS) other parameters. This method, called currently in a nascent stage, it emerging opportunity of targeted using detailed questionnaires with targeted advertising, allows different promises to be a large business advertising from the viewpoint of telcos 4 5 mandatory and optional questions Current and past usage patterns ads to be delivered to different opportunity with high growth rates. and highlights operators ’ strengths in Usage Uptake of various value-added services that seek to gain a better understanding Time spent consuming various types of content consumers viewing the same content. For instance, behavioral targeting is gathering customer information. This of the consumer’s stage in the relevant expected to grow more than eight-fold paper also discusses processes and buying process or general lifecycle. Tariff plan from $0.53 billion in 2007 to $4.4 systems that operators need to Billing Payment method and frequency Operators can ascertain the location Credit history billion in 2012 in the US (see Figure implement to translate their strengths information of consumers based on 1). Moreover, it is expected to into actionable consumer intelligence their postal address, IP address and comprise around 8% of total online ad and the delivery of targeted ads 3. proximity to Base Transceiver Stations Source: Capgemini TME Analysis
1 Content units include programs on digital TV and web pages rendered over the fixed-line or mobile Internet. 2 Behavioral targeting is an advanced form of targeted advertising that serves targeted ads based on the combination of several behavioral traits of a consumer such as interests, opinions, lifestyle, etc. 4 Parameters such as name, age and sex can be required to be mandatory. 3 Capgemini Analysis; Efficient Frontier Insights, “Search Engine Performance Report Q42007”, January 2008; eMarketer, “Behavioral Targeting: Advertising Gets Personal”, June 2007; 5 Parameters such as marital / relationship status, number of household members, income bracket and possession of various consumer durables can be optionally filled by consumers. Morgan Stanley Technology Conference, March 2007; Business Week, “So Many Ads, So Few Clicks”, November 2007; ZenithOptimedia, Annual Ad Spending Forecasts, 2007. 6 Non-traditional data sources include social networks, search patterns, broadband usage, etc. 52 53 Existing customer
Identify behavioral insights from Create a single view of the customer Figure 4: Value-Chain Analysis of Issues with Targeted Ads IT systems and relationships and network consumer web interactions across delivery systems Suggested Mitigation Measures User interactions on various channels Operators have traditionally relied on “ such as emails, blogs, photo/video legacy systems that have data Customer Intelligence Advanced Targeted Ads Delivery control provide inherent sharing, etc. carry valuable scattered across a number of sub- Management Analytics & Reporting information about consumer behavior, systems, for example CRM 8, billing, No real-time data collection Lack of real-time support Inadequate leveraging of strengths TO OPERATORS FOR interests and preferences. Operators and usage monitoring sub-systems in and analysis for cross-channel customer cross-channel customer analytics intelligence by delivery as well should use advanced analytics to fixed-line, mobile and Internet Lack of support for as reporting systems non-traditional data sources extract useful information from services. However, this provides only Issues with Lack of adequate feedback TARGETED ADS Current Systems Use of proprietary data models mechanisms for measuring RoI hitherto unused data such as text, fragmented views of the customer and that hinder consolidation from multiple sources image or video content. From this is unsuitable for making actionable Fragmented views of information, inferences should be consumer profiles for targeted ads. consumer across platforms
Therefore, operators need to take Understand customers’ social roles drawn regarding the type of content Therefore, operators need to create a Enable support for non-traditional Support data mining Support simultaneous, sources and real-time updates capabilities that deliver real-time processing of certain initiatives to gain actionable and relationships that consumers are interested in and single, 360-degree view of the user to through event-driven architecture insights about customer customer profiles, ads, Consumers use social networks to behavior and channel requested content and customer intelligence that can be used their preference areas. These insights capture user preferences and interests Suggested Use service oriented approach effectiveness in real-time ad response ” to gather data from Mitigation Measures to create cross-channel consumer interact with a larger community. can also be used to form relevant sub- in detail and build in-depth, cross- different sources Enable standards-based ad metric feedback for effective profiles, separate consumers into Analysis of these interactions can segments for delivery of targeted ads. channel consumer profiles. Create a unified view of monitoring of ad campaigns the customer through on various delivery channels relevant sub-segments and deliver describe consumers’ individual and identity management targeted ads effectively. group relationships as well as their Telcos such as Orange, AT&T and To implement the initiatives discussed social roles. This information can then T- Online that own content portals can above, operators need to put in place
Key Initiatives to Convert Operator be utilized not only to target study consumers’ usage of various IT systems for gathering and Source: Capgemini TME Analysis Strengths into Actionable Customer individuals but also to shape the services on their websites and thereby managing customer intelligence, Intelligence opinion of an entire group. For add important behavioral information identifying appropriate sub-segments Key operator initiatives for gathering instance, identifying “alpha users” or to consumer profiles. Mobile players through advanced analytics and in-depth and actionable customer group-influencers and then targeting can similarly gain significant insights delivering targeted ads as well as Customer Intelligence Management To counter these problems, operators intelligence, necessary for creating them with special product offers can from consumers’ usage of mobile reporting their effectiveness. System need to implement a system that consumer sub-segments and help to indirectly influence a wider Internet as all URL requests pass Many of the current implementations solves the first two problems through delivering targeted ads, are shown in audience of consumers with similar through them. Other telcos would need IT Systems Required for Effective of customer intelligence management the use of an event-driven architecture Figure 3. interests. to partner with online players such Delivery of Targeted Ads systems suffer from four primary and a tokenization and classification Yahoo! to gain the necessary customer Traditional implementations of IT drawbacks. First, analysis of user procedure that helps convert Track and profile consumer behavior Telcos such as SK Telecom that own data and subsequently draw inferences. systems for ad delivery have certain behavior is not performed in real- unstructured data 9 into structured on a regular basis social networks can perform this quite shortcomings that need to be time, leading to latency in reporting data. This enables support for real-time Tracking user behavior on platforms effectively. However, other telcos may addressed for effective customer and action. Second, there is a lack of updates and non-traditional sources 10 . such as mobile, Internet and digital need to partner with social networks to intelligence management, consumer adequate support for gathering and The pitfalls of proprietary data models TV is necessary for gaining deeper get access to consumer data and profile segmentation and delivery, as well as analyzing unstructured data from should be avoided through the use of a insights into customers’ behavior and as well as target specific consumer the reporting of targeted ads. Figure 4 non-traditional sources such as social service-oriented approach, which personal preferences. These initiatives segments for customized ads. provides a snapshot of the key issues networks, search patterns, broadband exposes native data through a set of include monitoring Internet usage in as well as the suggested mitigation usage, etc. Third, the prevailing use of well-defined interfaces. Lastly, the terms of sites visited, type of content, initiatives. The salient architectural proprietary data models prevents system should create a single 360- time of day and duration of visits. Figure 3: Key Initiatives to Capture Customer Intelligence Required for Targeted Ads features of the required IT systems are faster integration of non-traditional degree view of the customer by Inferences should also be drawn from then discussed subsequently. data and interoperability with third- consolidating data from multiple calls made from the fixed or mobile party sources. Lastly, current systems channels and sub-systems into a platform in terms of origination/ offer only fragmented views of the standard unified data model through destination geography, time of day, consumer across multiple platforms. techniques such as data federation 11 value-added-services used and other Track and profile Understand and identity management 12 . These consumer customers’ social parameters. behavior on a roles and systems should also have the ability to regular basis relationships OPERATORS NEED TO IMPLEMENT assign anonymous attributes to Players such as BT, Virgin Media and customer data in order to maintain Talk Talk have collaborated with Initiatives to privacy. Phorm, an ad network, to monitor Gather CUSTOMER INTELLIGENCE approximately 70% of British Customer Intelligence “ broadband households 7. Users are tracked via a random number stored MANAGEMENT SYSTEMS that support in the Phorm cookie, which is Identify behavioral Create a single view insights from of the customer persistent across browser sessions and customer web across real-time updates shutdowns. User data is observed interactions delivery systems anonymously and the system does not log or store any personal information 8 Customer Relationship Management. or IP addresses, thereby safeguarding 9 Unstructured data refers to information from non-traditional sources and can be in the form of e-mails, notes, search keywords, feedback forms, documents and images/videos referenced. consumer privacy issues. 10 Non-traditional data sources include social networks, search patterns, broadband usage, etc. Source: Capgemini TME Analysis 11 Data Federation refers to the combining of data from various data sources into one single virtual data source or Data Service; the data can then be accessed, managed and viewed as if it were part of a single system. 12 Identity management allows building a complete view of the customer by managing mult”iple identities spread across services and networks. 7 Company websites. 54 55
1 Players such as France Telecom (FT) have started using similar Operators need to adopt architectures as they increasingly face the challenge of gathering consumer information from disparate data a learn-and-adapt approach and have flexibility sources managed by different functional units such as fixed-line, “ Internet, mobile and online. FT has in their implementations addressed this problem by tying up with a leading IT services provider to implement a data federation solution. system discussed in the earlier sub- type of content and device of targeted advertising systems This system allows data support staff section. These data mining capabilities characteristics, and are based on to gain virtual access to consumer enable the system to deliver insights information generated by customers data from multiple business units as if about customer behavior across through usage events such as Telefonica and Vodafone have tied up K.R. Renjish Kumar is a manager in from a single source. FT can multiple channels and effectiveness of browsing, streaming video, etc. The with Amobee Media Systems to use Capgemini’s TME Technology Services consequently profile consumers based various channels in real-time. The system should also allow the latter’s ad platform that Lab. His current work focuses on the on their behavior across multiple ” system should also have an open customization of the campaign based interoperates with telcos’ CRM strategic analysis of systems, platforms platforms. architecture to interface with a on parameters such as duration, systems and enables contextual as and architectures in the telecom, media centralized data source or multiple frequency capping and ad sequencing. well as behavioral targeting 13 . A few and entertainment industries. Prior to Advanced Analytics System disparate data sources. Lastly, the system should enable large telecom equipment providers joining Capgemini, Renjish worked on IT, Operators also need to implement an standards-based ad metric feedback have started using the acquisition mobile and convergence issues with advanced analytics system, capable of Moreover, the system should support for the effective monitoring of route to acquire the necessary ad leading European vendors and operators. analyzing customer usage across the creation of well-defined and advertising campaigns on various platform competencies. For instance, He is based in Mumbai. multiple channels and developing distinct customer segments either delivery channels. Tandberg Television was acquired by multi-dimensional behavior profiles in manually or through the use of Ericsson in April 2007, and Tamblin Sameer Vaidya is a senior consultant in real-time. automatic clustering based on a The processes and systems described was acquired by Alcatel-Lucent in Capgemini’s TME Technology Services combination of parameters such as above can be used to identify sub- September 2007 14 . Lab. He has eight years’ of experience in The analytics system needs to address demographic, behavioral, etc. The segments and micro-segments that Telecom IT solutions design and the current issue of lack of real-time system should also use predictive would respond favorably to specific Lastly, operators should not consider development. He has worked in various support for cross-channel customer modelling to make predictions about marketing messages, and deliver ads the implementation of processes and roles such as business analyst and end- analytics. The system should future customer actions by analyzing targeted at those segments. Such systems discussed earlier as only a to-end solution designer. He is based in implement effective data mining current and historical data. Finally, the highly targeted ads would be more one-time activity. Since consumer Mumbai. procedures that perform examination, system should aggregate usage relevant to consumers and generate behavior, business models and IT pattern-extraction and analysis of data information about different channels higher RoI for advertisers. system standards are constantly from existing sources, including the and analyze the relative effectiveness evolving, there are no clear best of each channel. In conclusion, operators should not practices yet in the realm of targeted ignore the potential opportunity advertising. Therefore, operators need Targeted Ads Delivery and offered by targeted advertising. to adopt a learn-and-adapt approach Operators should Reporting System However, operators’ success in and have flexibility in their The targeted ads delivery and offering targeted advertising would implementations of customer reporting system needs to support depend on their ability to address the profiling, segmentation and delivery implement advanced simultaneous, real-time processing of rising expectations of advertisers in of targeted ads. This iterative customer profiles, as well as content delivering highly effective, RoI- approach would also help operators “ requests on multiple channels, and enhancing ads. To achieve this, manage risk and counter competitor analytics systems deliver relevant ads. The system operators need to deploy extensive moves by aligning their should also address the inadequate processes and systems to capture and implementations with market leveraging of cross-channel customer analyze advanced customer evolution. for developing intelligence by current delivery and intelligence on an ongoing basis, form reporting systems. customer sub-segments and deliver targeted ads. They need to collate cross-channel The targeted ads delivery system information from multiple data should be designed to take inputs sources as well as databases, such as behavioral profiles from the advanced analytics system CRM, billing and network monitoring and select suitable customer micro- systems. The information may then be segments for targeting. It must select used to accurately profile consumers, of consumers and insert relevant ads in the correct understand their roles as well as format into the appropriate channel in interactions with the larger real-time, based on rules or targeting community and obtain their 360- triggers for the ad inventory. Triggers degree views. include customer behavior profiles, 13 Company websites. ” 14 Company websites. 56 57 a a INSIGHTS
Quest for Growth in Turbulent Times: Revenue Stimulation Strategies for TME Players 60
Flexible Innovation Management: Increasing the Returns on New Product Portfolios 68 TME consumer spend “ IS HIGHLY CORRELATED WITH THE PERFORMANCE OF THE WIDER ECONOMY Quest for Growth in Turbulent Times: Revenue Stimulation Strategies for TME Players Figure 1: Comparison of TME Consumer Expenditure with Overall Household Spend by Jerome Buvat, Benjamin Braunschvig and Subrahmanyam KVJ ” TME Consumer Spending per Capita as a % of TME Consumer Spending per Capita, US, Household Expenditure per Capita, US, 1984-2007 Real Terms $, 1984-2007 Abstract: TME players have recently been facing challenging conditions with slow down in growth below economic growth rates in 8.0% consumer expenditure. In the US, growth in overall TME spending in real terms has declined to an average rate of 1.2% since 2000; and this is despite growth in the overall economy during this period. TME expenditure peaked in 2000, reaching about 7.5% of overall 7.5% 2.500 household expenditure, and since then has declined to about 7%. The impending recession is likely to only aggravate the situation CAGR further, and players will need to identify strategies that will help them weather the storm. Our analysis indicates that in the UK, the +1.2% 7.0% 2.000 CAGR overall spend on TME in real terms is likely to stagnate at an average growth of around 5% from 2008-2012. +4.3%
However, the aggregated numbers mask the potential growth in some TME sub-categories such as gaming or PVRs which are 6.5% 1.500 CAGR expected to continue growing over the next five years, but at a slower pace. The evolution of technology and emergence of new +2.8%
business models such as advertising, has lowered entry barriers for players to exploit these segments and seek growth. Players such 6.0% 1.000 as Orange have already gone into new areas, such as movie production and gaming, to make up for decline in traditional revenue
streams. Bundling across the value chain is a strategy that players can adopt to improve wallet share. Players such as Nokia and 5.5% 500 the BBC have been bundling devices with gaming, music and TV content. Developing customized offerings for consumer micro-
segments can also help players maximize their market share and sustain growth. 5.0% - 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 8 8 8 8 8 8 8 8 8 8 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 9 9 8 8 7 7 6 6 5 5 4 4
Source: Capgemini TME Strategy Lab Analysis; US Bureau of Economic Analysis
Evolution of TME Expenditure TME Expenditure Compared with TME players in developed markets Overall Household Spend expenditure in this area. Services such have recently been facing challenging TME expenditure in real terms has as broadband and mobile, which up conditions as a consequence of the been declining in recent years as a until now drove growth, have seen very low growth witnessed in percentage of household spend. It Figure 2: TME Consumer Spending per Capita and GDP per Capita, Year-on-Year slowdown as markets peaked. consumers’ per capita TME peaked in 2000, reaching about 7.5% Growth Rates, US, 1984-2007, % in Real Terms Consequently, per capita consumer TME EXPENDITURE expenditure. The pace of increase in of overall household expenditure, and expenditure on TME services has TME expenditure has been slowing since then has declined to about 7%. YoY growth GDP per Capita YoY growth TME Spend per Capita slowed down in comparison with the down, and has fallen below economic Overall, TME spending in real terms expenditure on the overall basket of AS A PERCENTAGE 7.0% growth levels in recent years. has grown since 1984 by a CAGR of Bursting of the Dotcom goods and services consumed. Bubble (2000- 2001) 6.0% US Financial “ Moreover, the impending recession is 2.9%, however, this growth has been Recession (1990- 1991) TME Expenditure Compared with OF likely to only exacerbate the slowing down to fall to an average 5.0% GDP slowdown. Players will need to rate of 1.2% since 2000. This is 4.0% identify strategies that will help them despite growth in the overall economy In order to understand the future HOUSEHOLD SPEND ride the storm. during this period (see Figure 1). 3.0% growth prospects for TME consumer 2.0% spend, we first assessed what the growth in the past has been after In this paper, we seek to understand There are a number of reasons that 1.0% has been the behavior of consumer expenditure can possibly explain this stripping out the effects of inflation 0.0% 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 and population growth. We compared 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 in developed TME markets and its phenomenon. The growth in digital 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 relationship with the wider economic content consumption, especially from -1.0% 2 this ‘real-terms’ TME expenditure per declining capita with overall economic cycles. cycle. We identify what could be free online services, has become -2.0% growth areas for TME players in an difficult to monetize. Competitive and The analysis indicates that per capita otherwise slowing industry, and regulatory pressures have resulted in a consumer spending on TME correlates propose strategies that players could rapid decline in prices in the delivery Source: Capgemini TME Strategy Lab Analysis; US Bureau of Economic Analysis significantly with the performance of ” adopt to tap these pockets of growth. segment, affecting overall consumer the wider economy (see Figure 2). 1
60 61
1 Real-term growth in TME consumer Ad-funded services are unlikely to be Expected Evolution of Overall TME Figure 4: Consumer Expenditure Per Capita in Selected Areas of the TME Value Strategies for Growth spending has outperformed GDP a source of growth for the industry, in Consumer Expenditure Chain, UK, 2008E-2012E CAGR, Real Terms Convergence as an Enabler of during times of strong economic the wake of declining consumer The overall spend on TME in real Growth growth, for instance between 1993 expenditure. A comparison of year- terms is likely to stagnate at an average During the previous periods of and 1999, when TME grew at a rate on-year advertising expenditure per growth of 0.6%, from the growth rates TME Average: slowdown, individual areas in the of around 2-3 percentage points capita with GDP reveals that, like enjoyed over the past five years or so +0.6% p.a. TME value chain helped to provide higher than the overall economy. consumers, advertising is sensitive to (see Figure 3). Our analysis indicates the necessary impetus for a recovery There were a number of drivers that economic cycles. The TV advertising that delivery, which forms the most Content Delivery Devices in consumer spend. As an example, helped growth in TME spending to industry in the UK is set to decline by significant proportion of consumer mobile services and broadband have perform better than the GDP during over 5% during 2008, and growth in spend on TME, is likely to register 17% largely helped the recovery from the the period. In particular, Internet online advertising is expected to slow negative growth over the next few 11% 13% last slowdown that ended in 2001-02. 8% 7% services and mobile services registered down to a rate of 18%, compared years, while the spend on devices is This time around, we believe a significant upside. In the UK, with the robust 40% growth it likely to slow down to a rate of 1.3%, 0% -1% -1% -4% 0% convergence across the value chain is 2 g t s e t d s s s s likely to drive growth by lowering expenditure on Internet services grew enjoyed during 2007 . from the average growth of over 5% n n e il e e e le e r i te i b n x x o c e m v o r i o s i y a n o te F v la at a CAGR of over 50%, driven by the enjoyed in the past. o M M n B n e P entry barriers for players diversifying G C I R o D C k ic ile V s c s b P e a u across the value chain. We define two uptake of dial-up services, and mobile o b m y M M a a l G l ta services grew at an average of 21%. P i types of convergence within the wider o ig e D id value chain (see Figure 5). Vertical Figure 3: TME Consumer Spending CAGR, UK, 2003-2012E, %, Real Terms £bn V On the other hand, when the overall convergence is the movement of economy declined in the two previous services or players within the same Market Size 2003 2007 2012 2003 2007 2012 2003 2007 2012 2003 2007 2012 Source: Capgemini TME Strategy Lab Analysis US recessions, TME spend followed £bn 10.4 11.5 13.5 29.6 30.6 29.4 10.9 13.5 14.0 51.0 55.6 57.2 element of the value chain, keeping suit and declined with the economy. the fundamental business model In the last downturn, consumer spend intact; for example, Vodafone’s took a hit on all TME areas – content, acquisition of Tele2 to enter the fixed 5.3% delivery and devices. Per capita spend 3.5% line business. Horizontal convergence 2.7% on television sets, for instance, 2.2% encompasses player moves into 1.3% registered a sharp drop, to decline by 0.8% 0.6% adjacent areas of the value chain; for 2.1% year-on-year in 2001. The music -0.9% instance, device manufacturers such 3 devices market witnessed a steep 21% Content Delivery Devices TME terms from 2008-2010, and grow £1.5 per Mbps . Mobile prices have as Nokia launching content services. reduction in per capita expenditure in % Share of from the current 17% to constitute eroded due to competition, and Overall TME 2001 compared with 2000, and the about 25% of total spend on content regulatory directives such as the cut in The evolution of technology and 20% 55% 25% 100% magazine/newspaper market by 2012. This growth will be driven termination fees are likely to drive this emergence of new business models experienced a sharp reduction in CAGR 2003-2007 CAGR 2008-2012 by the increasing penetration of even lower. The growth in devices is such as advertising, has lowered entry
2001, with around 4% year-on-year Source: Capgemini TME Strategy Lab Analysis; US Bureau of Economic Analysis gaming consoles—the UK alone has likely to come from gaming consoles barriers for players to seek growth by decline, after growing steadily since an installed base of 21 million gaming and PVRs. The proportion of UK TV moving horizontally across the value 1993. consoles – as well as the growth in homes with a PVR is expected to rise chain. For instance, the unshackling The declining growths in direct TME Categories Likely to Drive online gaming. to 35% in 2010 and up to 50% by of the ‘closed’ mobile value chain, The impending recession is only likely consumer spend and advertising, Future Growth 2013, up from just 13% at the end of driven by open-source OS and to aggravate the recent decline in TME present a formidable challenge to We have seen that growth in In delivery we have seen penetration 2007 4. devices, enables online players to spending, as consumers curtail their industry players. To sustain growth, consumer spend on TME services will of broadband reach 58% of directly distribute applications such as expenditure on telecom and media players will need to identify growth decline in most categories, with the households in the UK, while mobile In the next section, we turn our IM and location-based services to services. We have already started pockets within an otherwise declining exception of content, which will penetration is over 100%. Broadband attention to how players can users. Similarly, the emergence of observing instances where consumers industry, and adopt measures to tap continue to grow at an average annual prices have declined from £70 per effectively tap these pockets of growth Internet TV has allowed content have shifted from high-value TME these areas effectively. rate of 3.5% from 2008 to 2012. Mbps per month in 2002 to about to tide the slowdown. players to reach consumers directly. services to relatively lower-priced However, the overall numbers mask services in response to the Expected Future Growth in TME the potential growth in some TME unfavorable economic environment. Categories sub-categories, such as gaming and For instance, survey results 1 indicate With a view to identifying the likely PVRs, which are expected to show that around 10% of consumers in the growth areas, we analyzed consumer moderate to robust growth over the UK plan to end their pay-TV contracts spend on the three major TME next five year (see Figure 4). and migrate to cheaper substitutes categories of content, delivery and Overall TME spend such as Freeview in the short term. devices, and how the expenditure in Within content, gaming is likely to each of these categories is likely to emerge as the key growth driver, with IS LIKELY TO STAGNATE evolve over the next four years from an expected CAGR of 17% in real 2008-2012. “
1 Telegraph.co.uk , “Pay-TV customers to cancel contracts as credit crunch bites”, October 21, 2008. 3 Ofcom Communications Market Report 2008. 2 Enders Analysis, “UK Advertising – Online Reality Check”, September 2008. 4 Informa Estimates from Media week, “PVR Homes in the UK”, October 2008. ”
62 63 has helped FT to differentiate and gain additional share of consumers’ Figure 5: Convergence Framework wallets, especially through its presence in original content CONTENT IS EXPECTED Content Delivery Device production that allows it to monetize the rights it fully owns. Video TO GROW FASTER than Traditional Portable Music Mobile Media Media Player Similarly, Belgacom has also acquired News sports rights to drive subscriber “ the device and e
c Handsets
n growth for its IPTV platform. Asian e Fixed g r Pictures telcos such as Reliance in India and e delivery segments
v Web n Home SK Telecom in South Korea are also
o Blogs Content Gateways C
l following the content route to drive
a Podcasts c
i Broadcast
t 8
r growth. The Reliance ADA Group
e PC/Laptop V bought 71% stake in film production and processing company Adlabs for Advertising Pay TV TV $83 million. SK Telecom bought offering a bundled package of services PMPs and gam”ing consoles are 21.7% of IHQ, producer of movies across the value chain. In fact, many increasingly becoming content hubs Horizontal Convergence and TV programs, for over $13 device players have already started with multimedia support. For million. Content produced by iHQ is bundling content and delivery instance, BBC’s iPlayer can now be used by SK Telecom to bolster its services with their core offerings (see accessed over Nintendo’s Wii gaming Source: Capgemini TME Strategy Lab Analysis mobile TV services. Figure 6). console and BT Vision can be viewed over Microsoft’s Xbox 360. Sony also Bundle across the Value Chain Nokia’s CWM (Comes With Music) launched Go!View jointly with Sky Consumers have started to embrace offer is an example of content during the summer, allowing bundled services. For instance, in Q1 bundled with device, however Nokia subscribers to download TV shows 2008, around 32% of consumers in has taken a step forward with the onto the Sony PSP gaming console. By the UK opted for ‘triple-play’ bundles development of its online content registering online, consumers can In this section, we assess the strategies subscription as well as on an à-la- of Internet, voice and TV compared portal Ovi. Other device players, such select monthly entertainment, comedy that TME players could adopt to carte basis. It has also established a with 18% in 2007. Similarly, TME as the PMP 9 vendor SanDisk, have or sports packages for € 7 each or effectively utilize the opportunities presence in the MMG (Massively players can stimulate growth by started mirroring this trend of offering simply rent on a pay-per-view basis presented by the converging telecom Multi-player Game) segment by bundled services. with TV episodes and movies and media industries in order to distributing the popular game Dark available from € 2 and € 3.20 sustain growth. Age of Camelot. Such MMGs can offer Figure 6: Selected Examples of Manufacturers Bundling Devices and Content significant revenue upside as onwards, respectively. Services to Lock-in Consumers Strategies for TME Players evidenced by the immensely popular Effective Segmentation and Targeting Diversify into Content Services World of Warcraft, which has more Content Delivery Device In order to drive growth even in Content is expected to grow faster than 11 million users worldwide with Internet Portal difficult times, TME players should than the device and delivery areas of an average monthly user spend of s t continue to pay heed to the old e
5 e Online Directory l
about $10 . i the TME value chain over the next s b d marketing adage of identifying o few years. The broader content market n a M
H superior consumer insights coupled is expected to grow at a CAGR of Many industry players have also Online Music Portal with effective segmentation and 3.5% (in real terms) from 2008 to started making the shift towards targeting. It is likely that, even in offering other content services apart s 2012 in the UK, compared with r
e l
y declining markets, operators can a
expected CAGRs of -0.9% and 1.3% from gaming. For instance, France a l n o P identify customer segments that offer
s r (in real terms) for delivery and Telecom (FT) has evolved from a pure a i e
d growth opportunities if they really P devices, respectively, over the same IPTV delivery-based operator to an e M understand consumer needs. time period. Therefore, TME players integrated and differentiated player in
that do not have a presence in content the content space with presence t BT Broadband provides IPTV through xBox n across the value chain (production, e A corroboration of this theory is
services should certainly examine m e Broadcasting service n i
m by Sony found in the music industry, where
aggregation and delivery). FT a entering this fast-growing area of the o t r H the value of sales declined almost 15% e value chain. produces content in the form of t n
movies 6 as well as premium soccer E Movie "Hancock" released on internet-connected Sony televisions from £1,109 million in 2006 to £942 million in the UK 10 , and yet there are Orange (France Telecom) has already games and offers own-branded Partnership Acquisition New Service still certain segments where spend is started to tap extensively into the channels 7 that broadcast sporting growing as these users remain highly gaming market in France. Through its content, movies and TV shows to Source: Capgemini TME Strategy Lab analysis. Company Websites engaged with music. mobile portal Orange World, it offers support its delivery products – IPTV a myriad of games on both and Mobile TV. This shift into content
5 Blizzard Entertainment Press Release, “World Of Warcraft® Surpasses 11 million Subscribers Worldwide”, October 2008; Epicguide.com estimates monthly revenues at about $12 per 8 Reliance ADA Group owns and operates India’s second largest mobile operator, Reliance Communications. subscriber. 9 Personal Media Player. 6 Orange has established a subsidiary Studio 37 to produce movies and TV content. 10 Ofcom Communications Market report, August 2008. 7 Orange Foot+, Orange Sports and Orange Cinema. 64 65 Figure 7: Targeted Offerings of E-Plus and Impact on Mobile Service Revenue Growth, Germany, 2007
Target Profile Value Proposition Mobile Service Revenue Growth for E-Plus Germany over the Same Quarter Last year, (%), Q3 '06-Q2 '08 • High value unlimited bundles for 15% heavy usage over 300 minutes Heavy • Offers truly unlimited calling 10.9% Usage 10.0% MVNO to any number, any destination at 90/month 10% 8.4% 8.1% 6.8% • Generous bundles of Normal anytime minutes at low monthly 4.2% E-Plus Usage 5% Main Brand rentals and call tariffs 2.5% 2.9% • No-frills, simple pre-paid tariff plan 0% Low O2 Usage • Distribution and sales only MVNO through online channel
-5% • Cheap calls ranging from 9 to 19 Eurocents to Turkey Turkish T-Mobile Vodafone Immigrants • No additional charges MVNO while roaming in Turkey -10% Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08
Source: Capgemini TME Strategy Lab analysis; Enders Analysis, “European Mobile Market Analysis”, June 2008 In conclusion, the economic recession is likely to exacerbate the slowdown in the TME industry, adversely affecting growth prospects for players. Another example of an operator Effective targeting through customized This has attracted eyeballs, especially However, all hope is not lost as bucking the overall market trend of offerings, as discussed above, helped during a recession when consumers convergence presents some new and negative growth is Germany’s E-Plus E-Plus to grow service revenues by need to make even more decisions exciting growth opportunities. Jerome Buvat is the Global Head of the Subrahmanyam KVJ is a consultant in (owned by KPN). E-Plus launched around 7-8% year-on-year 11 , whereas about their businesses and wealth. Innovative players with agile business TME Strategy Lab. He has more than ten the TME Strategy Lab. His recent work three MVNO brands, each aimed at its competitors suffered from negative models and comprehensive consumer years’ of experience in strategy consulting focused on the converging telecom and specific usage segments and with revenue growth (see Figure 7). This Advertisers have been attracted by the insights are likely to emerge as in the telecom and media sectors. He is media markets, and the mobile industry. market-leading pricing. For example, was driven by an overall increase in quality of the audience offered, successful in tapping growth. The based in London. Prior to joining the lab, he worked with a its Base brand offers heavy voice users monthly usage from 79 minutes per because, for selling and tracking the acquisition and integration of new leading electronics manufacturing large and unlimited voice bundles, subscriber in 2005 to 136 minutes per performance of advertisements, CNBC capabilities and the adoption of new Benjamin Braunschvig is a senior services firm in a project management while its Simyo brand offers users no- subscriber in 2007 12 . E-Plus also grew measures only the viewers belonging business models will remain key consultant in Capgemini's Media role. He is based in Mumbai. frills and SIM-only pre-paid plans. Its its market share from 13 to around to the target segment. Advertisers see challenges as players seek to make practice. He has more than 4 years of Al-Yildiz brand offers Turkish 15% in the same time period, and in this highly targeted audience with difficult and expensive moves across experience working on consulting projects immigrants discounted calls to Turkey the first half of 2007 gained the CNBC as a way to beat fragmentation the value chain. Players will also need with broadcasters and media groups. His and no additional charges while second most net additions, 1.4 in today’s TV market. to develop an exhaustive recent work focuses on the impact of roaming in Turkey. Its Vybe mobile million, behind only the market leader understanding of consumer convergence on the media sector and on service targets teenagers with cheap T-Mobile. Moreover, its EBITDA CNBC has benefited significantly from requirements and behavior in order to the monetization of digital content. He is monthly fees, large SMS bundles and, margin also expanded from 22% in its segmentation and targeting create customized offerings and based in London. free song downloads and web 2005 to around 40% in 2007 13 . approach as its revenues from Europe, innovative bundles that can help to browsing on its music portal. the Middle East and Africa increased benefit from latent growth. A media company that has employed by around 39% year-on-year in H1 segmentation and targeting very 2008 14 . In comparison, the European effectively is CNBC, which delivers TV advertising market grew by only business news through its TV channel around 2% year-on-year in Q1-2008 and website. CNBC has defined its and declined by around 3% year-on- target audience as up-market men in year in Q2 2008 15 . Moreover, channels the top 20% income bracket. such as ITV1 and Channel 4 witnessed OPERATORS NEED TO IDENTIFY and Moreover, over the last few quarters, it around 10-13% decline in ad revenues has started to focus on shows that over the corresponding timeframe, deal with issues that its target segment further driving home the success of address micro-segments TO is worried about, for example, debt CNBC’s segmentation strategy 16 . makeover or investment management. “ SEEK GROWTH
11 In Q1 and Q2 2008. 12 KPN Annual Report 2007. 13 KPN Annual Report 2007 14 Independent on Sunday, “Amid the TV turmoil, it's always good news at CNBC”, September 14, 2008. ” 15 The Nielsen Company, “First Quarter Global Advertising Up 4% From 2007”, July 2008; Nielsen Wire, “Global Advertising Up Slightly in Q2 2008”, October 2008. 16 Independent on Sunday, “Amid the TV turmoil, it's always good news at CNBC”, September 14, 2008; World Advertising Research Center, “UK Commercial TV Broadcasters Braced for Grim Year End”, July 2008; World Advertising Research Center, “The WARC Advertising Outlook for Autumn 2008”, October 2008.
66 67 Operators capable of flexible innovation management OUTPERFORM THE COMPETITION Flexible Innovation Management: “ IN TODAY ’S UNCERTAIN MARKETS Increasing the Returns on New Product Portfolios by Dr. Ronald Klingebiel, Prof. Dieter Lange and Sven Metscher
Abstract: The management of uncertainty in the innovation process, whether strategic or immediate, closed or open, radical or The study findings indicate that by preferable to focus resources on a bureaucratic hurdles to jump. One incremental, becomes increasingly important in ever-faster moving markets such as telecommunications services. To bring leveraging these four capabilities, smaller number of projects, most ”of major telco in central Europe, for inspiration to fruition, managers need to decide how to allocate scarce resources to the development of a few selected ideas, as operators can increase by almost 60% which will be launched? Furthermore, example, displays the classic flexibly as possible. But exactly how this should be done remains a mystery to many. The Centre for Strategic Studies (CSS) 1 has the proportion of new products that the funnel concept was designed for symptom: the go/no-go decision- 3 the development of new products, not making at each stage-gate advances therefore conducted extensive empirical research to determine the effectiveness with which operators use stage-gate processes to exceed a 10% rate of return . The combined effect of such capabilities services. It is unclear how funnels only those NPD projects that promise prune new product development portfolios. Four key capabilities are required to optimize the funnel for new product portfolios: can increase the average portfolio ought to vary between industries, let sufficiently certain returns, therefore strategic portfolio pruning, resource allocation discipline, funnel design optimization, and careful process tailoring. To increase their profit by more than 40%. This article alone different firms. constraining bolder innovations. As a returns to innovation, operators need to excel at these capabilities and should reposition their stage-gate processes from an describes the mechanisms by which result, NPD managers bring in ‘safe emphasis on quality control mechanisms to one of aligning innovation portfolios with changing market dynamics. this opportunity can be realized. The issue is that most firms exercise bets’ only. The operator has few block only gentle selective pressure on their busters and is often taken by surprise Flexible Innovation Development: product pipelines, in effect creating when markets change. The Principle ‘tunnels’: resources are committed The only certainty we have about the Strategic planning blunders, such as carried out by the Centre for Strategic Most major companies have adopted a irreversibly from the beginning. It is understandable that emblematic future is that it will look different the botched transfer of the iMode- Studies (CSS) 1, which aimed to funnel approach to the management Managers often find numerous ways ventures such as iMode or early over- from any current projections we might concept from Japan to Europe, are identify the organizational capabilities of their product development process. of bypassing the funnel’s competitive commitment to 3G have reduced make. It follows that selecting the publicly-known manifestations of the that determine the success of In principle, this method offers a resource allocation system, thereby providers’ appetite for risk-taking. right projects at the right time punitive costs associated with funnel/stage-gate innovation staged approach to investments in further reducing innovation This, however, forfeits opportunities, presents a huge challenge for firms developing services without adequate processes. Exclusive data was gained new product development (NPD) effectiveness. Even if funnels are particularly as many firms have not operating in highly unpredictable investment flexibility. Two years after from interviews with more than projects. Each NPD project has to pass managed effectively, formal decision yet accessed the benefit offered by the market environments. The its launch, most European iMode twenty European telecoms operators 2. a number of go/no-go gates, typically gates and standardized processes funnel. In its early stages, pro-risk telecommunications market has seen service offerings were abandoned at a All interviewed companies had first- after initial feasibility analyses, first sometimes slow down decision-making actually benefits an influx of new players from adjacent significant loss. At fault was not hand experience of product launch building prototypes, and then scaling- commercialization and constrain operators. This is because the initial industries, riding the wave of operators’ willingness to engage in failures, but some had been more up production. The central idea is that radical innovation. resource requirements of NPD technological possibilities and new strategic ventures, but rather successful in initiating and choosing only projects with the highest projects are low, compared to the bringing radically innovative business their inability to react to emerging the right projects and had achieved a commercial prospects will advance These challenges indicate that many value of exploring project prospects models. So when planning for the information about the diminishing much higher product hit rate. through iterative resource allocations companies do not benefit from the more fully. At later stage-gates, when future, telecoms executives often feel commercial viability of these before the full commitment level is flexibility that funnels offer. This uncertainty resolves and decision- trapped between a rock and a hard opportunities. The study found that those firms with reached. The expectation is that firms article spells out the capabilities makers have more information place: bet on one of many future greater flexibility in their innovation initiate more projects than can required to increase the overall available, projects are pruned more scenarios and potentially witness The question, therefore, is how can processes are better prepared to eventually be introduced to the expected payoff from the NPD rigorously and funding decisions rapidly eroding margins as failure telecoms firms undertake better succeed in the relentlessly shifting market. portfolio. become more conservative. costs escalate; or wait until the future portfolio management in uncertain telecommunications market, and can comes into view, by which time firms markets? What is the best way to increase the probability of successful Unfortunately, management literature Capability I: Strategic Portfolio Unfortunately, many telcos use have forfeited emerging opportunities manage resource allocation? And how new product launches. Within this provides little guidance as to the Pruning Capitalizes on Funnel similarly conservative decision- to competitors and face empty can flexibility be employed without group of firms, those with capabilities optimal number of gates. It is also Flexibility making criteria at all of their NPD pipelines. sacrificing the benefits of stability? in the areas of portfolio pruning, unclear how selective companies When operators adopted stage-gate stage-gates. Priority is often given to resource allocation, funnel design, and ought to behave at each gate. Should processes, they often failed to adapt projects with the expectation of a high Some interesting answers can be process tailoring, outperformed those firms explore a high number of their project selection strategy. Thus, net present value (NPV). This can be glimpsed from an in-depth study of firms without such capabilities. product propositions but launch very the only difference between a stage- misleading. We believe that it is much flexible innovation management few? Or perhaps it would be gate process and the previous system more important, in the initial stages, is often a higher number of to study the probability distribution of
1 The Centre for Strategic Studies is based in Cambridge, UK. CSS research focuses on strategic planning and innovation in hypercompetitive markets. 3 This indicator measures the effectiveness of product innovation. Through flexible NPD management, operators can increase the total number of projects per year that bring in more than 2 The study included both established firms and aspiring players from across Europe. The anonymity of participants is safeguarded throughout this article. €110 for every €100 invested. 68 69 F 1: O N P dc D P Fb A grater focus on payoff
Competitive dynamics, technological developments, and social trends add up to complex market uncertainties, distributions RATHER THAN NPV STANDS TO IMPROVE which are increasingly difficult to forecast. Therefore, the payoff from a telco’s portfolio of NPD projects has a probability distribution. Using a staged approach to product development influences the expected payoff. Instead “ of fixed commitments, the portfolio contains a set of options. A stage-gate approach allows firms, for a period of product hit rates time and at a small cost, to explore new product ideas to gain a better understanding of their commercial viability. This way, firms acquire the option to launch a product that may turn out to fit markets perfectly, but there is no commitment to launch that product should new information suggest that it will be a market failure. Resources are allocated sequentially at subsequent decision gates: as many as necessary to be able to develop projects further and to study their market fit, as few as possible to reduce the risk of wasting capital on market failures. The higher expected project outcomes. Operators Some telcos are already making use of projects must be discontinued and the the number of product ideas initially explored versus the number of products eventually launched, and the higher the ” number of decision gates, the higher the degree of flexibility in product innovation funnels. If this flexibility is should ask themselves: how likely is it better decision-making processes. One freed resources re-allocated to the well-managed, then it increases the overall expected payoff from the NPD portfolio, because it reduces downside that the performance value of the mid-sized company, for example, has most promising projects. If this and maximizes upside. project will be significantly higher or an explicit policy of providing rough pruning mechanism is ineffective, lower than the estimated NPV? revenue estimates early on and potential blockbusters will be starved requires NPD managers to analyse a of the necessary development Tunnel Funnel As illustrated in figure 1, conservative range of scenarios and their impacts resources. Tell-tale signs of poor s e s decision-makers prefer to allocate on project success, thus making discipline are: lack of transparency in c e y u c t i d n resources to safe bets with positive explicit the variability of potential stage-gate decision-making criteria; n e a r u h
t expected payoffs and a narrow range project outcomes. In total, the firm emphasis on personal relationships r y y n y t t t i o i e i l l l
i of possible outcomes. This is a sensible spends approximately 30% of its NPD rather than commercial merit; i i p d b b b p i n a a strategy if the NPD process contains budget on projects that never make it executive pet-projects; and an o x a
b b
e e l o o e
f no flexibility. However, because to market launch. Many provocative incentive system that punishes r r u r
n P u e P e s
v funnels offer flexibility, the opposite is product ideas receive funding for the product development managers for i v t G o e
s c p required. As long as there is an first and second stage of discontinuing projects. s r
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o i f f n e G L ss a opportunity to discontinue or recycle development—until it becomes more E o in L the project at a later stage, telcos certain that their commercial In cases where operators do not react µ Portfolio Value µ Portfolio Value should focus more on the positive end prospects are poor. Some projects, to signals of commercial viability of of the probability distribution curve however, with a few modifications, their NPD projects, for example if µ = expected net present value than on the mean. Indeed, there is a match unfolding market preferences market intelligence suggests that case for telcos being more effective by and become surprisingly successful consumer preferences are drifting, the The increase in portfolio payoff is the value of flexibility. An explicit focus on flexibility value provides telcos with a pursuing more projects, including initiatives—products that tend to be overall value of flexibility is negative. tangible parameter for funnel optimization. Observing changes in flexibility value can answer many vexing questions some with negative NPVs. shelved by telcos with more Here, funnels incur only costs and no that surround the funnel concept: How many gates are best? How thin should resources be spread across project conservative approaches to decision- benefits. Therefore, flexible options? How should gate decisions be made? To that extent, CSS has studied the impact of four managerial The only thing that matters initially is: making. O2’s first step towards fixed- management does not fit all systems. capabilities on flexibility value. This empirical research informed subsequent statistic modelling. While models can how great is the profit potential in a mobile convergence with Genion in But in the right hands, rigorous never provide exact predictions, CSS’ flexible innovation model can provide important indications as to how telcos best case scenario? Instead of selecting Europe and Digi’s introduction of the discipline is highly effective. CSS can improve the management of product innovation funnels. The four capabilities are described in the article text a few projects with highly certain voice-SMS service Bubble Talk in research shows that efficient pruning and illustrated below. average payoffs, operators should Malaysia have shown that such first- of innovation funnels can almost Decision- Making Strategy explore many projects with less to-market products bring clear double the average new product profit certain above-average payoff potential. advantages: they sustain revenues and increase the proportion of new 1 If only a few of these riskier projects until competitors catch up and products that outperform the internal turn out to be blockbusters, and the increase brand value and learning rate of return (IRR) by up to 20%. The firm manages to prioritise these effects over that of competitors with more flexible the development projects over others, new product delayed offerings. process, the more discipline is needed. Flexible sales and profits are likely to exceed Innovation those of a more conservative decision- Capability II: Resource Allocation Pruning discipline can be achieved in Process Tailoring4 2 Resource Allocation Discipline Management making strategy. Thus, a greater focus Discipline Supports Portfolio part through standardization and Capabilities on pay-off distributions than on NPV Pruning objectivity. Before receiving next-stage and a deliberate exploration of more A medium-sized fixed-line provider funding, every NPD project should be uncertain projects stands to improve recently complained about the high evaluated against a transparent set of product hit rates. cost of product innovation and the criteria. In addition, crucial estimates 3 low success rates relative to such as commercial prospects, competitors, despite using a funnel typically provided by project system. This complaint is an example managers, need to be triangulated Funnel Design of failing to match flexible decision- through multiple sources. Objectivity making with resource allocation can be further increased by rotating discipline. In order for funnels to the composition of stage-gate decision work effectively, some development committees, therefore reducing personal bias.
70 71 This is where incumbent providers subsequent stage requires greater have a natural advantage as they investment. Both the number of gates F 2: Sc NPD P c generally exercise greater process and number of projects pursued will discipline. One major telco influence the effectiveness of a telco’s The graphs below illustrate the difference between conservative (1) and pro-risk (2-4) decision-making. In contrast established a rigorous online innovation management. to conservative approaches that select projects only if the expected project value in NPV terms exceeds the Internal submission process for stage-gate Rate of Return (IRR), funnels provide the opportunity to also seed-fund projects with a greater chance of a negative reviews, facilitated by software tools, CSS research shows that adapting payoff (70% in graph 2) than a positive one (30%). Because the first phases of product development typically only which ensured criteria transparency funnel design can dramatically require small investments, these investments can be viewed as the cost of learning. If, after initial exploration, it and fairer project decisions. Even improve effectiveness, if it is carried becomes clearer that there is no realistic market for the product, the project can be discontinued at the next gate. more importantly, this telco’s incentive out according to the five most All that is lost is the minimal cost of initial exploration. This enhances the upside opportunity at proportionately little system differentiated between project significant factors that influence expense. The same principle applies to projects with greater payoff uncertainty (3), and for those with a skewed payoff distribution (4). Greater uncertainty comes with more radical and long-term product and platform ideas. failures that were due to external flexibility value. These factors are Skewed distributions exist, for example, if a new mobile service depends on the success of one of two competing forces, such as unforeseen market market volatility, decision-making standards such as DVB-H and DVB-T. When deciding to fund (3) and (4), downside exposure is capped because changes, and those due to personal strategy, budget constraints, product funnels offer the possibility to discontinue projects later. The upside, however, is significantly greater than that of the competence, such as management characteristics, and project divisibility. projects that conservative decision-makers tend to choose. This is signified in the graphs by the distance x from the skills. The telco’s resource allocation expected value µ, and the greater probability of highly positive project outcomes. Thus, the value of flexibility is the approach effectively reduced First, high market volatility requires expected improvement of the overall average NPD portfolio payoff when adopting such a project selection strategy. managers’ propensity to pursue high flexibility. One integrated projects for longer than justified, and provider, operating in a hyper- quickly redirected their skills to more competitive country, typically has 1 Positive Project NPV 3 Wide Project Payoff Distribution productive use. about 40 first-stage development Tunnel FunnelFunnel y y t t i i l l i HE MORE i b T projects, of which usually only 12 b 4 3 a a % 5 % 0 b Capability III: No One Size Fits make it to market. The company’s b 0 % 0 % o o 5 5 r r 2 5 0 P FLEXIBLE THE All—Funnels Need Fitting to Firm’s closest competitor usually posts about P % % Specific Situation 25 first-stage projects, of which on IRR µ µ+ x Project Value IRR µ µ + x Project Value Decision-making and resource re- average 20 are launched. Despite the “ allocation discipline matter on a daily lower launch rate, the integrated 2 Negative Project NPV 4 Skewed Project Payoff Distribution DEVELOPMENT PROCESS , basis. But operators should also provider outperforms the competitor FunnelFunnel FunnelFunnel y y t t i i l l i intermittently consider whether the by approximately 25% higher return i b b a a b design of their NPD funnel processes on investments in innovation and has b % 60% 2 o o 0 3 0 r the more r 7 0 % 10% % P is optimal for their situation. One size a 40% lower absolute cost base. This P 10% does not necessarily fit all, especially shows that in highly volatile market µ IRR Project Value IRR µ µ + x µ+ 2x Project Value as too much and too little flexibility environments, a wide and highly discipline is IRR = Internal Rate of Return, µ = expected net present value, = negative payoff scenarios against which firms are protected if they can discontinue projects at a subsequent decision gate incur costs. The commonly used four- selective funnel is more appropriate. stage funnel design is unlikely to be as needed suitable for a Romanian wireline Second, for companies capable of the incumbent as it is for a British mobile flexible decision-making described provider. The wireline incumbent, above, wide funnels with many operating in a recently deregulated decision gates are suitable. Conversely, earlier versus later stages. Fourth, if a In consequence, operators able to market with fewer technological and more conservative decision-making company’s projects tend to be adapt their funnel structure to the high-end service differentiation fits shorter, narrower funnels better, characterized by physical investment prevalent conditions in which they ” pressures, may require much less because it reduces stage-gate in technology or infrastructure, find themselves—taking into account flexibility than a mobile provider bureaucracy and other flexibility sequential allocation and re-allocation the aforementioned five factors— operating in the hyper-competitive UK costs. Third, the size and dispersion of resources across stages becomes realize higher new product hit rates market. cycle of a company’s development more important. The feasibility of and return on innovation investments. budget will influence the number of allocating sequentially, of course, also In addition, many firms are unsure projects at a given time, the depends on how easy it is to Capability IV: Process about the appropriate number of affordability of additional stage-gates, subdivide the different work-packages Tailoring Accommodates projects to be pursued per stage, and and the relative spread of resources at across stages, which constitutes the NPD Project Diversity about the proportion of resources that fifth factor. Firms with the above three should go to projects that will capabilities of flexible innovation eventually be discontinued. This management can focus their matters downstream as each attention on an additional concern: funnel process rules do not fit all types of projects equally well. The return on product innovation can be
72 73 The return on product inn“ovation can be increased further . BY TAILORING DECISION STRATEGY AND PROCESS ACCORDING TO DIFFERENT CLASSES OF NPD PROJECTS
increased further by tailoring decision A pan-European mobile operator The four outlined capabilities— Dr Ronald Klingebiel directs the Centre Professor Dieter Lange has more than Sven Metscher is a Research Associate strategies and process paths according currently displays a high awareness of decision-making strategy, disciplined for Strategic Studies in Cambridge, UK. two decades of experience in academic at the Centre for Strategic Studies, UK. to different classes of NPD projects. these complexities. At each decision re”source, allocation, funnel design, He also serves as an academic adviser on research as well as within industry and He specialises in research into the For example, telcos that advance NPD gate, managers add a strategic factor and tailored processes—are crucial to collaborative projects with Capgemini consulting sectors. As Vice President and dynamic management of innovation projects along the process based to the financial value of the project. optimizing funnel management. Consulting, where he leads the Strategic TME Consulting’s Head of Central portfolios in telecommunications services primarily on financial merit find their This weighting improves the reliability Perhaps the most obvious benefit is Innovator Award initiative. Before his Europe, Dieter specialises in strategy for and handset markets. Sven’s prior work portfolio insufficiently diversified. and robustness of the judgement so the fact that an enhanced stage-gate academic career, Ronald worked with the high technology and communications experience included positions at Therefore, pure financial aspects need that its future value is more process shifts the benefit of stage-gates A.T. Kearney and BearingPoint sectors. His major areas of expertise BearingPoint Consulting and Capgemini to be complemented with strategic, holistically reflected. Multiple from a mechanism of progress control consultancies. He specialises in dynamic include strategic renewal, process and Consulting in Germany. He is based in forward-looking considerations. assessors determine the strategic to one of uncertainty reduction and strategic planning and has co-edited technology innovation and organizational Cambridge, UK. factor, based on a set of eight firm-market alignment. Bringing ‘Strategic Reconfigurations: Building restructuring. He is non-executive co- Arguably, therefore, NPD projects transparent criteria; the strategic factor innovation managers up to speed on Dynamic Capabilities in Rapid chairman of CSS and a co-editor of need to be allocated different decision ranges from 0.5 to 1.5 and is the four capabilities is a means of Innovation-Based Industries’ due for ‘Strategic Reconfigurations: Building weights. If most projects in the multiplied by the prospective financial enhancing innovation productivity publication in 2009. He is primarily Dynamic Capabilities in Rapid portfolio tend to be associated with value of the project. In addition, the without over-paying for flexibility. based in Cambridge, UK. Innovation-Based Industries’ due for one type of service, then a project that mobile provider operates a fast-track publication in 2009. He is based in opens income opportunities from a process that can skip as many as two Düsseldorf, Germany. second type of service should receive gates; if the innovation project is a higher weighting. Similarly, a incremental in nature, its payoff portfolio with mostly incremental uncertainty is verifiably negligible NPD activities should give a higher and/or it is crucial for competitor pre- preference to its few radical project emption. propositions, even if these rank lower in the financial assessment. The same Harnessing Uncertainty weighting logic applies to balancing Telcos can enhance their return on external and internal innovation as product innovation by viewing NPD well as local and global initiatives. projects as options. At each stage-gate, Telcos which balance their portfolio in these options provide operators with such a proactive manner avoid the flexibility: the right—but not the tendency of centralized funnels to obligation—to pursue selected suppress development of projects on revenue opportunities. This keeps the fringes of their usual development costs down as investments are made activities. This is an effective way to incrementally, avoiding premature prevent fateful strategic inertia. over-commitment to projects for which the business case ceases to exist.
74 75 lite ARPU Enhancers • One of the most expensive phone numbers in the world is 666-6666, which was sold for US$2.75 million in Doha (Qatar) as part of a charity event in 2006. Another BYTES pricey number is 888-8888, which was sold for US$270,723 in Chengdu, China. Source: http://www.theregister.co.uk/2006/05/23/mobile_number_sold/
• In April 2006, Yahaya Wahab, a Malaysian man, received 806,400,000,000,000.01 ringgit (US$218 trillion!) phone bill for a connection he had terminated in January that year. He was ordered to pay up within 10 days or face legal proceedings.
Source: http://www.msnbc.msn.com/id/12247590/
Genders and Technology • Over 75% of the UK’s iPhone users are male.
Source: comScore, “Comscore M: METRICS: 80 percent of iPhone Users in France, Germany and the UK Browse the Mobile Web”, July 2008
• Currently, around 40% of US gamers are women. Moreover, women aged 18 or older comprise around 33% of the overall game-playing population. In contrast, boys aged 17 or younger constitute only 18% of the gaming population.
Source: Entertainment Software Association, “Women Comprise 40% of US Gamers”, July 2008
• In 2006, one out of every eight married couples in the US first met online.
Source: http://wvls.lib.wi.us/Newsletter/PastIssues/2007/May2007lamp.htm
Work-Life Balance • 80% of Americans that use Internet / email / cell-phones at work (wired-and-ready workers) feel that technology has improved their ability to do their jobs. 58% of them also believe that these tools have allowed them more flexibility in the hours they work.
Source: Pew Internet and American Life Project, “Networked Workers”, September 2008
• However, 49% of wired-and-ready workers say that technology has increased the level of stress in their lives. A similar proportion also believes that ICT makes it harder for them to disconnect from their work when they are at home and on weekends.
Source: Pew Internet and American Life Project, “Networked Workers”, September 2008
E-mail, Spam and SMS • In the US, the average mobile customer sent or received 357 SMS per month in Q2 2008, representing a 450% increase over Q2 2006. Furthermore, US teens aged 13 to 17 had the highest levels of text messaging, sending and receiving an average of 1,742 text messages per month or over 55 messages a day! We value your comments and ideas. Please contact us at [email protected]
Source: Nielsen Wire, “In U.S., SMS Text Messaging Tops Mobile Phone Calling”, September 2008 Insights is published by Capgemini’s Telecom, Media & Entertainment (TME) consulting practice. We are the leading global management consulting group dedicated to helping CEOs and senior executives • 74% of all e-mails in Q2 2008 were spam. The spam emails were generated in the converging communications industries address their most critical strategic and operational challenges. primarily by over 10 million zombie computers, which are systems infected by ‘bots’ (small malicious programs) and controlled remotely by cyber criminals. For further information visit: www.capgemini.com/tmeconsulting Source: PR Newswire, “Ten Million Zombies Distributing Spam and Malware Every Day, According to PandaLabs and CommTouch”, August 2008 Editorial Team: Benjamin Braunschvig Jerome Buvat Bobby Ngai Design: Elisabeth Tahar • However, 29% of internet users buy from spam emails. The most commonly purchased items include performance enhancement pills, software, adult material and counterfeit luxury items such as watches, jewelry and clothing. Atlanta•Bangalore•Dubaï•Düsseldorf•Helsinki•Lisbon•London•Madrid•Milan•Mumbai•New York•Oslo• Paris•Rome•San Francisco•Shanghai•Stockholm•Sydney•Utrecht Source: Marshal Limited, “29% of Internet Users have Purchased from Spam, According to New Research This publication has been printed with vegetable-based inks on 100% recycled paper. from Marshal”, August 2008
© 2009 Capgemini. No part of this document may be modified, deleted or expanded by any process or means without prior written permission from Capgemini.
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