volume 3: spring|summer.07

telecom, media & entertainment journal

Innovation 2.0 Business Transformation Mobile Instant Messaging First Person Interview: Peter Bazalgette, Endemol New Patterns of Consumer Behavior

CONTENTS first person 4 An Interview with Peter Bazalgette, Endemol (available on request) industry insights

12 Digital Natives: How Is the Younger Generation Reshaping the Telecom and Media Landscape? 20 Mobile Instant Messaging: Cannibal or Cash Cow? 30 Developing a Successful Digital Media Strategy 38 Optimizing Telecom Operators’ Supply Chain Management

management insights

46 Innovation 2.0: Learning from Online Players 54 Transforming Telcos: Have the Giants Learned to Dance? 62 Private Equity: Outlook for Value Creation in Telecom and Media light bites

70 Strategizing in an Uncertain World editorial

Welcome to the Spring/Summer edition of Insights.

The reshaping of the telecom and media industries through convergence is continuing apace. With a low cost of entry into the Web world, many new players have emerged offering innovative applications and are now looking for ways to generate revenue from them. The advertising industry is shifting online fast, creating new sources of value to those who can monetize their audiences effectively while also challenging traditional business models. And creating an addictive content and entertainment experience is fast becoming an imperative to engage consumer attention and unlock new revenue streams.

We had the opportunity to discuss these issues with Peter Bazalgette, Chief Creative Officer for Endemol, for our First Person section. British newspaper The Independent referred to Peter as possibly “the most influential man in British television,” which is testament to his contribution to the content and entertainment industry. Peter’s understanding of the value of content as well as audience preferences makes him one of the leading lights in the format and gameshow industry worldwide. He and I discussed the major disruptions currently reshaping the content and broadcasting industries and the complexity of making content available online. Peter also shared his opinions on the most appropriate business models for Web-based content and reflected on the need to leverage content across several platforms.

Consumers, especially the 15–24 age group, are key to shaping the way we communicate and consume content. We start our Industry Insights section with a study from the TME Strategy Lab that analyzes new patterns of consumer behavior, drawing key implications for players in telecom and media. The mobile device, often considered the “first screen” by many young users, is also playing a key role in how we communicate and consume content. In our second article, we focus on the prospects for mobile instant messaging and analyze its impact on overall messaging revenues. We go on to discuss the key success factors for a winning digital distribution strategy, suggesting a roadmap for companies to develop a compelling digital entertainment offering. Finally, with an increased focus on delivering both fixed and mobile services in a timely and cost-effective manner, we examine telecom and media players’ strategic issues in supply chain management.

Key lessons on how to survive in the fast-changing telecom and media landscape make up our first report in the Management Insights section. We draw out key learnings from the innovation process and practices of the main Internet companies to suggest important action points for telcos. Following a recent study on business transformation, we asked telecom industry leaders what challenges and lessons can be learned from over 10 years of implementing major transformation programs in their organizations. Lastly, with the substantial increase in both the number and the size of M&A deals in the telecom and media industries, we analyze the growing importance of Private Equity in telecom and media and highlight the challenges to value creation in this dynamic and complex sector.

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

Didier Bonnet Managing Director Telecom, Media & Entertainment

3 industry INSIGHTS

Digital Natives: How Is the Younger Generation Reshaping the Telecom and Media Landscape? 12

Mobile Instant Messaging: Cannibal or Cash Cow? 20

Developing a Successful Digital Media Strategy 30

Optimizing Telecom Operators’ Supply Chain Management 38 Digital Natives: How Is the Younger Generation Reshaping the Telecom and Media Landscape? by Jerome Buvat and Benjamin Braunschvig

Abstract: Predicting consumer behavior has always been one of the key challenges in the telecom and media sector. Detecting any early indicators of change will be crucial for telecom and media players to gain insight and ready themselves for whatever awaits them in the future. The habits of the 15–24 year old age group, the technology-savvy generation, herald the changes in the way we will communicate and consume content in the future. Capgemini’s TME Strategy Lab analyzed these so-called ”digital natives” in order to identify emerging patterns of consumer behavior. The attitudes of this generation are underlined by the need to control, socialize, create and make efficient use of their time. To take advantage, telecom and media players need to redefine their relationships with their customers, offering services that increase consumer involvement as well as create addictive experiences.

The history of the telecom and media 2006.2 These examples reflect the instance, was the early adopter of the sector is littered with unexpected difficulty in predicting consumer Internet, embracing the medium successes and surprising failures. behavior, which is set to become even much faster than the rest of the Video calling, for instance, was more complex with the increasing population: 65% of American teens thought to be the “killer 3G number of options available to was using the Internet in 1998, a application” by many mobile consumers for communicating and penetration figure that was only operators, but uptake of the service is consuming media. reached by the overall US population still limited with less than 5% of 3G in 2005.3 Products and services subscribers using the service in the To anticipate how consumer behavior popularized by this age group often UK and France in 2006.1 Other than will evolve, it is important to identify subsequently gather momentum in price and quality, most operators early signs of change in how people the wider population. Consider that underestimated visual privacy communicate, entertain and interact video games were predominantly played concerns when assessing demand for with each other. A good barometer of by teenage boys in the 1980s before the service. Similarly, no one the impending developments is the they developed into a mainstream anticipated the phenomenal growth of evolution in the attitudes of 15–24 leisure activity. The average age of SMS, which grew from 10 billion to year olds, an age group that is often at British video gamers has risen from 21 100 billion messages sent every the forefront of cultural and in 1998 to 27 in 2006,4 belying that month worldwide between 1999 and technological change. This group, for gaming is solely a teenage obsession.

1 Strategy Analytics Insight, April 2006. 2 Gartner, 2006; Telecomworldwire, 1999. 3 Interactive PR and Marketing News, July 1998; Pew Internet Project, Internet Penetration and Impact, April 2006. 4 BBC, “Gamers in the UK,” December 2005.

12 Therefore, understanding how the The Media and Communications an average Internet user in the UK, for 15–24 year old age group consumes Consumption Boom example, now owns three to four telecom and media services can give Over the past few decades, the devices, with 85% owning a PC, 57% us important insights into what is in telecom and media sector has a WAP-enabled phone, 53% a games store for the industry. undergone dramatic changes as console and 48% an MP3 player.5 choices available to consumers have In this report, Capgemini’s TME increased manifold. For example, This world of choice is praised by Strategy Lab analyzes 15–24 year olds’ content producer Endemol offers its users who communicate and consume use of technology to communicate, Big Brother programs not only on TV media more than ever before. In the entertain and socialize in order to but also on the radio, the Internet and UK, for example, weekly time spent identify emerging patterns of mobile devices, in full length as well on communication and media consumer behavior. We begin by as short format. Consumers can also activities has increased by 15% from studying how our consumption of interact with the programs through 53 hours to 61 hours per week communication and media services voice calls and SMS to vote, win between 2001 and 2006.6 has evolved over the past few years. prizes and send suggestions to the We go on to consider how telecom production team. Looking at media use specifically, we and media players should respond to estimate that time spent per week these emerging patterns of consumer Consumers’ use of personal digital increased from 50 hours to 56 hours behavior in order to take advantage of devices has also accelerated in the from 2001 to 2006 in the UK (see the arising opportunities. past few years. In addition to a TV set, Figure 1). Consumers continue to be

Figure 1: Estimated Time Spent on Various Media Activities in the UK

Estimated Average Weekly Media Contribution to Growth in Media Usage per Person per Week (UK) Usage (%, UK, 2001–2006)

50 hrs+12% 56 hrs Interactive 3% 1% 4% Web Content Gaming 66% 7% 10% Gaming 6% Text-based News Interactive Web 33% Content 44% 39% Audio/Music TV and Video 7%

Audio/Music 1%

46% 41% TV and Video Entertainment -8% News

2001 2006

Source: Capgemini TME Strategy Lab analysis; Ofcom Communications Report, “The Communications Market,” 2006; IDATE, “Telecom 2.0: Emerging Usages and Implications for Carriers”, June 2006; ARCEP reports; European Interactive Advertising Association survey of 7,000 people across Europe, 2005; BBC, “Gamers in the UK,” December 2005.

5 Nielsen NetRatings, “The 21st Century UK Digital Consumer,” 3 October 2006. 6 Capgemini TME Strategy Lab estimates based on OECD data; AT&T Research Labs, “The History of Communications,” June 2000; Ofcom Communications Report, “The Communications Market,” 2006; European Interactive Advertising Association Media Scope Surveys; BBC, “Gamers in the UK,” December 2005.

13 Time spent on text “ communications“ IS OVERTAKING VOICE. interested in TV and music, spending Additionally, we communicate more Changing Behavior of 15–24 nearly 80% of their media time on than ever before. In France, time Year Olds such activities. However, the growth spent on communication doubled to Telecom and media usage is changing in media use comes from new types of 4.5 hours per week over 2000–2006 rapidly. To understand where these content such as gaming and (see Figure 2). Consumers have also changes will lead us, it is important to interactive Web content like online started to communicate differently, look at the behavior and attitudes of shopping, user-generated content or with time spent on texting overtaking 15–24 year olds. The new patterns of social networking.7 Gaming, in fact, is voice. Usage of IM, email and SMS behavior are especially pronounced the single biggest contributor to the grew dramatically during this period. among the younger generation, the increase in media time over the past 5 The Internet played a significant role, pioneers of the digital age. The under- years, accounting for 66% of the with consumers spending more time 25 year olds are the first “digital growth in media use. The average time on the Internet and dedicating 40% of natives” who grew up surrounded by spent on gaming per person in the UK this time to IM and email. IM is devices. In the US, for instance, more nearly tripled over 2001–2006. This is particularly popular among the than two thirds of all 8–18 year olds due to the availability of higher younger generation; for example, 75% have a TV in their bedroom, nearly quality games on various platforms, of US online teens use IM compared half have a video games console, and ranging from traditional consoles to with only 42% of online adults.8 The more than 30% have a computer.10 PCs and mobile phones. The other preference for text communication is key growth area, interactive Web on the rise because it is not only Our analysis shows that the behavior content, has contributed to more than cheaper but also non-intrusive, of this generation is characterized by 30% of the increase in media use. In enabling users to be always connected four key themes that summarize the particular, user-generated content and discreetly, wherever they are. new media and communication social networking are growing rapidly, Consumers are also considering new equation. This younger generation gaining significant traction among the ways of communication such as desires Control, with the ability to youth. In the UK in 2006, online blogging to be in touch with the access content and communicate 12–17 year olds spent three times as online community. Indeed, two thirds whenever they choose, regardless of much time as an average user engaged of bloggers in France in 2006 said location. Impatience is also with such content. that they considered their blog to be a characteristic of this age group, as it communication tool.9 seeks to make the most efficient use of its time through multitasking and “media snacking.” The youth are also Figure 2: Estimated Time Spent on Communications, Per Person, Per Week (France) constantly engaged in Community SMS Interactions, sharing opinions on 2 hrs 23 mins X1.9 4 hrs 25 mins what content is worth seeing or 5% experiencing. Additionally, they are 8% looking for avenues of self-expression Email 18% Text that enable them to showcase their Communications 53% creativity and portray their Originality. 38% 57% Control For a long time media consumption 75% Wireless Voice 21% IM has been a lean-back, passive experience, constrained by Wireline (incl. VoIP) 26% broadcasting schedules. However, younger users are playing a more 2000 2006 active role in controlling and deciding

Source: Capgemini TME Strategy Lab analysis based on Arcep reports; IDATE, “Telecom 2.0: Emerging Usages and how and when they want to consume Implications for Carriers,” June 2006; MSN Report, “Europe’s Online Youth,” 2006.

7 Examples of user-generated content commonly referred to as “Web 2.0,” include YouTube, DailyMotion or Flickr. Social networking websites include MySpace or Facebook. 8 Pew Internet Report, “Teens and the Internet,” July 2006. 9 Médiamétrie, 2006. 10 Kaiser Family Foundation, “Generation M: Media in the Lives of 8–18 Year-Olds,” 2006.

8 Figure 3: The Younger Generation Consumes Less Scheduled and More On-Demand Impatience Content Consumers today are living in a world of hyper-choice. They own multiple Change in Weekly TV Consumption on the TV set per Consumers Who Have Ever Viewed TV or Video on Viewer by Age Group (Hours, UK, 2001–2006) Mobile or Internet Platform (%, UK, 2006) devices that provide access to a very wide range of communication and content services. To make the most of their +11 mins Mobile TV/ 3% time, they are increasingly consuming 15–24 year olds Video Clip Download several types of content at once, rapidly 6% All age groups switching attention from one source to another, a form of multitasking (see Figure 4). This is a key trend for all 24% demographics and especially for 15–25 TV over PC

38% year olds. In the US, 25% of teenagers’ -1.5 hrs media time in a typical day consists of overlapping media experiences.14 Youth Overall This is creating a generation of time-

Source: Capgemini TME Strategy Lab analysis; Ofcom, Communications Report, “The Communications Market,” 2006; starved users, juggling various eMarketer.com, “Mobilizing Social Networking Sites,” 26 January 2007; M:Metrics Benchmark Survey, February 2007. activities at the same time, always on the lookout for something better to invest their attention in, eventually Figure 4: Multitasking Behavior While Online (US, % of Online Users, 2006) resulting in attention thinning.

78% 73% In order to maximize the “efficiency” 70% of their media time, younger users 61% “pull” content through search engines Teens Adult and RSS feeds that let them only consume the bits of content that are relevant to them. They are also looking to consume content in stripped down, fragmented formats that one could call “micro-chunks.” Content is thus increasingly “snacked” Watching TV Listening to the Radio under the form of short TV recaps, sports highlights, user-created short Source: Capgemini TME Strategy Lab analysis; eMarketer.com, January 2007. films, or single music tracks. As a result, short-form content from media players has also started to debut on the Internet. For example, in April media. They are starting to move However, this does not mean that the 2007 Michael Eisner, former Disney away from platforms such as linear TV younger generation is abandoning CEO, launched a series of 90-second and radio that do not enable content traditional media; in fact, they are “webisodes” called “Prom Queen” on to be consumed in a flexible way. Take increasingly relying on services that sites such as MySpace and YouTube, broadcast TV, for instance, which let them access content whenever they with distribution on mobile handsets forces users to consume content want (see Figure 3), such as Personal planned for the second half of 2007.15 according to a schedule. The younger Video Recorders (PVRs) and Web TV. generation is spending less time in Consider, for example, that nearly The need to manage time efficiently is front of the TV set than other age 38% of the youth in the UK now leading to a generation of “ad- groups. The average time spent by consumes TV content on a PC avoiders,” ready to shut out 15–24 year olds in the UK on TV compared to 24% of all individuals.12 advertising inputs if it is not perceived viewing on the TV set has declined by The same is true for radio, with 40% as entertaining or informative. Two nearly 1.5 hours over 2001–2006, of 18–26 year olds listening to radio thirds of 16–24 year-olds in the UK compared to an increase of 11 online compared with a 25% average indicate that they largely ignore TV minutes for other age groups for the for Internet users in the US in 2006.13 ads. This compares to less than a same period.11

11 Ofcom Communications Report, “The Communications Market,” 2006. 12 Ofcom Communications Report, “The Communications Market,” 2006. 13 Forrester Research, “Consumers’ Behaviour Online: A Deep Dive,” 4 January 2007. 14 NPD Group, “Kids’ Leisure Time II,” 2007. 15 Paidcontent.org, “Eisner to Provide Short-Form Video to MySpace,” 28 March 2007. 1

9 quarter of those aged 65 or older.16 Figure 5: Consumer Confidence in Peer Content (% of Online Users, US, 2006) Respondents of a survey in the UK deemed skipping through ad-breaks at 32% “30 times normal speed” as the most 28% Adults attractive feature of the PVR. 15–25 year olds

Community Interaction The influence of their peer group on 15% the younger generation is nothing 13% new. However, the Internet has 12% opened up the possibility for today’s younger generation to interact with a 4% global community at any time, anywhere. This age group continuously exchanges opinions on Peer-Generated Information Peer-Posted Event Listings Weblogs what is worth seeing, reading and Source: Capgemini TME Strategy Lab analysis; eMarketer.com, January 2007. downloading. Conversations between peers then arise around that content in the form of blog comments, links sent by email, IM discussions, merging communication and content Yahoo! Answers. Tripadvisor is a travel into what one could call “conversational information site attracting more than content.” Indeed, for an increasing 20 million unique visitors per month, number of young users, content gets where the content is entirely provided added value from the ability to by users themselves who have consume and discuss it collectively. contributed nearly 5 million reviews Consider for instance that 30% of the on hotels and tourist facilities.18 volume of the blogosphere is made up The online encyclopedia Wikipedia is purchase on the Internet based on of comments posted by blog readers. one of the most trafficked sites in the peer reviews.19 Some companies are These comments are actually world and is fed exclusively by successfully leveraging user reviews perceived by blog readers as being hundreds of thousands of volunteers and recommendations on their sites. just as valuable as the original post. who dedicate their time to the For example, Netflix, an online movie creation of new articles and the rental service, has 5.7 million Blog postings can create a word of improvement of existing ones. mouth effect that can propel the customers and members select approximately 60% of their movies popularity of content from a core These online community dynamics based on user recommendations group of fans to the mainstream in no alter traditional patterns of trust: tailored to their individual tastes.20 time. Witness the popularity of the consumers, especially the younger relatively unknown UK artist Lil Chris generation, have more confidence in Originality who rose to fame mainly due to the peer-generated or “crowd-sourced” Young people also want to stand out buzz created by online communities. content (see Figure 5). Online users in their community and be regarded Before his single reached the number are also increasingly relying on peer as cool, original, fun and 3 position on the UK charts in recommendations to make purchase independent-minded. The Internet September 2006, nearly 65% of the decisions. In Europe, more than 50% has opened up a whole new world for traffic on his website originated from of consumer electronics online buyers this generation to indulge in creative online communities such as Bebo and have checked product reviews from 17 self-expression and showcase their MySpace. other customers, and 30% made a individuality. The younger generation Members of online communities do is especially active in developing not just discuss their favorite bands or creative online identities through films, but are also keen to share their personal profiles on social networking own knowledge and experiences with sites such as MySpace and Facebook. others. This is evident from the Over half (55%) of online American growth in user contribution to sites teens have created a personal profile such as Tripadvisor, Wikipedia, and on these websites, totaling 170

6 Brand Strategy, “Pulling Power of the Digital Age,” December 2006. 17 Hitwise statistics, 8 December 2006. 18 Company website; Comscore Media Metrix, July 2006. 19 Forrester, Trendwatching.com, 2005. 20 MarketWatch, “User Generated Content: Recap of 2006 and What to Expect in 2007,” 4 January 2007.

16 million and 17 million users opinions, reviews, recommendations Consumer-led innovation can help respectively as of January 2007, and a and creativity and are playing an strengthen the ties between customers significant industry is growing to increasing role in influencing peers’ and brands, because consumers feel enable users to customize their consumption. This can have a empowered by their involvement in profiles. Many 15–24 year olds use significant impact on the overall view the product development process. It this avenue to share their own of the marketers’ product, service and can also benefit companies’ bottom artwork, photos, stories, poems and brand. Dell, for example, faced lines by ensuring that product talk about themselves. They want widespread consumer ire when Jeff development resources are deployed their creativity to be recognized and Jarvis, an online blogger and a according to consumers’ initial the Internet gives them a platform to journalist, posted a blog on his responses, thus increasing the chances do so. frustration at dealing with the of meeting consumer needs. company’s customer service and To showcase their talent, young users support. Telecom and media players, II. Recreate source of value are also increasingly using new therefore, need to redesign their to the consumer professional-grade technology to traditional relationships with the The traditional provider–end user create better quality content. Some consumer, leveraging consumer relationship needs a refresh as players are actively providing these involvement and insights at every consumers desire more information, tools to promote innovation and stage of the product lifecycle and participation and control. Because ads harness talent. Microsoft, for example, creating new sources of value to gain can be easily skipped by tech-savvy has launched a set of development consumer attention. and time-starved consumers, brands tools aimed at letting consumers need to find ways to recreate create gaming content for its Xbox I. Involve consumers in the engagement by adding value to their 360 console. creative/development processes marketing message. One way for Internal sources of innovation such as players to create value is to entertain The technology-savvy and impatient marketing and R&D departments can them or enable them to improve their younger generation is eager to be complemented by the active skillsets. This is what Nintendo did, showcase its creativity, stay constantly involvement of consumers. for example, creating viral videos that

in touch with the community and Consumers are increasingly interested advertise their Wii. The videos were control their media experiences. in giving their opinions and uploaded on YouTube for everyone to Against the backdrop of these expressing their ideas online. stream, link to and comment on and

emerging behaviors of the online This trend towards greater user were seen by over a million people on youth, many wonder whether these participation can be leveraged for the Web. trends are a passing fad or are here to product development, where stay. We believe that the uptake of many of these services is rooted in “ inherent consumer needs and as such, they will grow further into the mainstream. Some activities praised Rooted in customer by the younger generation are already being adopted by all age groups. For needs, SOCIAL NETWORKING is example, close to 50% of MySpace users were over 35 in 2006, up from entering the mainstream. 40% a year earlier.21 “ Recommendations consumers can become valuable test The telecom and media space is being beds and an important source of Players can also create value to the reshaped by new consumer behavior, ideas. For instance, operators could user by giving them more control, which will challenge the traditional, establish an “ideas blog,” inviting allowing them to personalize, remix static, non-interactive and pre- suggestions, comments and ratings, or or modify content, thus satisfying packaged media experience. This they could open up some of their their need for creativity and self- presents several issues for players in applications to enable mobile mash- expression. The BBC allows the TME industry in terms of service ups. Swisscom Mobile, for example, consumers to creatively reuse free of offering as well as marketing. For has set up an online “lab” that allows rights material from its archive and instance, consumers now have an users to test beta versions of products, create mash-ups. This has led outlet to lend their expertise, give feedback and submit new ideas. to the creation of mash-ups and user-

21 Nielsen/Netratings, 2006.

11 generated applications such as IV. Offer addictive experiences peers, but also compare their status. “Fetch M4,” which extracts traffic In today’s choice-filled world, Designers have ensured that users can information on the M4 motorway in the engaging the time-starved and showcase their skills and be rewarded UK for display on mobile phones.22 attention-deficient consumer is accordingly: in “experience points” in becoming increasingly difficult. the case of World of Warcraft or in the III. Weave strong relationships with Players need to look at delivering new number of friends in MySpace. These online opinion makers and innovative services to capture the “social currencies” are displayed for Consumers increasingly rely on the consumer’s interest. Understanding everyone to see in the user’s profile. peer group and on social information what creates an addictive experience This helps to increase the social status websites to make their purchase will be crucial to win the attention of of the holder and to reinforce decisions. For companies, it is critical the increasingly elusive consumer. addiction. Ultimately, addiction will to understand how these decisions are made and to try to influence them. Organizations need to identify and Figure 6: Most Popular Websites by Percentage of Total Time Spent Online by Internet Users (%, US, December 2006) listen to emerging group of online experts, who are increasingly holding sway on consumers’ choice. For MySpace 12% example, for most social information websites (Digg, Wikipedia), the number of active contributors is Yahoo 9% actually more limited than one could imagine. In fact, only 3,300 contributors—2% of registered MSN 4% users—provide 70% of Wikipedia articles and a mere 0.2% of Digg registered users have submitted four eBay 4% stories or more.23

The same applies to blogging, where Google 2% the number of blogging gurus is actually limited and clearly identified. Source: Capgemini TME Strategy Lab analysis; Compete.com, 2007. While control over these experts is impossible and any attempt to manipulate opinion is dangerous, it is The growth in time spent on activities grow as users enter the closed elite of still important for marketers to engage like gaming or social networking “most experienced gamers” or “most with these influencers. Marketers reveals that consumers have an connected people.” In both cases, should try to build a relationship of increasing dependency on these monetization levels are high and likely trust with these key online figures by services. In some cases, addiction can to grow: World of Warcraft generated providing information transparently be extreme: For instance, users of more than ?1bn in 2006 while and accepting both positive and World of Warcraft, a multiplayer Newscorp expects digital revenues to negative feedback openly. Honda UK, online game, spend an average of 25 exceed $500m in 2007, primarily for example, is the first sponsor of hours per week on the game. Social driven by MySpace.26 Industry players 2TalkAbout.com, which lets audiences networking is also a very addictive should leverage these insights and freely publish their views on well- activity: On average, users spend replicate these distinctive forms of known brands. Honda engineers and twice as much time on these websites addictive community interactions by associates regularly log on to as on traditional websites.24 MySpace emphasizing features that let users contribute to and respond to is probably the most addictive, as compete with each other and feedback. This has helped the aggregated time spent on this website showcase their skills and creativity. company to build an active accounts for close to 12% of the community of customers as well as overall time spent on the Internet in Addiction patterns are also evident on potential buyers who share experiences. the US in 2006 (see Figure 6).25 the mobile. The mobile phone, in fact, is the preferred device of the new The addictive nature of these generation and is the hub of their experiences comes from the ability for social life, using it to permanently users to not only interact with their keep in touch with their community.

22 Patricia Seybold Group, “Outside Innovation at the BBC,” October 2006. 23 The New Yorker, 31 July 2006; Publishing2.com. 24 80mn per month on average for social networking websites; 30mn per month on average for traditional websites; source: The Online reporter, September 2006; Comscore Media Metrix, 2006. 25 Compete.com, 2006. 26 Online Media Daily, “MySpace Brightens Newscorp Earnings,” 10 May 2007.

12 Figure 7: Most Missed Activity by Age (UK, 2006)

1.Use Mobile Phone 2. Watch TV Watch TV 52% 3. Use the Internet via 52% Computer 48% 47%

41% 1. Watch TV 2. Listen to Radio 3. Read Newspapers 28% and Magazines

23% 21% Listen to Radio

15% 15% 12% 15% 12% 12% 12% 13% Read Newspapers/ Magazines 9% 7% 7% 7% 4% Use the Internet via Computer 4% 7% 5% 2% 3% 2% Use a Mobile Phone

16–2425–34 35–44 45–54 55–64 65+

Source: Capgemini TME Strategy Lab analysis; Ofcom, Media Literacy Audit, May 2006.

In a UK survey of media preferences messaging. Extending social networks insights will be able to offer innovative in 2006 (see Figure 7), the most to mobile devices, for instance, can services and gain in the long run. missed media activity was television enable operators to generate new for all age groups except 16–24 year revenue streams since many olds, who nominated the mobile consumers upload content captured phone. However, older age groups are over their cell phones. For example, Jerome Buvat is the Global Head of the also showing increasing dependency SK Telecom’s mobile social TME Strategy Lab. He recently led a on their mobiles, with 25–34 year networking site, Cyworld, had a paid variety of studies including an analysis of olds placing it second. In order to user base of around 0.5 million fixed-mobile convergence services and the sustain this and drive similar patterns consumers in 2006 with an average development of home gateways. He for other older age groups, mobile ARPU of ?1.5 per month.27 closely follows the media market as well operators, developers and vendors as the emergence of alternative must work together to embed more technologies and business models. Jerome features that match the needs of older In conclusion, the online world is is often called on to speak at industry generations, such as home increasingly full of consumer advice, conferences/events on these and other management, banking, healthcare and suggestions, complaints and creations. telecom- and media-related topics. Prior not only community, entertainment This embodies the fact that people to joining the Lab, Jerome led a variety of and communication. want to be more involved in what strategy projects in the telecom sector, they consume and how they consume focusing particularly on the mobile, Mobile services can offer solid it. This is exemplified by the 15–24 broadband and wholesale segments. monetization prospects: consumers age group. The increasing roles digital He is based in London. show a higher willingness to pay on technology is playing in this group’s the mobile platform than on the fixed leisure activity are an indicator of Benjamin Braunschvig is a senior PC-based Internet. Consider for what the medium- and long-term consultant in Capgemini’s Media instance that in a survey conducted by future hold for telecom and media practice. His current work focuses on Capgemini across the UK and France consumers. The changing behavior monetization of digital content. His in December 2006, 80% of towards media and communication recent consulting projects include research respondents interested in mobile IM exhibited by this age group will on the impact of convergence on the were willing to pay an average of become mainstream as they mature media sector as well as the design and around ?3/month. Industry players and their digital habits cross the launch of portals and mobile data should work towards developing generation gap. Players willing to offerings. He is based in London. mobile services beyond voice and listen, learn and incorporate consumer

27 Company website.

13 Mobile Instant Messaging: Cannibal or Cash Cow? by Jerome Buvat, Marc Beijn and Rahul Prabhakar

Abstract: After its success on the PC, instant messaging (IM) could become a key application on the mobile as well, providing a much- needed boost to data revenues. However, operators fear that mobile IM could cannibalize the revenues from messaging services such as SMS and MMS. Capgemini’s TME Strategy Lab undertook a survey of mobile users in France and the UK to assess the interest in mobile IM, existing usage experience and perceived barriers to further adoption. User interest as well as telco initiatives around resolving pricing and access to existing online IM services will help drive mobile IM uptake. Though some substitution of other messaging traffic and revenues is likely, operators should see an overall net gain from mobile IM.

As the mobile market reaches Internet. On the PC, for instance, the operator messaging revenues. As part saturation and voice prices decline number of global active online IM of its investigation, Capgemini across Europe, operators are betting accounts over Yahoo! and MSN commissioned a survey across mobile on mobile data to drive revenues. SMS numbered nearly 350 million in 2006, users in the UK and France in has helped operators to grow their up from 20 million in 2000. Usage of December 2006,3 to gain insights into mobile data revenues so far but, along IM has also increased significantly, with current mobile IM usage and with voice telephony, it also faces the average online user worldwide understand consumer preferences. slowing growth prospects. SMS sending 350 messages per month in Based on the survey findings, we revenues, which increased at a CAGR 2005 compared with a mere 56 in analyze consumer expectations for of 5% over 2003–2006 in Western 2001.2 IM offers the potential to mobile IM and evaluate how well Europe, are faced with an estimated herald a new age in mobile messaging current operator offerings are 2% decline over 2007–2010.1 To that is real-time, interoperates with addressing these needs. We go on to combat this, telcos have attempted to the PC user base and supports assess mobile IM’s likely impact on diversify beyond basic voice and text multimedia (video, audio, pictures) revenues, and recommend how messaging with advanced services exchange. However, operators have operators can launch a successful such as MMS and mobile Internet, but remained reluctant to promote the service while avoiding risks of these have failed to ignite significant service widely. This reluctance is driven revenue cannibalization. interest among consumers so far. Only largely by the fear that mobile IM, as an 4% of European mobile users access alternative text-based communication the mobile Internet once a week or service, could cannibalize their high- more, while MMS usage remains at margin SMS revenues. less than one message per user per month. Mobile operators, therefore, are In this report, on the look out for new opportunities Capgemini’s TME and compelling applications to drive Strategy Lab data revenues. addresses the question of Instant messaging (IM) is one such whether application that is expected to gain mobile IM popularity on the mobile platform, will enhance after being a runaway hit on the fixed or undermine

1 Yankee Research, “EMEA Mobile Data Applications Forecast,” September 2006. 2 Internetworldstats.com, September 2006; Radicati Group, “Instant Messaging Market to Reach 867 Million Accounts by 2005,” June 2005. 3 Survey conducted by Gfk NOP across 300 mobile users in the UK and France. The sample covered 150 current mobile IM users and the rest were consumers, who were aware of the service.

20 Consumer Expectations from Awareness Pricing Mobile Instant Messaging Many surveyed respondents indicated Most (80%) of the surveyed The Capgemini survey identified early low awareness of mobile IM and its respondents interested in using signs of consumer interest in using benefits. Among the non-users, 12% mobile IM were willing to pay for the mobile instant messaging. More than of respondents said that they do not service. In fact, more than 50% were 50% of surveyed mobile subscribers use mobile IM because their operator prepared to spend ?2–5 per month, aware of the service across the UK and did not offer it. These consumers were while 21% indicated that they would France were interested in using it. unaware that their mobile operators pay more than ?5 a month (see Figure However, despite interest, mobile IM were, in fact, offering the service. 1). This is good news for operators, uptake is very low, with penetration at Similarly, when consumers were asked given that consumers are accustomed around 3% in France, Germany and why they were not interested in to using the service for free on the PC. the UK in 2006.4 Moreover, even mobile IM, nearly one third said they among the mobile IM users surveyed, did not know enough about it or did However, current prices charged by our findings indicate that usage not foresee any use for the service. operators are a key barrier to uptake. continues to be low. The service is accessed rarely, with 50% of users logging in less than twice a month, Figure 1: How Much Are You Willing to Spend on Mobile IM per Month? (% of and only 19% using the service on a Respondents Interested in Mobile IM, UK and France, December 2006) daily basis. The number of messages exchanged during a session is also 29% rather low: Nearly two thirds (64%) of users send less than five messages per 24% session. Further investigation revealed 20% that uptake of mobile IM is being held back by issues in four key areas: awareness, pricing, access to existing 11% fixed IM services and usability. 10%

6%

Under e2 e2–e3 e3–e5 e5–e7 e7–e9Don’t Know

Source: Capgemini TME Strategy Lab analysis; survey results of 300 mobile subscribers across the UK and France, December 2006.

4 M:Metrics Press Release, 3 October 2006.

21 is significantly higher too, with 58% healthy opportunity to telcos, being of of MSN mobile messenger users significant interest to a majority of sending more than five messages per mobile consumers. However, mobile session, compared with 26% for subscribers have not widely adopted proprietary services (see Figure 2). the service so far due to issues around pricing, access to existing PC-based

Figure 2: Usage of MSN Messenger on the Mobile Device Compared to Operators’ Proprietary Services, UK and France (% of Mobile IM Users, December 2006)

Number of Sessions Users Are Engaged in Number of Messages Users 74% Send Per Session

49%

43% 34% 29% Over half (55%) of the existing mobile 23% 18% 20% 21% 20% IM users surveyed considered the 16% 16% 15% 17%

service to be “too expensive” but 6% would use it more if it were cheaper. 0% Moreover, the usage-based tariff plans5 >1/day 1–6/week 2–3/month Less Often 21 or more 11–20 6–10 1–5 were not to the liking of most mobile users. More than 50% of respondents User using MSN Live Messenger User using mobile operator’s proprietary MIM interested in the service preferred a 6 Source: Capgemini TME Strategy Lab analysis; survey results of 300 mobile subscribers across the UK and France, flat-fee pricing model. December 2006.

Access to Existing PC-based IM Networks Usability and Availability of IM networks, low ease of use and Mobile carriers in Europe have Advanced Features poor awareness. Clearly, operators developed their own proprietary Issues relating to the user experience, need to address these concerns in order mobile IM services that limit users to such as incompatible handsets, to drive service adoption and usage. the operator’s subscriber community. complicated interfaces and restricted However, the Capgemini survey features, constitute a further barrier to Evaluation of Operators’ Mobile highlights that the popularity of such uptake. Nearly one fifth (19%) of IM Initiatives services among consumers is low. consumers interested in mobile IM Operators in Europe have followed a Most respondents would prefer to use indicated that they do not use the rather cautious approach to mobile IM the same IM service as they do on a service because their handset does not until recently. They have developed PC. Access to the existing PC-based support it, while 8% perceived mobile proprietary interfaces that lack IM networks such as MSN and Yahoo! IM as too complicated to use. interoperability with existing PC- messengers was, in fact, the top based IM networks and have opted reason given for interest in mobile IM, Users also expressed the desire to for usage-based pricing. As our survey with almost half (49%) of the continue to access the same range of highlights, this has created key barriers interested respondents citing it as a features on mobile IM as are currently to mobile IM adoption. In the meantime, factor. Among the mobile IM users available on the fixed client, such as handset vendors and Internet players surveyed, respondents who had access integrated access to email, file and are making significant strides in to their PC-based IM service logged in photo sharing, and group messaging. offering instant messaging on the more frequently, and sent more For example, 25% of those interested mobile device. Yahoo!, for example, messages, than those using operators’ in mobile IM said they want to use it has partnered with Motorola, Nokia and proprietary offerings. For example, for file or photo sharing. However, RIM to have its mobile application more than half (57%) of users using this feature is currently unavailable on suite (Yahoo! Go) pre-loaded on their MSN messenger on their mobile existing mobile IM services. devices. However, recently mobile accessed the service once a week or operators have started to re-think more, compared with only 32% of Our survey results demonstrate that their approaches to IM and are those on proprietary platforms. Usage mobile IM continues to present a making some headway in providing

5 “Usage-based tariff plans” refers to charging by time (per minute of use), per message or data traffic exchanged (per KB). 6 “Flat fee” refers to unlimited usage for a flat monthly subscription fee.

22 an enhanced instant messaging Our consumer survey also indicated ?12 for unlimited IM and email. experience on the handset. In this that price is a major deterrent for Orange France, however, has section, we evaluate how recent mobile IM adoption. Only one fifth of launched an affordable mobile IM operator initiatives will remove the potential mobile IM users is willing to subscription package for ?4/month for barriers to mobile IM adoption. spend more than ?5 a month. unlimited usage. Orange subscribers However, most operator offerings, and can also opt for a daily flat-fee rate of Pricing especially the usage-based models, are ?0.90, more suited to relatively Prior to 2005, all the major European likely to result in particularly high infrequent users. Some players have mobile IM services were charged by bills (see Figure 3). While plain text broken the mold in 2006 by offering usage, and this continues to be the instant messages create low data mobile IM for no extra charge. For case for several operators. In usage- traffic, the application and presence example, Ten Mobile (France) and 3 based tariff plans, consumers are updates generate much more traffic, UK offer MSN Messenger free to charged per message, per kilobyte of leading to high costs for consumers. certain pay monthly customers. data or per time unit. Users of SFR and Orange Messengers in France, for Though flat-fee offerings tend to work Access to Existing PC-based IM

example, are charged ?0.10 per out cheaper than usage-based pricing, Networks message sent, while Telefónica’s they are still more than the ?5/month Prior to 2005, European operators service costs ?0.30 for 5 minutes’ consumers are willing to pay. For had mainly developed proprietary,

access.7 Usage-based charging models, example, Telenor charges ?5.99 a mobile-to-mobile IM solutions. however, are not particularly month for unlimited usage of MSN Vodafone UK, and SFR and Orange in appealing to consumers since instant Messenger while Swisscom charges France, for example, all launched their own IM services between 2002 “ and 2004. US operators, on the other hand, launched mobile IM in partnership with Internet players such A majority of consumers as Yahoo! and MSN. This helped to drive mobile IM in the US markets with penetration levels reaching 7.5% are INTERESTED IN MOBILE IM and in 2006, more than double the UK, “are willing to pay for it. France and Germany. d e s

messaging is typically a more a Figure 3: Monthly Mobile IM Spend for Select Operator Offerings (Based on 350 conversational application than SMS; B Messages or 1.5 MB Data Exchange, January 2007) for example, in 2005 an average user e g

sent 350 IM messages per month from a a PC compared with 95 texts over a s Plan Launched In: 8 U 2005 28.10 mobile phone. Consumers are also Per KB likely to find it hard to predict their 2007 216.50

monthly spend since IM usage is often 2005 210.50 spontaneous with users indulging in Per message 2 idle chit-chat. Moreover, PC-based IM 2005 17.50 has set consumer expectation for 2007 24.00

unlimited usage. e 2005 25.00 e

F 2006 25.99

t Unlimited However, the flat-fee model is gaining data traffic a ground, with several operators l 2006 26.00 F adopting this type of pricing in 2005 2006 210.00

and 2006. Swisscom, 3 UK and 2005 212.00 Orange France, for example, have launched flat-fee offers, giving

consumers access to unlimited Source: Capgemini TME Strategy Lab analysis. Monthly bill calculation for message-based pricing assumes usage of 350 IM messages sent and received per month. For calculation on data traffic (KB) based pricing, presence and application mobile IM. generated traffic is assumed to be 1.5 MB overall . Note: Swisscom flat fee includes email access. Monthly costs for Orange offer (under unlimited data traffic) takes into account the monthly bundle costs of ?4/month.

7 Company websites. 8 Radicati Group, “Instant Messaging Market to Reach 867 Million Accounts by 2005,” June 2005; Internet World Statistics, www.internetworldstats.com.

17 Lately there has been a shift in installation and login. Nokia, for flat-rate charging models and prices approach among operators in Europe example, embeds Yahoo! IM clients on are likely to come down in the (see Figure 4). The trend towards some of its handsets, while 3 UK medium term, especially as data tariffs y

giving r access to existing PC-based IM customers can download a Yahoo! or reduce. Operator initiatives have a

networkst on the mobile device has MSN mobile IM client in a small started improving the user experience, e

recentlyi gained significant impetus number of clicks. Once the client is making the service more convenient with twor of Europe’s largest operators, installed, users have to enter their

p and easy to use. Finally, consumer

o awareness of mobile IM is likely to r

P increase as operators step up

Figure 4: Mobile IM LaunchesMobile IM byLa uncEuropeanhes by Eur Operatorsopean Operators marketing efforts to push mobile data services and online players promote 2005 2006 2007 n 2002–2004 their mobile products more aggressively. o i

s Mobile IM Forecast and Impact n

e on the Messaging Market t

x The stage seems to be set for mobile

e IM uptake in Europe, now that operators are overcoming barriers M I such as interoperability with existing

d PC-based IM networks and pricing. e

x Assuming these developments i

F continue apace, we have evaluated how mobile IM penetration is likely to Source: Capgemini TME Strategy Lab analysis. grow over the next 5 years. What will increasing mobile IM use mean for existing messaging services such as Vodafone and Orange, switching from login ID and password (which is the SMS and MMS? Are operators right to their proprietary platforms to a same as on the PC) only once and can fear that mobile IM will substitute partnership approach with MSN. subsequently launch the service SMS and MMS usage and lead to Orange and Microsoft launched a co- through a single press of a button on overall cannibalization of messaging branded fixed and mobile IM service the menu. Furthermore, revenues? In light of the survey findings, called “Orange Messenger by developments are also underway to we have analyzed the likely impact on Windows Live” in December 2006. integrate IM with other core mobile overall messaging market revenues. The service can be accessed by features. Vodafone, for instance, existing Windows Live Messenger recently announced plans to integrate Mobile IM Forecasts users and offers the same functionality the presence function into the address Our survey indicates that mobile IM is as the original Microsoft platform, but book of mobile phones, which will generally of interest to European with Orange branding and content. improve user experience. However, consumers, with more than 50% of Vodafone announced a similar advanced features such as group those respondents aware of the service agreement with Microsoft and Yahoo! messaging, and picture and file expressing readiness to use it. in February 2007. In the past 2 years, sharing are not widely available on Moreover, text-based communications Bouygues (France), Wind (Italy) and 3 mobile handsets. is becoming increasingly popular. UK have also partnered with Microsoft For example, in France, 50% of a and/or Yahoo! to launch mobile With these new developments, we consumer’s time spent on versions of their instant messengers. expect that most of the key barriers to communication activities is taken up adoption will be resolved within the by SMS, IM and email, up from 8% in Usability and Availability of next few years. The issue of access to 2000.9 IM is also surpassing email in Advanced Features existing PC-based IM networks is popularity on the PC, especially with Operators and handset manufacturers already being addressed by the trend the younger online population: On are working on making mobile IM towards partnership with online average, 14–21 year olds in the UK easier to use by ensuring simple players. Many operators are adopting spend almost 50% of their online time

9 Capgemini estimates based on Arcep reports, IDATE, “Telecom 2.0: Emerging Usages and Implications for Carriers,” June 2006; MSN Report, “Europe’s Online Youth,” 2006

24 on IM and only 13–15% on email.10 over the mobile phone. The forecasts messages sent per day in 2006, to Such trends lay the foundation for also take into account our expectation nearly seventeen messages a day in mobile IM to gain popularity. that Internet access over the mobile 2012. The growth in usage is phone will become increasingly expected to stem from higher Our analysis indicates that, in the UK, common, reaching nearly 60% adoption of mobile IM creating a uptake of mobile IM will accelerate penetration in the UK by 2012. network effect, leading to more rapidly over the next 5 years, with This will be aided by the increasing opportunities to interact with both the penetration growing from 2% of active availability of 3G-enabled handsets mobile and PC communities. PC- mobile users in 2007 to more than and the use of more advanced phones based IM usage grew from an average 30% in 2012 (see Figure 5). By that by consumers. These will help to of two messages sent per online user point, there will be approximately 16 overcome the inconvenience of small per day in 2001 to nearly twelve million consumers using mobile IM in screens and keypads as well as enable messages in 2005 worldwide as the the UK.11 These growth prospects are better application performance due to community grew from 45 million to based on a scenario that envisages higher processing power. nearly 300 million active accounts.12 most operators moving into The potential for mobile IM usage to partnerships with Internet players, the Increasing adoption of mobile IM will grow is also reflected in the survey availability of affordable flat-fee tariffs, also be accompanied by higher usage. findings where current users report integration of photo and file sharing We expect mobile IM subscribers to sending up to fifteen messages a day features, and consumers’ growing use the service extensively, increasing when the service is free of charge. awareness and comfort with using IM usage from an average of three

Figure 5: Mobile IM User Forecast in the UK (Million and % of Active Users)

32%

16.2 CAGR 63% 20%

12% 10.0 8% 5% 6.2 4% 2% 4.1 2.6 1.9 0.8 2006 2007 2008 2009 20102011 2012

Source: Capgemini TME StrategyNumber Lab analysis.of mobil e IM users Mobile IM user penetration (% of active mobile subscribers)

10 The Guardian, “Young Blog Their Way to a Publishing Revolution,” 7 October 2005. 11 We have focused on the UK market for forecasting mobile IM users and usage based on consumer survey findings as well as secondary market research data. 12 Capgemini TME Strategy Lab estimates; Internet Society 2002; Radicati Group, “Instant Messaging Market to Reach 867 Million Accounts by 2005,” June 2005.

25 Impact of Mobile IM on the Overall always accessible over fixed or mobile be non-intrusive and not enter into a Messaging Market IM, creating more usage opportunities conversation, unlike IM, which is an We expect the SMS usage substitution for IM and impacting SMS. Moreover, inherently conversational application. rate to increase from 3% in 2007 to if we look at what potential users said 25% by 2012 for mobile IM users (see in the survey, an SMS substitution rate We expect mobile IM to replace 50% Figure 6). The near-term impact will of around 10–15% seems likely, once of MMS and video messaging traffic be insignificant due to low mobile IM the various consumer concerns have by 2012, double that of SMS. This is penetration, the high price of the been addressed. Additionally, nearly in a scenario where features such as service and poor user experience. SMS 15% of respondents indicated that photo and file sharing are widely traffic substitution reported by current they anticipate SMS usage substitution available over the mobile IM client mobile IM users in our survey is also of 20–30% due to IM. and handset limitations are overcome low, with nearly 80% expecting no due to high penetration of more impact. Operators that have launched However, we do not anticipate mobile advanced phones. Moreover, we the service such as 3 UK and Amena IM to completely replace SMS and the expect mobile IM to address many of in Spain also report that mobile IM two services are expected to continue the shortcomings associated with uptake has not led to a decline in SMS to serve different usage needs (see MMS and video messaging, which has usage so far. This is possibly because Figure 7). SMS’s popularity will inhibited uptake of these services. The most subscribers currently use the continue due to its widespread use as average user in Europe, for instance, service to communicate with the PC- well as convenient and familiar sends less than one MMS per month. based IM community while SMS remains interface. Moreover, IM will not be This low adoption is attributed to popular for mobile-to-mobile texting. able to address the need to issues of pricing and user communicate with those people unfamiliarity with using the service. On the other hand, the standardized and familiar interface, suitably Figure 6: SMS Traffic Substitution Expected Due to Mobile IM (% of SMS Messages adapted to the mobile handset, is Substituted, UK)13 expected to attract users to mobile IM. The price differences between flat-fee •Mobile Internet usage becomes common mobile IM and relatively expensive •Mobile IM base reaches critical mass multimedia messaging services will of 30% of active mobile subscribers, creating a network effect also have an effect. Therefore, we expect mobile IM to significantly impact MMS and video messaging usage.

25% However, despite the substitution, 19% mobile IM will grow overall mobile messaging traffic, from 3 billion per • Low mobile IM adoption month in 2007 to 12 billion in 2012 SMS continues to be popular for • 12% in the UK (see Figure 8). IM will mobile-mobile texting represent nearly 65% of this traffic in 8% • Mobile IM adoption gains 2012, growing at a CAGR of 100% momentum as most barriers to adoption are resolved between 2007 and 2012, compared 5% • User experience improves with with a CAGR of 2% and 34% over the 3% higher penetration of more advanced handsets same period registered by SMS and MMS respectively. 2007 2008 2009 20102011 2012 In terms of revenues, we expect Source: Capgemini TME Strategy Lab analysis. mobile IM to offset the loss incurred from SMS, MMS and video messaging Going forward, SMS substitution will outside the circle of close friends and substitution (see Figure 9). SMS and increase as mobile IM adoption and family who are unlikely to be on a MMS will sustain up to 10% and 30% usage gains momentum, creating a user’s buddy list. SMS will also revenue loss respectively due to network effect. Hence, users will find continue to be the preferred mobile IM, amounting to nearly more and more of their contacts messaging service when users wish to ?650m in 2012. IM revenues, on the

13 The forecast model considers overall market factors as well as consumer specified drivers and restraints from the survey. Overall market factors such as handset pricing, 3G penetration, uptake of mobile Internet, email, MMS etc. are used to derive a base mobile IM user and usage forecast. Subsequently, based on consumer responses on the importance of factors such as operator pricing, interoperability, user experience and marketing, we arrived at how mobile IM adoption could be further impacted. Both overall market factors and consumer survey findings are, therefore, considered to arrive at the final forecast.

26 Figure 7: Mobile IM and SMS Will Continue to Serve Different Usage Needs

SMS Mobile IM

ß Notify someone (response time can exceed several hours) ß Enter into a real-time conversation (response time Context expected <5min) ß Avoid a conversation ß Avoid being intrusive

ß Communicate with any mobile user ß Communicate with users in buddy list

Message ß Can be used to communicate easily ß Users tend to communicate mainly with a buddy Recipients with strangers list comprising known friends and family ß Can be used for infrequent contact ß Users are unwilling to accept people they do not with acquaintances know well as contacts

ß Casual or professional messaging Nature of ß Casual messaging mainly Exchange ß Time to reflect on content of message

Source: Capgemini TME Strategy Lab analysis.

Figure 8: Estimated Overall Mobile Figure 9: Estimated Mobile IM Revenues Generated Compared with Revenue Loss Messaging Traffic in the UK (Million of Other Messaging Services in the UK (?m per Annum) Messages per Month)

11,874 IM revenue 788 Video Messaging revenue loss MMS revenue loss 8,185 IM SMS revenue loss 480

297 199 Video 162 Messaging 122 30 3,227 541 MMS 254 -7 -16 124 -45 -124

-299 2,846 3,118 SMS

-625 2007 2012 2007 2008 2009 2010 2011 2012 Source: Capgemini TME Strategy Lab analysis.

Source: Capgemini TME Strategy Lab analysis. other hand, are expected to reach nearly ?800m in 2012, leading to a net revenue gain of ?150m for mobile operators.14 of mobile messaging to some degree, below par due to low speeds as well the net effect on operator revenues is as the limited range of services In conclusion, we expect mobile IM expected to be positive. available on operators’ “walled- uptake to increase rapidly in the next garden” portals. However, with high- 5 years, with particularly strong Recommendations for Mobile speed access a closer reality now than growth from 2010, assuming that most Operators before and operators opening up barriers to adoption are addressed in Mobile operators have so far struggled Internet access on the handset, the the wake of operator initiatives and to make money out of services other stage is set for the mobile device to technological advances. Although than voice and SMS. The mobile emerge as a hub of communication mobile IM will substitute other forms Internet experience has so far been and entertainment. Operators

14 Consumer survey findings and current tariff plans indicate an average cost of ?0.04/message. This price per message has been multiplied by the traffic forecast to calculate mobile IM revenues in 2007. To calculate mobile IM revenues from 2009 onwards, we have assumed that most operators will offer flat fee tariffs, at around ?4/month, in line with consumer expectations.

27 currently have an opportunity to advertising opportunities by managing browsing, email and IM access participate extensively in how the banners and pop-ups on the available at affordable monthly flat mobile Internet landscape shapes up. desktop client. fees will help to create significant However, they may also risk failing to customer value, appealing to a large capitalize on this opportunity, losing Mobile operators can also drive base of current subscribers and out to online players, who are trying to development to enable a better user increase overall mobile Internet replicate the edge they have on the PC. experience and bring in value to the penetration. NTT DoCoMo and KDDI partnership. Operators can work with in Japan, for example, have The same holds true for mobile IM, platform providers such as successfully implemented such a where operators are likely to lose out Fastmobile, which provides customers strategy with unlimited browsing and to online players if they restrict with a simplified way of accessing and email available to users at a flat interoperability with the existing fixed using messaging services across SMS, monthly subscription charge (nearly IM community and price it too high. MMS, email and IM. Fastmobile’s 50% lower than the unlimited The good news is that some operators solution also integrates features such browsing plans available in Europe). are making the right moves in as mailboxes and address books The low-cost, flat-rate tariff plans have partnering with online players, across all messaging services, enabling helped the Japanese operators to drive launching flat-fee pricing and a single interface to access various email usage amongst its subscriber investing in development of a better applications. base to more than 80% penetration. user experience, as well as educating KDDI, in fact, saw its data ARPU the customer on advantages and use II. Pricing Options more than double after introduction of the service. However, this approach Higher than expected substitution of of the low-cost flat-free tariffs. 3 UK does come with certain risks of brand other messaging services could lead to has recently launched a price plan dilution and existing messaging a net revenue loss for operators. If an along the same lines, allowing users to revenue cannibalization. But operators overall 50% substitution occurs across access unlimited Internet and mobile can mitigate these risks to some extent SMS, MMS and video messaging IM for £5 on top of standard voice if they jointly develop the service with usage, operators could face a net ?50 and SMS tariff plans. online partners and consider pricing million loss in messaging revenues. options that will drive overall ARPU While we do not believe this scenario Operators can also look at options for uplift. is very likely, we propose some bundling IM with social networking options for operators to mitigate such services, which are gaining popularity I. Joint Development of Mobile IM a risk. For example, mobile providers on the mobile Internet. For example, with Online Partners can consider offering different mobile users could be allowed to exchange as The partnership approach is not IM versions at different prices. A well as upload pictures and videos to without risks. Operators may have basic, text-only version can be offered concerns about their brand being with an option to upgrade to include overshadowed if their mobile IM file sharing. For instance, charging ?4 service is provided by strong Internet for the basic version and an additional players. There is also the potential for ?1 for file-sharing features would help operators to miss out on additional operators to stay revenue positive in revenue streams if the online player this scenario. Furthermore, since markets other content and services photo and file sharing consume directly to the mobile users. higher bandwidth, operators can justify the premium for these features. In order to mitigate these risks and Moreover, MMS and video messaging retain control, operators should follow are currently highly priced on a per a joint development approach. event basis, resulting in low service Consider Orange’s partnership with uptake and limited revenues. In Microsoft: Orange co-brands the contrast, an affordable flat-fee mobile service, ensuring the IM application IM offer may appeal to consumers, retains the company’s trademark look driving higher penetration and, hence, and feel. Orange also provides content higher revenues. and additional services such as ringtones and logos, which can be We suggest that operators also accessed over the IM client on the consider pricing options such as desktop. It also capitalizes on IM’s bundling other Internet applications ability to attract user traffic to drive with IM. For example, making Web

28 WE DO NOT EXPECT IM to “ cannibalize SMS substantially as “they serve different needs.

their online profiles through the IM messaging revenues. By partnering technologies and business models. Jerome interface. With mobile social with existing fixed IM providers to is often called on to speak at industry networking already showing early develop co-branded fixed/mobile conferences/events on these and other signs of success, such a bundle could applications, operators can also retain telecom- and media-related topics. Prior create significant value to the control over additional revenue to joining the Lab, Jerome led a variety of consumer and help drive uptake as streams while meeting growing strategy projects in the telecom sector, well as revenues. consumer demand for access to focusing particularly on the mobile, Internet-based services. broadband and wholesale segments. He is based in London. In conclusion, while mobile IM has struggled to take off so far, it has the Jerome Buvat is the Global Head of the Marc Beijn is a senior consultant in potential to become a successful TME Strategy Lab. He recently led a Capgemini’s TME practice in Benelux. service for operators if it is positioned variety of studies including an analysis of His recent work includes research on correctly. Although mobile IM will fixed-mobile convergence services and the innovation strategies and fixed-mobile have some erosive effect on other development of home gateways. He convergence. He has worked on a types of messaging, careful pricing closely follows the media market as well number of strategy and marketing strategies can deliver greater overall as the emergence of alternative projects in mobile and broadband areas. He is based in Utrecht.

Rahul Prabhakar is a senior consultant in the TME Strategy Lab. His recent research includes an analysis of innovative services in Japan and South Korea as well as the development of MVNOs in Europe. His current work focuses on the Chinese telecom and media market. Prior to joining the Lab, Rahul worked in India’s leading ICT company as a solution architect and key account manager, designing and selling of enterprise connectivity and security solutions. He is based in Mumbai.

29 Developing a Successful Digital Media Strategy by Jason Forbes, James Rooke and Della Huff

Abstract: After many false starts, digital entertainment may be coming of age but key challenges still remain. Emerging case studies suggest that the winners and losers will be determined by how well they simultaneously address three critical factors: richness of Content, breadth and depth of Capability, and understanding of the Consumer. Ultimately, the ability to enable the end consumer goal of “any content, through, any channel, on any device, at any time” will be measured by how successfully the “3 C’s” are understood and integrated. This article discusses lessons to date from the digital distribution market and presents highlights of Capgemini’s survey of consumers’ digital media preferences. The responses demonstrate that consumers’ appetite for digital media is strong. The winners will be those with the right set of capabilities to bridge the gap between consumer expectation and current reality.

Though digital distribution has gained However, given the lessons learned a foothold in the entertainment from the music industry and having industry, the market remains at the recently successfully tested a number early stages of a shift from physical to of different distribution models, digital product consumption. Digital digital video distribution is sales still only represent around 10% increasingly being considered a of total sales1 in music and less than complimentary, not cannibalistic 2% in video2. Digital sales growth channel. In a January 2007 interview, forecasts have also recently been Bob Iger, CEO of Disney, noted that revised down (see Figure 1). “Pirates of the Caribbean and Cars were Responsibility for the low digital take two of the most downloaded films on up has generally been placed on the iTunes when we launched movies content providers, reluctant to release there in October, yet those two content for digital distribution. Their movies did extremely well in their reasons include the fear that this would sell-through DVD business.”3 cannibalize their highly profitable physical businesses, the importance of protecting their lucrative bricks-and- mortar–retailer relationships and concern over digital piracy.

1 International Federation of the Phonographic Industry, January 2007. 2 Capgemini estimates based on estimated US video download sales in 2006. 3 ft.com, “View from the Top: Bob Iger,” 31 January 2007.

24 Similarly, some TV networks have seen an increase in audience figures Figure 1: US Market Video Sell-Through Forecasts ($m, 2006–2009) for shows that are made available digitally, demonstrating the power of a Kagan Digital Forecast, 2005 multi-channel strategy; for instance, the US version of The Office Revised TDG Digital Forecast, 2007 significantly increased its TV ratings after episodes were made available on iTunes.4 YouTube’s recent deals with 2,592 NBC and the BBC, Joost and News Corp attest to the growing acceptance 1,916 that content providers must embrace consumer demand for digital products 1,430 and so monetize digital content 986 through emerging legal channels. 786.9

These realizations and the increasing 337.5 focus on digital distribution as a core 27.1 91 component of overall strategy has 2006 2007 2008 2009 resulted in a flurry of M&A activity in the digital sector with online media Source: 2005 Forecasts from Kagan, State of Home Entertainment 2005; Revised digital forecasts from Adams Media Research 2007. deals worth more than $8.9bn5 in the US. Underpinning this surge is not only a belief in latent consumer demand, but the recognition that financial markets are rewarding astute Capgemini’s 3 C’s framework— Second, the timing of content digital acquisitions and growth, even “Content, Capability and Consumer” availability must be considered: Can if monetization and financial returns (see Figure 2)—provides a means for content be accessed more quickly remain nascent in acquisition cases identifying some of the key reasons through another source or channel? If like News Corp’s of MySpace. behind the current market restraint it can, consumers may again sidestep and the factors that media companies legal channels in favor of illegal ones. In the meantime, the digital must address. In nearly every case, entertainment space is becoming more one “C” alone will not be enough to Finally, content pricing: How much crowded with traditional and be successful, emphasizing the need does each title cost and how does this emerging competitors as content to do all three things comprehensively compare to alternatives, especially providers, distributors, retailers, as opposed to just one thing quickly. physical products like CDs and technology players and consumer DVDs? Prices must address consumer electronics companies place their Content, be it music, publishing, perception of the value of digital strategic bets. But many questions video or games, is the foundation of media compared to physical products. remain as to how compelling a given the entertainment value chain. An At the moment, many consumers proposition really is.6 In this article, effective digital content offering must think prices are too high relative to Capgemini’s Media & Entertainment typically address three key parameters. the value of the product,7 limiting take practice assesses the key factors that up. Consumers may be reluctant to underpin a best-in-class proposition First, catalogs must be extensive pay the same or more than the cost of and recommends some key steps to enough to dissuade consumers from a DVD for a digital version that lacks implementing a successful digital strategy. searching for more comprehensive special features and cannot be shared alternatives (including illegal ones). seamlessly across devices. Frustrated What Are the Key Success A key challenge here remains by the high prices and limited content Factors for Digital Distribution? intellectual property management, available from legal sources, some Despite the recent growth, uptake of with each content provider typically consumers are turning to peer-to-peer digital distribution remains limited in facing huge complexities (e.g. music (P2P) sites for video content: About 6 the mainstream with significant clearances, talent clearances, rights for million Internet-enabled US barriers to widespread adoption. new digital media) and so limiting the households downloaded video files ability to provision legal content. from a P2P service for free in Q3

4 tvweek.com, “NBC: iPod Boosts Prime Time,” 16 January 2006. 5 Jordan Edmiston Group, “2006 Media and Information Industries M&A Overview,” 10 January 2007. 6 Seeking Alpha, “Netflix’s Long-Awaited Launch of VoD: Slightly Disappointing,” January 2007. 7 Capgemini Consumer Needs Analysis, May 2006.

25 Figure 2: Capgemini’s 3 C’s Framework This change in interaction has been profound, with many Internet users now spending as much time online as pabil 10 Ca ity watching television. Clearly something had to give and indeed • Distribution Internet users spending more than 10 • Devices & Equipment hours per week reported a 65% decline in television consumption.11 This loss of “control” for traditional linear programming has been met t C n • TV & Movies u with different approaches by old and ’s s e • Music 3C t t new media players, all with different o

n • Gaming m

o • User-Generated • Existing Demand perspectives on consumer needs and e

C Content • Latent Demand

r how best to address them. • Publishing • Future Demand • Advertising Although a full understanding of consumers’ needs and behaviors might seem like a critical area of

Source: Capgemini analysis. focus, this is often not the case. The failure of many in the digital and broader entertainment space has often been caused by an inability to understand and address consumer needs on a satisfactory and timely 2006, compared to 1.2 million who its innovation in P2P distribution, as basis. For example, as recently as 8 paid to download a file. examples where gaps have been 2005, legal movie downloads through addressed. More broadly, falling Movielink cost as much as $29.99 All these issues are critical; leave device prices and bandwidth costs, with no major Hollywood titles them unresolved and piracy will device interoperability improvements, available.12 continue to flourish. increased penetration of time-shifting devices like DVRs and place-shifting In order to better understand Capability is the “glue” that links devices like Slingbox and Apple TV consumers’ evolving needs in digital content to consumers. It describes the are all indications of further entertainment, Capgemini recently ability to store, manage and distribute movement in the right direction. conducted studies across the US and content while providing users with Europe to determine consumer interest compelling ways to browse, discover, Despite this progress, capabilities are in a range of content types, be it music, purchase, consume and share. still far short of what is needed to gaming or video. Capability issues remain a significant enable the types of compelling barrier to mass-market adoption of consumer experiences that will digital entertainment. In particular, attract the mass market to digital lack of storage capacity, slow consumption. download times, restrictive DRM and compelling interfaces to navigate Consumer demand and technological content types are all challenging innovation have been the main drivers barriers to consumer adoption. of the entertainment market’s recent evolution from a one-way, passive While announcements like Apple and experience to a two-way, dynamic, EMI offering DRM free music at a participative relationship. The higher price9 signal how DRM may technologically empowered consumer come to be addressed at an industry is now increasingly creating and level, challenges like storage and interacting with content through a distribution offer capability gaps that number of channels that provide an individual players can exploit. Look alternative to traditional products, no further than TiVo’s innovation in competing for available set top box storage, or BitTorrent with entertainment time.

8 NPD Group, “Peer-to-Peer Digital Video Downloading Outpacing Legal Alternatives Five to One,” 20 December 2006. 9 ft.com, “EMI and Apple Agree iTunes Music Deal,” April 2007. 10 Vox, “Time Spent Online Catches up with Time Spent Watching TV,” February 2006. 11 New York Times, “Internet use Said to Cut into TV Viewing and Socializing,” 30 December 2004.

26

There is a large gap between stated consumer“ demand “ and CURRENT FORECASTED LEVELS of digital consumption.

The survey results suggest a large gap movie downloads15 bundled with download movies, “preferring to own between stated consumer demand and DVDs, there would be a substantial a physical DVD,” “not wanting to current forecasted levels of digital shift away from conventional DVD watch on a PC” and “download times” consumption. For example, 71% of sales. For content providers, broadband were the top three reasons in all four people in a $14bn US video DVD players and retailers, the implication countries surveyed.16 Worse still for market expressed an interest in is clear: Offer consumers the bundles existing players, complacency may no downloading recent movies (see they desire and you will take share longer be enough as a spate of new Figure 3). But with the current limited from your competitors; fail to do so competitors such as Joost and choice and poor user experience, TDG and share will be taken from you. Brightcove seek to address these gaps predicts only $91m will be spent on in consumer demand. Across legal movie downloads in the US for Critically, respondents indicated that countries, consumers in our survey 2007.13 Indeed, content types with capability-driven issues limited their expressed a significant appetite for some of the highest levels of interest interest in purchasing digital content. switching providers if alternatives like “Recent Movies” have until For respondents that did not could better meet demand (see Figure recently been one of the most poorly served. Even now, iTunes’ selection is still limited to a small subset of studios. Figure 3: Consumer Appetite for Media Downloads (% of Respondents) Consumers’ stated demand (what they say they will do) and actual demand Please rate your interest in purchasing the following types of audio and video content below that you can download to your PC or compatible device, transfer (what they actually consume), to other portable devices, and transfer to your TV through a special connection. however, can be very different. Definitely Interested Probably Interested Capgemini ran a conjoint analysis to determine preferences across different Recent Movies 27% 44% types of products. The results helped Music Tracks 29% 31% determine what level of substitution might occur in the video space, as Recent TV Shows 16% 40% well as the potential marketshare shift Classic Movies 13% 40% from the current video market if other types of digital and hybrid product Simple Video Games 17% 33% bundles were made available today. As Classic TV Shows 12% 35% can be seen in Figure 4, were Video 24% on Demand14 (VoD) and sell-through More Complex Games 17% Music Videos 12% 23%

Source: Capgemini Conjoint Survey, August 2006, n =1,797.

12 Apple Matters, “Movies Via the Net,” November 2002. 13 TDG, “Online Movie Downloads,” April 2007. 14 Video on Demand (VoD) is a pay-per-view, free, or subscription-based rental television service in which a viewer can order a movie from a menu on the TV using their remote control. It is delivered instantly to the television set for either instant viewing or viewing within a set time period (usually 24 hours), typically with the ability to pause, rewind, etc. The viewer does not own the movie. 15 A movie download is an electronic sell through (EST) copy of a movie, TV show, music video, etc. that can be downloaded from the Internet and played on various devices such as a PC, laptop, video iPod or PlayStation Portable. 16 Capgemini Conjoint Survey, August 2006.

27 5). Yet building a set of capabilities to Step 1: Define the Capability Suite by the desired levels of automation lock on to these new types of This first step requires a clear versus human interaction. consumer demand has proven far understanding of the core business from easy for many players. flows from content acquisition to final Capability definition can be a complex consumer support. In most cases, process, but partnering with existing Capability Deployment: How to though capability levels will vary, the expertise should make the process Execute a Digital Strategy capabilities themselves remain largely smoother. Pioneers in the digital space have consistent, as illustrated in Figure 6. begun to grasp the sheer complexity Step 2: Decide to Build, Partner or of defining and enabling the suite of Each of the capability blocks will Outsource capabilities required to construct a require a number of integrated Having defined the capabilities compelling digital entertainment elements, including processes and required, players must determine offering. Once a value proposition has policies to inform how the capability whether to build, partner or outsource been agreed, three steps are typically will be executed; technology in the with existing or new partners. needed for launching a digital form of infrastructure and Prioritizing each capability against its entertainment service: 1) Define the applications; and people in the form strategic importance and the likely capabilities required; 2) Decide of organization and skills. It is critical value:cost ratio can help inform whether to build, partner or to determine the optimal mix across potential ownership options for outsource; and 3) Develop a capability these three dimensions. For example, players (See Figure 7). Generally, and ownership roadmap. business processes will be informed strategic importance will often be company-specific, shaped by how integral a given capability is seen over time. For example, though Virgin Figure 4: US Video Market Breakdown (%, 2006) Media in the UK may see full ownership of the TV platform as being a core part of its proposition, Breakdown by Product Type Breakdown by Product Type—Actual Should Certain Bundles Be Available for retailers like Carrefour in France

Movie Download 0.1% or Target in the US, this capability VoD 9.4% VoD 6.3% may be seen as secondary in their Movie Download 1.1% Movie Download + DVD 4.7% overall strategy.

VoD + DVD 10.8% Borders Books’ (an American bookseller) use of Amazon.com in the

VoD + Movie US and FNAC’s (a French retailer) use Download 5.5% of Glowria’s on-demand entertainment platform in France are examples of players who have chosen an entire

Jewel Case Jewel Case capability platform provided by a DVD 90.5% DVD 71.6% partner instead of building it. Indeed, Wal-Mart’s recent announcement of a

Source: Capgemini Conjoint Survey, August 2006. Note: VoD = Video on Demand. video store enabled by Hewlett Packard17 reflects that, even for the larger players, the advantages of partnering can be substantial in minimizing costs while providing options for greater ownership in the future.

Step 3: Develop the Capability & Ownership Roadmap Defining what capabilities and functionality will be enabled, by when, and by whom will inform the business case for launch. However, the build, buy or ally decision is not a static one and will likely evolve over

17 Infoweb, “Wal-Mart Embraces Digital Video with HP Service”, February 2007.

28 time as the proposition and the Figure 5: Consumers’ Willingness to Switch Provider market matures. As the challenges associated with the 3 C’s are If a local cable, satellite or telecom provider began offering the following bundles, how likely would you be to switch providers in order to take advantage of a overcome, players will likely desire VoD/PPV + DVD offering? greater ownership of core capabilities Probably Switch Definitely Switch as revenue streams become more 61% 61% substantive. Target, for example, has 56% 55% signed a contract with one of its technology partners that explicitly 42% provides for capability ownership as 48% 34% the market takes off, signaling an end 42% to longer term contracts.

Recommendations for Industry 21% Players 19% 14% 13% With all this in mind, several US UK France Germany recommendations can be made for the

Source: Capgemini Conjoint Survey, August 2006. different types of player:

Content providers should concentrate on monetizing content across a wider Figure 6: Capability Suite Overview number of channels. Earlier fears of cross-channel cannibalization are Set up Operations Enablers proving to be largely overstated, and

Strategy Planning, in many cases digital distribution is Content Publishing and 3rd Party/SLA 1 Operations Mapping and 7 13 Category Management Management Business Modeling increasingly viewed as a complimentary channel. Making 2 Content Licensing 8 Product Lifecycle 14 Business Rules & Usage Management Management content available across multiple channels better addresses consumers’ Content “Encoding”/ Platform (TV, PC, demand for “any content, through any 3 Authoring, Preparation 9 Mobile) Digital Supply 15 Core Capability Training and Delivery Chain Hosting channel, at any time,” while

Financial Processing diversifying revenue streams and 3rd Party “Rich Media” Shopping Cart & Site 4 10 16 Management Licensing Integration & Reporting reducing dependency on any one specific channel. Continuing to shrink Digital Supply Chain Infrastructure & Network and Customer 17 Web Analytics 5 11 Management release windows may be another key Experience Set Up part of this strategy; despite concerns about revenue losses, the opposite Content Delivery Fulfillment Channel 18 Customer Support 6 Network Set Up 12 Management may in fact be true. An academic study in March 2007 by researchers

Source: Capgemini analysis. from the Cass Business School in London found that simultaneous theatrical, DVD, and VoD releases could increase US studio revenues by 16%.18

Cable and telecom providers should leverage the strength of the living room relationship in order to drive new revenue streams. First, propositions should be developed that leverage incumbent advantages including existing consumer billing relationships and control of the at-home TV viewing experience. Second, the existing Video on Demand service through the set top box should be used to offer innovative product bundles. For example, consumers

29 Figure 7: Capabilityl Ownership Framework o r t n o C High c i g e t a

r Partner Build t S

(Broadband Provider) f o

e

c Customer Support n a

t (Content Provider) r o

p Outsource Partner m I

Low High

Value:Cost Ratio

Source: Capgemini Ownership Framework, 2007.

could purchase a VoD title and have Merchandizing higher margin mid-tier the option to purchase a digital copy content or indeed offering ways to or DVD of the same title for a mash up user-generated content will bundled price. Third, the quadruple offer additional products to further play of cable, Internet, voice and improve economics. Critically, retailers mobile phone should be exploited to can cross-promote physical and offer cross-platform digital offerings electronic products (e.g. “Buy the PC such as a TV download with a mobile game and get a free level online” or streaming option. This strategy will “Buy the DVD, and for $3 get a digital prove important to drive uptake as copy online”) to educate and migrate cable and telecom companies move their customers online. The opposite towards a more integrated browse, is also true. Retailers can use their purchase, and viewing experience. online or impending Interactive TV This will take time due to the channels to drive traffic back to the technical limitations of deployed set stores with effective discounts, given top boxes and cable head ends, so the preference in many consumer driving products and services that segments for an in store experience.20 leverage new hardware and software deployments will become increasingly The current advantage retailers have important. Cross-platform offerings in subsidizing DVD and CD prices to that offer consumers attractive pricing drive traffic and sales in other bundles, integrated billing, and segments may continue in the digital connection to the TV may position space. If retailers can hook consumers cable and telecom players as viable if to the site via low prices for movies, not preferred alternatives to retailers games or music tracks, they can use for entertainment. an integrated shopping cart to encourage purchases of other, higher Retailers should employ digital margin products. It is unlikely that distribution offerings as part of a broader content and broadband providers will multi-product, multi-channel strategy. enjoy the benefits of this business With nearly 90% of music, video and model in the short term since they gaming content still being purchased lack retailer product breadth. As a in stores,19 retailers should direct or representative for Wal-Mart said, “self-cannibalize” the market toward “Today, downloads is the focus of the higher margin digital products. site but this is all about… evolving

18 Paidcontent.org: “Movie Studio Revenues Would Rise with Dual DVD/Theatrical Releases, Study Says,” 6 March 2007. 19 International Federation of the Phonographic Industry, January 2007. 20 Capgemini Consumer Needs Analysis, May 2006. 21 Paidcontent.org, “Interview with Kevin Swint, Divisional Merchandise Manager, Digital Media, Wal-Mart,” 6 February 2007.

30 Fears of CROSS-CHANNEL CANNIBALIZATION are “ largely overstated. ”

this business into a multi-channel, Meeting this demand, however, James Rooke is a manager in multi-format offering for our requires enabling an intricate set of Capgemini’s Media & Entertainment customers.”21 capabilities. For those entering the practice. He has over 7 years’ consulting space, the level of complexity and experience across clients in Europe and Conclusion associated costs are likely to prove North America. He specializes in digital Beyond the hype, the much talked of challenging. By leveraging partners, media and home entertainment. He is inflection point for digital will only be however, the definition and based in New York. reached if the current challenges can construction of the right capability be addressed. Fully addressing the suite can be greatly enhanced, but Della Huff is a consultant in Capgemini’s limitations surrounding the content, ownership and control should be Media & Entertainment practice. She capability and consumer dimensions carefully considered and allowed to specializes in consumer research in will enable new physical and digital evolve over time. For every player, the digital media and home entertainment. bundles—something that our research definition and delivery of a unique She is based in Los Angeles. shows consumers want. Though these value proposition that addresses preferences will evolve, the existing content, capability and consumer gaps reflect the immaturity of digital needs the most comprehensively—as distribution and consumers’ opposed to one capability the most associated concerns with content quickly—will be the key for driving availability, poor user experience, future success. technology capability issues and pricing levels. But bridge the gaps and Jason Forbes is a vice president for players across the entertainment strategy and transformation in landscape have an opportunity to tap Capgemini’s Media & Entertainment into this demand. How these are practice. He has over 11 years’ embraced will invariably be experience as a consultant and executive determined by which industry across clients in Europe, Asia and North segment (content provision, America. He specializes in digital media, distribution, retailer or technology) helping clients across the value chain a firm is primarily from and the address and exploit the challenges in associated advantages or digital transformation. He is based in disadvantages this entails. New York.

21 Paidcontent.org, “Interview with Kevin Swint, Divisional Merchandise Manager, Digital Media, Wal-Mart,” 6 February 2007.

31 Optimizing Telecom Operators’ Supply Chain Management by Jean-Pierre Fabre Bruot and Andrea D’Angelo

Abstract: Supply Chain Management (SCM) is an oft-neglected opportunity to decrease operating costs and improve strategic positioning. Today, operators are facing increasing complexity in managing the physical flow of devices. High volumes, rigid vendors, demanding customers, technical complexity and short device lifecycles put SCM under heavy pressure. However, optimized SCM can sustain sales, improve customer loyalty and significantly decrease operating costs—saving as much as ?10m–15m per year. This is why operators should not miss the opportunity to optimize their SCM operations and transform a management issue into a source of competitive advantage.

In today’s mature telco markets, advantage and profitability. Until now, revenue. Similarly, unsatisfactory after- maintaining profitability and customer operators have not recognized the sales performances with long repair bases is an increasingly challenging significance of effective SCM, yet if times or inefficient provisioning task. Traditionally, telco operators managed correctly it can be the key to processes may reduce traffic revenues mainly focused their efforts on sustaining customer acquisition and and lead to higher churn rates. optimizing marketing strategies and retention. Handsets are a key criterion sales operations. However, these levers in choosing a mobile carrier and Effective SCM is also critical to on their own are no longer enough to generally play a major role in building and cementing operators’ meet operators’ ambitious targets. In operators’ marketing campaigns. So distribution networks. Being able to their quest for improved clearly, ensuring that the right devices provide a superior logistics service to performances, telcos must now focus are available at the right retail outlet, dealers—for instance, enabling them their efforts on what has traditionally at the right time and in the right to minimize upfront orders, reduce been an equipment vendor issue: quantity is of paramount importance. stocks at points of sale and streamline Supply Chain Management (SCM)1. Any product shortage could lead to internal processes—is a key service lower traffic revenues and potential component and therefore a driver of Given the scope of the processes churn. In our experience, a stock dealer satisfaction and channel loyalty. involved, supply chain management is shortage of just 5% can cost a large increasingly driving competitive operator as much as ?100m in lost

1 We define Supply Chain Management as optimizing the end-to-end physical flow of devices/handsets, ensuring the efficient provisioning of both distribution channels and individuals, and managing reverse logistics and technical assistance.

32 In Capgemini’s experience it is not usually require orders to be placed in off for each customer segment is a uncommon to identify potential advance with confirmation at the major driver of both customer EBITDA benefits of as much as latest 8–12 weeks from expected satisfaction and operators’ profitability. ?10m–15m per year. However, delivery—well ahead of realistic optimizing telco operators’ SCM is a demand forecasting capabilities. In Business Dynamics complex task: Challenges such as the addition, uneven service, as well as The rapid pace of product innovation sheer volumes involved and the delayed and fragmented shipping, are and the devices’ increasing technical difficulty of forecasting stock demands fairly common, adding complexity to complexity put heavy pressure on accurately require careful consideration. inventory management. supply chain management. One of the Yet the magnitude of the potential main challenges of telco SCM relates benefits means that, despite the Customer Management to the limited accuracy of demand complexity, optimizing SCM should be On the customer side, operators’ forecasts. The device lifecycle is a major priority for telcos. major challenges are avoiding under- getting shorter, especially for mobile servicing high-value clients and over- handsets, whose average life is no In this article we analyze the key servicing low-value clients. Telco longer than 15–18 months, and sales challenges relating to supply chain operators’ client base is made up of a trends are heavily impacted by a management, explore improvement variety of different segments, each one continuous cycle of promotions. levers and recommend the best with specific usage patterns and Forecasting demand in this options for telcos. service expectations that impact SCM environment is becoming more and requirements, especially on the after- more complicated: in our experience, Key Challenges for Telecom sales side. For example, advanced best practices reach a forecasting Supply Chain Management users may expect to be able to install accuracy no higher than 70%. The Optimizing SCM in the telecom and reconfigure their home gateways high demand variance could be environment comes with some with limited assistance, while less compensated by a higher level of significant challenges. First, the sophisticated clients may require a inventory, but tight budget objectives volumes involved are huge. Large home installation. Similarly, mean scope is limited. Therefore, European mobile operators purchase unsophisticated customer segments logistics managers have a hard time and distribute 3–5 million devices a may consider a 10-day repair time for balancing the risk of shortage with the year, providing after-sales support to their mobile phone a reasonable delay, risk of over stock. 1–3% of the total client base—usually while a business user may find it in the tens of million users. totally unacceptable. On the other The rapid product and technology Broadband operators also distribute side, each customer has a different innovations also have an impact on several million Customer Premises value to the operator, determined by after-sales. New devices are generally Equipment units per year, especially their expected revenue/margin stream, based on less stable technologies and in the customer acquisition phase. regardless of their actual service require a higher level of assistance. In After-sales assistance for the latter is expectation. Identifying the ideal the first year of introduction, 3G even more demanding because service-level versus cost-to-serve trade handsets experienced a return rate operators are usually the only identifiable point of contact to customers, whereas mobile operators Figure 1: Key Drivers of Supply Chain Management Complexity can rely on manufacturers’ assistance networks. External drivers Internal drivers

Manufacturers’ Operators’ Internal Processes Customer Business Dynamics On top of the large volumes, several Constraints Management Positioning and Organization external and internal drivers ßßßTight manufacturers’ Many customer Increased pace of ßWide range of: ß Logistics department production scheduling: segments with different product launch: ß Devices does not manage all contribute to shape a challenging ß Longer lead time usage patterns ß Shorter lifecycle the levers relevant to ß Distribution channels its performances: SCM framework, specific to operators ß Need for accurate ß Uneven customer ß Promotions planning value for operators ß Commercial policies ß Demand forecast and habits ß Limited flexibility ß Higher after-sales ß Purchasing (see Figure 1). ß Service is becoming agreement and to modify orders return rate due to one of the main device complexity schedules competitive drivers ß Uneven service level: ß Increased pressure ß End-to-End Supply Manufacturers’ Constraints ß Low delivery accuracy on margins Chain Management On the supply side, operators have to ß Potential shipment (SCM) is complex of faulty devices contend with device manufacturers’ tight production schedules, usually based on a “production-to-order” Supply Chain Management Characteristics

Suppliers Difficult Range of Range of Cost Dynamic Wide range of Complexity of approach and characterized by little Customer flexibility and long lead times. Also to Control Segments Services Pressure Market devices/channels End-to-End SCM for newer models production capacity is limited. Therefore, manufacturers Source: Capgemini analysis.

33 five to seven times higher than legacy blueprint, operations and demand forecast calendar, a delivery- consolidated 2G handsets, with up to policies. However it is possible to reliability SLA—including a penalty 15% of mobile handsets returned by identify a set of guidelines that in our for each day of delay—and a handset- consumers. Plus of course, the newer experience are applicable to most quality SLA. the technology, the less familiar the telco operators (see Figure 2). consumer will be with how to use it. Cost-Conscious Service Orientation Supplier Relationship Management Successful operators are able to Operators’ Positioning Suppliers’ rigidity is largely “rightsize” the service level they Operators’ service and commercial unavoidable. Changing major orders provide to their customer base by policies place additional burden on close to the shipment date will only shaping it to the various client SCM. Most operators serve the market lead to “best effort” deliveries, with a segments’ actual requirements and through a variety of different sales high probability of delays or partial value. The first implication of this channels, each one with specific shipments. Successful operators work approach is the need to define, requirements, procedures and service with vendors to optimize their discuss and implement a segmented levels. This often leads to fragmented operations by sharing their forecasts service policy; most operators either logistics and after-sales operations, and implementing collaborative follow an undifferentiated approach— making it difficult to achieve planning models. Collaborating in this same service to every customer—or economies of scale and increasing way should enable some degree of differentiate customers based on the operational complexity. Similarly, order flexibility. At the same time, it is devices they purchase, regardless of marketing departments tend to offer best practice to strictly monitor the true customer value. the widest possible range of devices, suppliers’ performances in order to regardless of actual rotation indices, enforce delivery reliability, applying The next step is to define the right which leads to an excessive number of penalties when appropriate. An level of investment per segment based Stock Keeping Units (SKUs) to be effective supplier relationship model on the cost to serve. Figure 3 shows a managed. This negatively impacts implies that supplier contracts should conceptual example of this approach, stock levels, complicates logistics not only be negotiated on price applied to after-sales. Some devices processes and increases the likelihood conditions but should also include have such a low unit value that the of shortages. precise service level agreements (SLAs). best solution is to substitute them instead of bearing the logistics and Internal Processes and Organization Such agreements between operators technical cost of a repair (A). This is Poor coordination between the and manufacturers are not true for entry-level DSL modems, marketing, purchasing and logistics uncommon. For instance, a major which cost no more than ?10–15. departments is a common factor in Dutch operator systematically When the customer value is under-performing SCM. Logistics negotiates detailed supply contracts low/average (as with most consumer managers are not in control of the with its vendors. Contracts specify a clients) and the device value is higher main levers that impact their performances: demand and supply. Demand forecasts are usually performed by marketing functions, which also decide price lists, Figure 2: Supply Chain Management Model Guidelines promotions and communication External factors Internal factors campaigns. Supplier management is Manufacturer’s Customer Business Operators’ Internal Processes generally a responsibility of Constraints Management Dynamics Positioning and Organization purchasing functions. Unsurprisingly, Suppliers Difficult Range of Range of Cost Dynamic Wide range of Complexity of Customer inadequate coordination between to Control Segments Services Pressure Market devices/channels End-to-End SCM these three functions will usually lead to poorer service and higher costs. In Supply Chain Management model guidelines Supplier Relationship Cost-Conscious Operational Flexibility and End-to-End Process many cases, operators lack shared Management Service Orientation Excellence Reactivity of SCM Control objectives or metrics that would drive ß “Sensitive” ß Pay due attention to ß Remove policies and ß Alternative means to ß Strict collaboration collaboration to help service practices that lead to cover a dynamic with “internal suppliers improve inefficiency range of cases clients” and with Differentiate service a more collaborative approach to SCM. their service ß Purchasing based on: ß Limit the number of ß Decision-making ß Monitoring of ß Customer value operational models framework to choose ß End-to-End suppliers’ the most effective/ information flow ß Customer ß Define and apply performances, efficient approach sharing and control What Does a Successful Telco expectation of efficiency-oriented applying penalties if for each specific case service SCM Model Look Like? needed procedures Each operator has specific challenges to face in order to design an Source: Capgemini analysis. optimized Supply Chain Management model, depending on the competitive environment, market conditions and

34 than repair costs, the “basic” repair process can apply, with a repair time Figure 3: Conceptual Example of Segmented After-Sales Policy of 1–2 weeks (D). For higher value clients, such as business users, the High standard repair time may not be acceptable because of service level expectations and potential traffic B C losses. In this case most operators Swap “Top End” “swap” the device, i.e. substitute the Repair damaged device with a new/ A Customer refurbished one, cutting repair times Value Substitute1 to 1–3 days (B). However, for very expensive devices the carrying cost of D a dedicated stock swap may be too “Basic” high, in which case operators can Repair negotiate accelerated lanes with their repair hubs to shorten repair time and provide a similar service (C). Low Low Device Value High A UK mobile operator recently achieved a ?1.1m saving per year by Source: Capgemini analysis. 1 Option to be negotiated with supplier. optimizing its exchange-repair ratio, limiting swaps to high value customers.

Operational Excellence Operational excellence can be instances when a customer requests device’s lifecycle, providing extra achieved by several means, depending an out-of-stock device and measures flexibility with no additional on operators’ specific SCM models the SCM’s ability to place devices investment in inventory. and operational requirements. accurately across the channels, not I Optimize product portfolio: However, some improvements can just its ability to get devices into the Product portfolio strategy is the usually bring benefits in the majority supply chain. Measuring stock responsibility of Marketing, but of cases: correctly at the retailer level usually the Marketing department I Improve data on actual product (whenever retailers are not owned does not bear the stockeeping costs availability: The Supply Chain by the operator) is also a key related to its decisions. Thus, it does function often has very little requirement to properly manage not have a strong incentive to limit understanding of true customer inventories. product portfolio complexity. demand, as there is usually little or I Tailor inventory size to single However, reducing the number of no data captured on lost acquisition device’s lifecycle: Operators tend SKUs by eliminating low rotation opportunities across any of the not to pay enough attention to items from the price list dramatically channels. An effective SCM product lifecycles. In general, improves logistics performance and information system tracks those inventory levels are decided based reduces the risk of shortages.

on the number of weeks of future I Avoid inventory fragmentation: demand that need to be covered to Inefficient logistics models disperse reasonably ensure the device’s inventory across many locations availability (“coverage rate”), (e.g. central warehouse, regional compensating demand-expected warehouse, retailers), leading to variance. However, devices in their unnecessarily high stock levels and launch phase will have a very the risk of shortage even when the unpredictable demand, and it will be requested device is actually available critical to avoid shortages. On the (but in the wrong place). Unwanted other hand, devices reaching stocks can also arise in centralized maturity or close to being phased warehouses when devices are out are easier to forecast and less virtually allocated—to a sales region critical from a business point of for instance—and cannot be unfrozen view. Therefore, the coverage rate to meet unsatisfied demand in other could be differentiated based on the areas. In general, the most efficient

35

hypermarkets only accept scheduled

deliveries, thus requiring different Optimized delivery means than express couriers (which are generally used to serve all supply chain the other channels); ensuring after- “ sales assistance in sparsely populated management can rural areas is completely different “ compared to major towns. generate yearly In our experience, many operators end up with a large number of EBITDA BENEFITS OF different SCM models built over time. However, it is usually possible to E10M–15M. define a generic model that can provide enough flexibility to serve the majority of operators’ logistics requirements. Considering the real cost/benefit ratio of tailoring specific solutions to single requirements inventory models are based on I Leverage collection points to instead of leveraging existing SCM centralized physical warehouses with improve after-sales: In high- model is a good practice that should systematic rebalancing of device performing after-sales models, be systematically applied to SCM allocation. Similarly, delaying collection points are required to decision making. “kitting” and configuration of screen consumer requests, verifying devices until the very last minute that devices are actually entitled to Recently, a Southern European can help maximize availability and receive assistance, and perform an incumbent totally redesigned its SCM remove unnecessary rigidities. initial diagnosis before shipping model to integrate its fixed, mobile them to the repair hub. Information I Define and enforce a returns and cable operations into a single policy: Uncontrolled commercial concerning returns is collected and logistic architecture. This enabled it to returns—and a lack of clear internal processed in order to identify the generate economies of scale and policies—can lead to unmanageable main causes of the fault and quickly eliminate sub-optimal legacy approaches. inventories of outdated devices as define appropriate actions. For well as unnecessary effort to track instance, specific instructions can be End-to-End Processes and the origin of returns, identify the provided to collection points to ease Communication Flows Integration “internal owner” and make a identification and solve known Ensuring that information is shared decision on disposal or reconditioning. faults. The same information can consistently and on time among SCM Similarly, operators have a short time effectively be shared with stakeholders—namely marketing, window to return devices to manufacturers and repair hubs in sales, logistics and purchasing—is key manufacturers that have not worked order to accelerate device debugging to enabling a smooth process. Shared since arriving at the retailer— and improve repair processes. decision making and information generally termed Dead On Arrival flows should be pursued both through (DOA). Thus, operators have to The size of the operational excellence organizational means (such as the define and enforce strict rules to benefits depends on the specific issues supply chain committee and ensure that retailers report DOAs to addressed but, as an example, the coordination functions) and by manufacturers in good time. Best- recent reengineering of a European appropriate integrated information ? practice operators define and incumbent’s SCM generated 4.5m in systems that provide a common tool circulate detailed policies both opex savings, mainly related to to support demand forecast, inventory internally and to distribution channels warehouse management optimization. management and order processing. that regulate DOA and commercial returns, and systematically apply Flexibility and Reactivity of penalties in cases of non compliance. SCM Model Retailers are also required to ask for Telco operators’ SCM models have to specific authorization before be flexible enough to serve a very returning devices and to fill in large client base with multiple retail specific forms (either on paper or on channels. Flagship stores have very an extranet) to ease returns different logistics requirements identification and processing. compared to wholesalers;

36 An SCM dashboard should be Figure 4: Impact and Implementation Complexity of Improvement Options designed to define and measure shared objectives that drive more end- mpact on mpact on oll-Out Optimization Levers Optimization Actions I I R to-end thinking and collaboration, Revenues Cost Complexity encompassing all operational, customer, Collaborative planning Supplier Relationship staff and financial dimensions. Management Vendor performance monitoring

Cost-conscious service Tailor service to customers’ The implementation of an integrated orientation value and expectations Improve data on product SCM system enabled a Southern availability and real demand European mobile operator to improve Tailor inventory size to individual device lifecycle collaboration among SCM process Operational excellence Optimize product portfolio stakeholders and process control. Avoid inventory fragmentation Define and enforce This improved overall device returns policy availability, delivering up to ?5m in Leverage collection points to improve after-sales annual benefits. Flexibility and reactivity Reduce the number of of SCM model different “models” Apply shared decision- How to Select the Right End-to-End processes making process and communication flows Improvement Options Integrate information Telecom operators can make a wide systems and dashboards range of improvements to their Supply Legend: Low High Chain Management. Each one will have varying degrees of impact on Source: Capgemini analysis. revenues and costs, and will have its own specific level of implementation complexity. Figure 4 summarizes I Cross-functional decision-making Jean-Pierre Fabre Bruot is a principal and compares the different processes and systems are usually in Capgemini’s Telecom, Media & improvement options. the most effective improvement Entertainment Consulting Services levers, with relevant impacts both on practice. He has over 15 years’ Selecting the most appropriate options revenues and costs. experience as consultant and executive will depend on operators’ specific in the Telecom and Services sectors in objectives and conditions. However, a These improvement actions are not Europe. He specializes in Business few considerations may help direct totally independent from each other. Process Redesign, Supply Chain improvement actions: While it is possible to design and Management and Marketing Strategy. launch very focused SCM Before joining Capgemini he was I Improvement levers impacting revenue usually generate the highest improvement actions, operators marketing director of a major European EBITDA impact. Given operators’ should consider that “cherry picking” logistics operator. He is based in Milan. huge sales volumes, even limited single improvement streams may not improvements—for instance maximize potential benefits. In our Andrea D’Angelo is a vice president and improving device availability at experience, the most effective Head of Capgemini’s Telecom, Media & points of sale—can provide initiatives for SCM optimization Entertainment Consulting Services significant benefits. follow an end-to-end approach, practice in Italy. Andrea is a involving all the stakeholders communications industry expert with I Many improvement levers impact (marketing, logistics and purchasing) wide functional experience in marketing both revenues and costs. For and addressing in a structured and operations and brings to his role instance optimized stock framework all potential improvements more than 16 years’ experience in Strategic management will reduce shortages— along the supply chain management Consulting and Line Management in thus increasing revenues—and at the value chain. major operators and equipment vendors same time will lower carrying costs. in Europe, the US and the Middle East. I Several improvement levers are He is based in Milan. simple and quick to implement. Lifecycle-based inventory management and product portfolio optimization can be considered “quick wins” and do not require much more than a management decision.

37 management INSIGHTS

Innovation 2.0: Learning from Online Players 46

Transforming Telcos: Have the Giants Learned to Dance? 54

Private Equity: Outlook for Value Creation in Telecom and Media 62 Innovation 2.0: Learning from Online Players by Priya Mehra and Tushar Rao

Abstract: With their traditional sources of revenue under threat from new types of competitor as well as services, European operators need to revise their innovation approaches. One potential source of inspiration for the telcos are the Internet players, who are considered to be some of the most innovative companies in the world. Capgemini’s TME Strategy Lab explored the innovation approaches of successful online players, looking for key lessons that can be applied to telcos. In companies such as Google and Yahoo!, a strong company-wide culture of innovation, as well as a focus on involving consumers and third-party developers in developing products, is key to success. Employees, consumers, external researchers, developers and open source development are all available to telcos to guide them towards a new innovation paradigm.

Innovation has always been central to launched thirty-three major products the growth strategies of telecom and upgrades in 2006 alone, in companies, but today the pressure to addition to partnerships for new innovate is greater than ever before. services and features. European operators are faced with saturating markets, fierce competition Traditional long ideation and product and technological disruptions, which development cycles are, therefore, no are set to impact their revenue outlook. longer sustainable compared to the speed and agility of Internet players. Telecom operators need to review Telecom players will, hence, have to their innovation strategies to adapt to innovate at a much faster pace than in the new competition paradigm. the past if they are to compete Internet players are breaking ground effectively against online players. in communications territory, successfully launching services that Innovation is also increasingly are competing head-on with occurring outside the corporation. traditional telco offerings. Consider, Consumers and communities are for example, that operators’ shaping the new telecom landscape. communication services—fixed voice, Open source development tools are mobile voice and SMS messaging— enabling online consumers as well as accounted for 95% of total time spent developers to play an active role in on communications in 2000 in developing, testing and refining new France. This was down to 53% in services. Skype, for example, opened 2006, with instant messaging and its instant messaging and presence email emerging as the new hot platform in 2005, leveraging nearly favorites. Not only have online 3,500 developers. Third-party players’ been successful in creating developers have launched nearly 100 and popularizing new services, but hardware and 300 software products they are also setting a blistering pace based on Skype’s open platform. The of innovation. Yahoo!, for example, initiative has expanded Skype’s reach has launched eighteen versions of its to a wide range of services such as instant messenger in the past 2 years, online gaming, e-commerce and incorporating features such as voice enterprise applications. calling, interoperability with MSN and integration with various content This changing business environment services and web applications.1 Google is putting pressure on telecom players

1 Company website.

46 to refresh their approach to innovation. In this report by the Capgemini TME Strategy Lab, we look at the best practices of successful and innovative online players and make recommendations on how telcos can best leverage the lessons learned from core group of advisors and products. The top management in these Internet companies. researchers, failing to tap into its large these companies makes themselves base of employees. Online players, accessible to employees, demonstrating Lessons from Innovative however, have been able to nurture a the commitment to innovation. This Online Players strong culture of innovation, opening creates an environment that The leading online players are the doors for any employee to encourages people to express regarded as some of the most contribute new ideas. The online themselves freely and be heard. At innovative companies in the world. players use brainstorming events to Microsoft, for example, any employee Google, Microsoft, Yahoo! and Skype stimulate idea generation outside the can submit a paper detailing a new regularly feature at the top of business usual office routine. Microsoft runs idea or suggestion to the Chairman magazines’ lists of the most innovative “Hack Days,” informal sessions that and the most promising ideas are companies, ranking far ahead of the are open to all employees.4 Similar selected for further development. nearest telecom operators.2 These events are conducted by Yahoo!, Google adopts a similar approach: companies also invest heavily in R&D: enabling internal developers to Any employee can turn up and Google and Yahoo!’s R&D spends showcase self-developed prototype discuss their ideas with the senior have grown from 9.8% to 11.6% and n from 11% to 13% of their revenues o i t respectively over 2005–2006.3 i n

Figurei 1: Online Players’ Innovative Approaches to the Ideation-to-Delivery Cycle f e

Innovation is part of these online D companies’ DNA since it is essential Ideation Development Launch Post-Launch for survival in the highly competitive, n Process of nnConverting selected Commercial launch nDeveloping add-on fast-evolving world of the Internet. generating ideas ideas into product of products accrued applications and offerings through acquisitions upgrading features Online players are creating an n Selection of ideas n Defining product n Capturing feedback innovation culture, which helps them interfaces from end-users to stay flexible and receptive to new n Testing s e

opportunities despite their increasing l nnEmployee-generated Consumer n Rapid integration of n Open APIs for end- size of operation. In this section we p ideation at Google, involvement through acquired properties users to create plug-

m Yahoo! and Microsoft Google Labs by Google ins and add-on will examine some of the best a applications n Involvement of n Experimenting by x practices adopted by online players at employees outside launching large n Extending reach by E the project teams numbers of products using open platforms each stage of the innovation cycle, through Microsoft and learning from from ideation and development to Hack Day failures launch and post-launch (see Figure 1). Source: Capgemini TME Strategy Lab analysis. Ideation Ideation is the process of generating and selecting ideas. Companies tend to restrict origination of ideas to a

2 Business Week’s Innovation Survey 2006: Google ranked 2nd, Microsoft 5th, Skype 46th, and Yahoo! 61st, ahead of the highest-ranking telecom operators Hutchison (78th) and SK Telecom (91st). 3 SEC Filings, Yahoo! Finance. 4 Seattle Times, “Microsoft ‘Hack Day’ Is Creative Play at Work,” April 2006.

47 management at “open office hours” Figure 2: Traditional vs. Google Approach to Employee Involvement in Idea sessions, which are held three times a

Execution 5 l week. The proposal for a a n

personalized Google home page o i Employee idea is executed by a product development team t emerged at one of these sessions. i d a

r Disjointed Ownership Internet companies also allow T employees to be involved in the Post- Employee X Launch projects from idea to fruition (see Launch Figure 2). This helps in energizing and inspiring their employees as they Employee Y Development feel a deeper sense of involvement. Google, for example, gives employees’ Employee Z Ideation full ownership of their concepts through all stages of development. Employee submits idea and is responsible for development of the product e Engineers are free to spend 20% of l Full Ownership g their time on projects that they are o o

passionate about, and if an idea gets G Employee A Post- the green light, they can retain Ideation Development Launch Launch responsibility for the project all the way through to launch. Source: Capgemini TME Strategy Lab analysis. It can be difficult to sustain the creative energy of start-ups as companies grow into large, ensure fast decision making and manages consumer expectations of bureaucratic organizations, but Yahoo! therefore quick time to market. Team these relatively under-developed and Google have both taken steps to members from cross-functional prototypes by using “maturity labels” retain the entrepreneurial spirit. backgrounds are able to bring different to indicate that a product is still at an Yahoo!’s Brickhouse, for example, is a perspectives as well as quicker experimental stage (see Figure 3). division launched in March 2007 to problem solving. Specifications for foster new ideas and hold on to talent new products are also loosely defined In comparison to a conventional set- that would otherwise seek funding so that the development phase is up where product launch is preceded 6 elsewhere. Google, meanwhile, has flexible, with each team member able by lengthy research, development, maintained a relatively flat to influence the project’s direction and production and testing, Internet organizational structure, with an suggest new features. companies are far more tolerant of employee-to-manager ratio of 20:1 failure since they can realize mistakes compared to the technology industry Furthermore, beta testing helps to early and rectify them. Internet average of 7:1, and its innovative shorten the product development players regard mistakes as learning culture has helped to limit its attrition cycle significantly. By involving opportunities to drive further 7 rates to less than 5%. consumers early, decisions are made improvement. Dogster.com, a social based on users’ feedback, thus network for pet lovers with nearly Development avoiding lengthy internal discussions. 300,000 members, credits its success The online players are adept at rapidly Beta products are launched at an early to learning from failure.9 The site taking a product from initial concept stage in their development, even if launched features quickly, observed to launch. Google Maps, for example, they have few features, and product customer behavior and fixed issues on went from trial to launch within 8 improvements are carried out over the fly. 8 months. Online players are able to time, based on consumer feedback. achieve this with limited resources Google products such as Gmail, Launch through a combination of small, agile Desktop and Talk, for example, were Although the online players have project teams and the use of beta all launched as betas before being efficient internal innovation processes, products. This helps them to launch developed into fully featured they are constantly searching for early and continue developing by commercial releases. Google also companies that can help them launch incorporating consumer feedback. invites user feedback for each of its new products rapidly (see Figure 4). Google, for example, sets up inter- products by setting up dedicated Google and Yahoo! for example have disciplinary teams of 3–4 people to group discussion sites. Google acquired eighteen and twenty

5 Business Week, “Managing Google’s Idea Factory,” October 2005. 6 Business Week, “Yahoo! Taps Its Inner Startup,” February 2007. 7 Future Think, “The Shift from Creativity to Value,” 2007; ERE.Net, “Google Continues to Innovate in Recruiting and Candidate Assessment,” January 2007. 8 O’Reilly Radar, “Web 2.0 Principles and Practices,” 2006. 9 CNN Money, “A Startup’s Best Friend? Failure,” April 2007.

48 companies respectively in 2005 and employees choose to leave, the value 2006,10 leading to new products and of the acquisition is diminished. features: Google acquired KeyHole Online players have a successful track Corp in October 2004, which led to record of integrating start-ups by Google Earth within 7 months, while ensuring that ownership of the Yahoo! acquired Dialpad in June 2005, products remains with the original which helped it add VoIP features to developers. For example, Jason its IM client by December 2005. Goldman, who joined Google from INTERNET Blogger, continued to oversee the Integrating start-ups can be latter for 3 years after its acquisition. PLAYERS ARE FAR challenging because of the culture Some of the talented people from the “ clash with the large, multi-billion acquired organization are also given dollar acquirer organization. The key positions to develop new MORE TOLERANT value of a start-up often resides not products and strategy. For example,

only in the patents it owns but also in the founder of Flickr, which was OF FAILURE, the skills and experience of its acquired by Yahoo!, now heads its

founders and employees. If these incubator initiative, Brickhouse. regarding mistakes as “ Figure 3: Various Labels Used by Google for Products in Development Stage

Early on in their development stage, products are offered for testing to learning Private beta Google staff and family, or to trusted Google users E.g. Google trusted testers programme opportunities. Experimental products are first made available to the public through the Google Lab Google Lab page E.g. Google Maps was first launched under the Lab category

Most Google products are commercially launched as beta versions Public beta Some widely available products keep the “beta” label for many years: e.g. Gmail has been in beta testing for more than 2 years and has been adding various features over time Some products are launched outside the Google brand to experiment Non Google with innovative user interfaces branded E.g. Searchmash search engine

Source: Capgemini TME Strategy Lab analysis.

Figure 4: Select Acquisitions Made by Yahoo! and Google to Grow Their Service Offerings

DoubleClick TrendAnalyzer Adscape MyBlogLog 2007 Internet ad serving Data visualization Video game Blog communities software software advertising service

Writely YouTube Measure Map Sketchup Del.icio.us Kenetworks 2006 Integrated into User-generated Blog search and 3D modelling Social tagging and Mobile content and Docs and video sharing site analytics tool capabilities for bookmarking applications Spreadsheets Google Earth Android Reqwireless Urchin 2Web Ludicorp Dialpad 2005 Mobile applications Mobile email Web statistics tool Launched as Photosharing site VoIP capabilities developer software developer launched as Google (Flickr.com) for IM client Google Analytics Spreadsheets Where2 LLC ZipDash Keyhole Picasa OddPost 2004 Mapping Launched as Core mapping Picture manage- Launched as new capabilities for Google Ridefinder capabilities in ment tools version of Yahoo! Google Earth Google Earth mail Kaltix Pyralabs Applied Semantics Sprinks Alltheweb OddPost 2003 Blog Site Context-sensitive Ads technology, Search engine Keyword-based pay- Personalized per-click Internet Search (blogger.com) ads technology, integrated into integrated Adsense advertising into Adsense Hotjobs Inktomi 2002 Online job search Search engine portal

Source: Capgemini TME Strategy Lab analysis; company websites.

10 Company websites and press releases.

49 Figure 5: Number of Products Available vs. Unique Mash-Ups Created by Online several key components. A strong Users for Select Internet Players (March 2007) company-wide culture of innovation ensures that creative employees can contribute to the ideation of new products and then take ownership of the development process right through to launch. The development cycle is short, since the beta model allows for products to reach the public before they are fully tested. The 1,085 online players also leverage external sources, whether by acquiring 324 complementary start-ups or providing open development tools.

120

86 Recommendations The telecom environment is facing far- reaching changes, driven by the popularity of new online services, Google Yahoo! consumer innovation, open source

Number of Products Mash-ups Created by Online Users development and new business models. Participating in this evolving Source: Capgemini TME Strategy Lab analysis; company websites; Programmable Web, “Mashup Dashboard,” February 2007. space will mean significant changes in the innovation approach and mindset Post-Launch Google and Yahoo! have opened APIs for most telcos. In this section, we The online players’ commitment to to a variety of products, leading to suggest key measures that telcos can continuous innovation means that creation of thousands of mash-ups. consider to tap the internal and products remain in a permanent state Google APIs, for example, has led to external ecosystem for driving of development and improvement. creation of more than 1,000 mash-up innovation. While part of this is internally-driven, sites, far more than the number of online players are also outsourcing products offered by the company itself Driving Internal Innovation innovation to a large external (see Figure 5). Housing Maps, for Telcos have evolved into massive ecosystem of consumers and example, is a mash-up created from organizations with a large pool of developers by opening their source Google Maps and real-estate listings human resources, rigid processes and codes. Open Application from Craiglist, which has attracted complex hierarchical structures. Programming Interfaces (APIs) help nearly 1 million visitors to the site.11 Considerable investments and effort Internet players to rapidly roll out are dedicated to maintaining legacy new features and attract new users, Opening up development to third networks, delivering traditional overcoming the limitations of parties carries the risk that the online communication services and available internal resources. With only player will lose control over the managing a large existing customer a few people on their payroll, start- original product. This can be base. In such an environment, driving ups like Flickr, for example, are able managed, however, by only issuing innovation at grass-root level, to access the creativity of thousands of APIs for add-on services and features, fostering a culture favorable to users and developers online through while retaining control over the core creativity and providing adequate open APIs. The online community has technology. Google offers tools to focus to developing innovative contributed to Flickr’s popularity by customize its search engine, but the services, can prove to be a formidable adding features such as plotting the core code is not open source. Online task. Telcos can, however, apply some locations where photos were taken on players have also introduced of the lessons learned from innovative a map and displaying pictures via TiVo. certification programs—Skype online players to leverage employee certifies hardware and software creativity and create a more nimble The larger Internet companies are also solutions developed using Skype APIs and responsive organization. not far behind in tapping the in order to maintain quality standards. collective intelligence of millions of Employee Involvement online users, enabling them to expand In summary, the online players’ As evident from the approach by their reach and audience on the Web. approach to innovation is built on online players, employee contribution

11 ZDnet.com, “Mash-ups: Business Models and Trends,” 11 October 2005.

44 can make a significant impact on Telecom operators should consider driving innovation in organizations. creating separate structures for However, getting a large employee incubating new business ideas and base to think “out of the box” in the research within the larger telecom environment can be a organization. This can help provide a challenge. Carriers will need to train degree of autonomy to the teams, leverage and collaborate with the and educate their employees in order allowing for speedy decision making. external ecosystem for driving to think differently and channel These units also need to operate on innovation. promising ideas into execution. ITV’s different performance goals, processes new innovation unit, Imagine, holds and reward systems, which allow for Tapping Innovation Networks 1-day workshops, providing tools that experimentation and failure. France Various innovation networks or enable employees to evaluate ideas. Telecom’s research arm for radically communities are available today, Employees are also exposed to various new business ideas, Explocenter, is acting as marketplaces for rapidly perspectives as the workshops draw independent of the rest of the accessing new talent as well as people with different backgrounds organization. The Explocenter intellectual property. Organizations and disciplines. Telcos should also functions like a start-up, with small benefit since they do not need to look at involving employees not only teams working on separate projects employ resources with new skills or at the idea generation stage but also and a governance committee, which spend money on developing new during execution to enable higher acts as a venture-funding body for technologies and products in-house. motivation and commitment. each project. Networks such as Yet2.com and Ninesigma, for example, provide a Recognizing employee contribution in Benefiting from External Innovation forum for prospective buyers and a public and organization-wide Telcos have always tapped vendors, sellers of intellectual property to manner also helps to encourage and developers and external researchers to interact and trade intellectual motivate ideation within the develop new technologies and property. Companies can scout for organization. Disney conducts “Gong products. These interactions have relevant innovative solutions, identify Shows”—internal brainstorming usually been restricted to a select unique technologies or product ideas, events where employees present their group of external vendors and third- and acquire the ones they deem useful. innovative ideas to the top parties, devoted to creating management. BT offers cash incentives proprietary services and requiring Open APIs of up to £30,000 for employee ideas heavy investments in developing We believe that telcos can learn from that are selected for implementation. intellectual property. However, the Web 2.0 principles and consider talent landscape is changing and it is opening APIs in order to transition to Creation of Substructures now possible to access a large pool of a “Telco 2.0” era. This will help In order to enable innovation to innovators, working outside the telecom players to foster an extensive flourish, it is essential to create a confines of the traditional enterprise. ecosystem of open developers and suitable environment that is tolerant This pool comprises not only independent vendors to innovate in

to experimentation and failure. While researchers and third-party developers voice, messaging, data and video the existing way of working prevalent but also consumers, who are willing services. Orange and BT have opened

in telco organizations is essential for to lend their skills to creating new APIs across their voice, messaging, operational efficiency, it can act as a products and services. Telcos, location and presence platforms, roadblock to creativity. therefore, have various options to allowing application developers to Open APIs help Internet“ players to RAPIDLY EXTEND “ THEIR REACH.

45 “ products that they offer in partnership R&D teams of with developers. This will help them differentiate the services from entirely NEWLY ACQUIRED START-UPS unmanaged third-party services should remain largely available over the open Internet. “ Involve Consumers It is becoming possible to tap into autonomous. consumers’ feedback quite early in product development stage. And technology-savvy consumers themselves are interested in trialing Figure 6: Example of Open APIs Offered by BT and Orange and contributing to service development. Telcos, therefore, can Voice Presence rely not only on researchers and •VoIP can be combined with other Web applications as •Presence can be used to share status information vendors but also consumers to well as websites between web-based applications programs and users innovate and propose new features • BT Voice Call API lets users integrate its VoIP service with • Application developers can use the presence API from and applications. Some operators have websites as well as applications such as games Orange or BT to integrate presence information such as “On •Similarly developers can embed the VoIP functionality in a phone call” or “Available,” with applications such as started using beta releases and customized soft-phones and groupware applications directory services, contact lists and groupware applications Telco 2.0 prototypes for services such as online Innovation Opportunities communication, content and mobile Location SMS applications. Swisscom Mobile Labs is •Location APIs allow applications to retrieve the • SMS API allows applications to send and receive text physical location of a mobile device, using Internet messages to phone users and obtain delivery status beta-testing a host of mobile data formats such as XML information applications such as PC-to-mobile

• Orange envisages that developers write applications such as •TranslateIT, built by an end user, uses BT’s SMS API to multimedia messaging, personalized fleet management, salesforce management and location- allow cell users to access a translation service through SMS mobile TV channels and video dependent content adaptation and repurposing using its •Developers can use the Orange SMS API to add notification Location API functionalities to any business application sharing. It has also set up Web forums for suggestions and feedback from Source: Capgemini TME Strategy Lab analysis. users to improve its products. Vodafone Betavine goes a step further and enables users to upload self- deploy new services and features (see reduce time to market as well as created mobile applications and Figure 6). Since March 2007, development and testing costs. seek feedback on their creations from Microsoft and BT Group have been Moreover, unlike in the proprietary other users. using TopCoder, an organizer of platform model, external developers computer programming competitions, will be able to create applications Web 2.0-based innovation solutions to run a “mash-up” contest. The swiftly, enabling the proliferation of are also available from vendors such competition encourages developers to services on the mobile devices. as IBM, which can be used by merge telecommunications features operators to support collaboration such as voice and text messaging with However, we believe that telcos with the external community for Web-based applications such as should not only open their platforms rapidly building and prototyping new mapping and search. Winners can to third-parties but also jointly services and products. In the US, for grab prizes ranging from $2,500 develop new services to maximize instance, Sprint-Nextel is piloting the to $25,000. revenue opportunities. Orange, for IBM solution, using blogs, wikis, instance, not only provides open APIs social tagging, surveys and polls to Operators can also work with the but also offers its own and partner support trials and capture consumer open source community, benefiting services to consumers; for example feedback.13 from lower development costs, Orange Messenger has been increased flexibility and a rich developed in partnership with Acquire and Integrate Start-Ups ecosystem of developers. NTT Microsoft, integrating France Telcos should scout for technology DoCoMo and Vodafone, along with Telecom’s VoIP and SMS services with start-ups as a source for innovation, to handset vendors such as Motorola and the Windows Live Messenger. gain new and unique capabilities. This Samsung,12 have teamed up to create a Operators, on their part, can bring in strategy can greatly reduce the time to single mobile phone software platform the long-standing billing and service market and cost of developing new based on the Linux kernel that will relationships with their customers for technologies. By acquiring or

12 Computer Business Review Online, “Mobile Giants Form Linux Platform Foundation,” 16 June 2006. 13 Wall Street Journal, “Made in IBM Labs: IBM Opens ’Innovation Factory’ Using Collaboration to Accelerate Innovation of New Products, Services,” 28 March 2007.

46 collaborating with start-ups in an start-up completely within the help to leverage the skills and early stage, telcos can benefit from standing organization can destroy any knowledge base of the telco innovative concepts and patents, as focus on innovation. Worse, it could organization through cross-allocation well as gain capabilities at lower costs. result in the exit of the most of resources as required. Cisco has innovative employees due to the used this approach for most of the Some telcos have started dedicating contrast between the flexible technology start-ups it has acquired to resources to monitoring and exploring environment within the start-up and expand its product portfolio. the market for innovative technology telcos’ process-driven way of working. In conclusion, in light of declining growth prospects and an increasingly Figure 7: Evaluaton of Options for Integrating Acquired Start-up Companies competitive telecom market, operators need to rethink their approaches to innovation. Moreover, since Integrate Completely Separate Entity Integrate Selectively communication as well as content

Cultural differences may Employees continue Employees continue services are increasingly being offered Employee with the same projects impact employee to work in a familiar Retention organization Can also pursue by Internet players over IP networks, motivation lateral growth paths network and infrastructure control Post-merger integration Post-merger issues Post-merger integration Innovation does not affect product can distract focus from at operational level will no longer serve as a source of Focus are eliminated development and innovation innovation competitive advantage for telcos in the Standard organization Existing flat structures Some functions are integrated Processes and procedures are and swift decision future. Online service providers are Culture forced upon making processes Autonomy of R&D is acquired entity remain in place maintained redefining the pace of innovation in

Redundant functions Redundant functions the telecom industry and numerous Separate structures Efficient are eliminated are eliminated with redundant Projects in standing lessons can be learned from Internet Resource Start-up company can functions exist Utilization organization can benefit from a larger No synergies achieved benefit from acquired players’ innovation approach. By pool of resources skillsets applying some of the best practices Little or No Advantage Significant Advantage followed by the successful online players, telcos can drive innovation Source: Capgemini TME Strategy Lab analysis. internally as well as tap the external ecosystem to compete effectively in the new telecom landscape. companies. BT has “Innovation Telcos can overcome this challenge by Scouts,” who perform due-diligence retaining the acquired company as a on an average of over fifty start-ups separate entity or opt for selective Priya Mehra is a manager in the TME during a single year. Similarly, France integration to minimize post-merger Strategy Lab. Her recent work includes Telecom has created an investment issues and avoid disrupting the start- assessing the case for WiMAX and fiber arm, Innovacom, to explore new up (see Figure 7). However, when the roll-out in Europe, evaluating online technology start-ups and support acquired company is held as a service strategies for operators as them through technological and separate entity or affiliate, it does well as estimating the revenue and financial aid. Innovacom has mean there is likely to be some cannibalization impact of mobile IM. achieved several technological duplication of function between the Prior to joining the Lab, Priya worked breakthroughs in telecoms with two entities. Additionally, cross- for a mobile operator where she helped twenty-five associated companies allocation of resources between launch voice and data products for the going public and acquisition of over organizations is difficult. Enterprise market. She is based in Mumbai. seventy-five companies. Selective integration is, therefore, Tushar Rao is a senior consultant in the The integration of start-ups has its recommended since it can help telcos TME Strategy Lab. His recent work own set of challenges, different from integrate the common functions such includes online strategies for those faced when integrating a large as finance, manufacturing to gain communications operators as well as the company acquired with a process efficiencies while keeping the development of fixed-mobile convergence. consolidation motive. Integrating the research and development teams as Prior to joining the Lab, Tushar worked fairly autonomous units. This can also with a leading Indian operator, where he was responsible for developing data services for the enterprise segment. He is based in Mumbai.

47 Transforming Telcos: Have the Giants Learned to Dance? by Didier Bonnet, Jean-François Lendais and Alastair Nash In collaboration with the Economist Intelligence Unit

Abstract: The highly competitive and fast changing telecom landscape is creating the need for business transformation in the telecom industry. But change projects are inherently complex to manage. Capgemini Consulting and the TME Strategy Lab, in co- operation with the Economist Intelligence Unit, conducted a cross-industry survey to identify the critical factors required to ensure successful implementation of business transformation projects. Our analysis suggests that while change is becoming an inherent part of telco strategy and planning, the ability to achieve change effectively is less consistent. Senior management support and leadership, as well developing transformation skills within the employee base, will be crucial to accomplishing successful implementation.

54 The need for business transformation technologies like WiMax, are in the telecoms sector has never been additional catalysts for change, which greater. Faced with ever tougher along with convergence, are opening market conditions, operators are up opportunities for new entrants and undertaking major transformation threatening established business projects aimed at creating new models. revenue streams and radically aligning their cost structures with the Business transformation has become competitive environment. an essential strategic response to these market challenges, but change When Capgemini Consulting projects are inherently complex to published its book titled Transforming manage. Delivering large-scale the Organisation in 1995,1 the key transformation involves training and drivers for the transformation of telcos coordinating multiple teams, were linked to the post-privatization overcoming employee inertia and Definitions agenda, the need to build more managing the resistance that is a market-facing organizations, as well as common response to change. If these Definitions of business transformation vary, but for the purposes of our survey, the new regulatory regimes designed challenges are not managed effectively, the term is used to refer to strategic, to encourage higher levels of there is a risk that the project will be enterprise-wide change projects that competition in this industry. Whereas delayed, over budget or fail to achieve have a profound impact on the most of the lessons and frameworks its ultimate objectives. organization’s capabilities, environment, described in the book are still valid processes and performance. Correctly today, some of the market factors Capgemini Consulting, in planned and implemented, business behind transformation have changed. collaboration with the Economist transformation can have far-reaching Intelligence Unit, decided therefore to implications and benefits for the Today, one of the most powerful conduct a cross-industry survey with organization, as well as deliver reasons behind transformation the primary aim to assess the critical significant results that are visible on the projects is the slow down of growth in success factors required to implement bottom line. The project types covered by our definition of business saturated fixed and mobile markets. transformation projects successfully. transformation are as follows: Fixed voice revenues in Western We also evaluated the experience of Europe, for example, are forecast to European businesses as they grapple I Corporate transactions (such as M&A and divestitures) decline by an average of 1.3% a year with implementing complex change between 2006 and 2010.2 Fiercer programs in order to recommend I Outsourcing/offshoring competition, too, is putting operators ways in which executives can improve I Strategic changes (such as changes of under increasing pressure to find new the success rate of transformation business model) sources of profitable growth. initiatives in their organization. We I Enterprise-wide technology projects

Incumbents have been particularly first look at the types of business I Cross-functional improvement affected by changes in the competitive transformation projects that have programs landscape, with Deutsche Telekom, become prevalent in the European I Enterprise-wide organizational for example, losing over 1.5m fixed- telecom sector. The report is based on restructuring; and a Capgemini survey of senior line subscribers in the first 3 quarters I Value-chain optimization initiatives 3 of 2006. Technological shifts, such as executives across Western Europe and (such as major supply chain projects) the move to IP-based networks, and a series of in-depth executive the emergence of disruptive interviews.4

1 Kelly, James and Gouillart, Francis, Transforming the Organisation, McGraw Hill inc., 1995. 2 Ovum, “Voice: A Vision of the Future,” March 2006. 3 Datamonitor, “DT Profits Tumble as Fixed-Line Losses Continue,” November 2006. 4 Capgemini Consulting, Economist Intelligence Unit, “Reinventing the Organization: Trends in Business Transformation,” December 2006. The findings used in the article are based on two main strands of research: an online survey of 125 senior executives across 18 industries in Western Europe at businesses with minimum annual revenues of $500m and direct interviews with 15 senior executives.

49 Types of Business reengineering. However, today, telco 2007, for example, KPN’s German Transformation in the European CEOs are looking at transforming mobile operator E-Plus signed a Telecoms Market their cost structures by using contract worth an estimated ?1.5bn The pace of transformation does not outsourcing as a way to decompose for Alcatel-Lucent to take over the appear to have slowed down in the and simplify their value chain as well operation and maintenance of past few years. Business transformation as make a large part of their E-Plus’s network.6 Other operators to programs have become central to the operational costs variable. The most have gone down this route include corporate agenda, and it is now obvious areas where operators are Telfort, T-Mobile and Orange in the unusual for large companies not to be looking at the cost-saving potential of Netherlands. in the throes of either planning or outsourcing are non-core and back- implementing some form of major office services such as IT maintenance, In their quest for designing much change program. Our survey shows HR or finance to enable the more flexible cost structures, telcos that, on average, telecom and organization to focus on a smaller set are now also embracing offshoring as technology companies have undertaken of key business issues. In late 2006, an integral part of their seven transformation projects (as for example, Vodafone finalized an transformation. Whereas this characterized in our definition—see outsourcing agreement as part of its phenomenon has been prevalent for page 55) over the past 3 years, and the strategic efficiency program, which many years in the US, European vast majority predicted that their level will result in most of the operator’s IT companies have been slower to react. of transformative activity would remain staff transferring to subcontractors, to This is radically changing today with the same or increase over the next deliver annual cost savings of some large telcos establishing development 3 years. £170m within 3 to 5 years.5 or contact centers in India, Eastern Europe and North Africa depending The most common types of business With the increased focus on radically on both labor arbitrage and language transformation programs identified in changing their cost structure, telcos requirements. British Telecom’s our study were: outsourcing, corporate are now also outsourcing parts of their $1bn outsourcing deal with Tech transactions and organizational operations that were considered Mahindra in India is a good example restructuring (see Figure 1). untouchable only a few years ago. of this trend, where the latter will For instance, some European mobile provide business process management Outsourcing/Offshoring operators are outsourcing their core and network-centric IT services to BT The survey highlighted that most network operations and management Global as well as its clients.7 companies had undertaken to equipment vendors. This enables outsourcing projects in the last couple telcos to not only lower costs but also Corporate Transactions of years. Many telco business leverage the skills of their suppliers, The second most frequent type of transformations in the 1990s were who are able to deploy the latest transformation projects are corporate focused on cost savings through staff technologies as well as hire and train transactions such as mergers & reduction and business process the requisite resources. In February acquisitions or divestitures. M&A has become a compelling strategic tool for operators keen to find further growth Figure 1: Most Common Types of Transformation Projects Undertaken by Telecom in the context of saturated domestic and Technology Companies (% of Respondents, 2004–2006) markets. European M&A activity in telecom and media increased in 2006, with 745 deals of over ?5m, up 22% from 2005.8

Markets have begun to consolidate across the region with operators 83% acquiring companies to boost their 67% 67% subscriber base and/or reduce the 50% 44% number of competitors. Telefónica 33% 28% expanded its European footprint into 6% the UK and Germany by adding Outsourcing/ Corporate Enterprise-wide Enterprise-wide Cross-Functional Strategic Value-chain Others 25 million subscribers when it Offshoring Transactions Organizational IT Projects Performance Change Optimization Restructuring Improvement acquired O2 for £17bn in 2005. In these cases, post-merger integration Source: Capgemini analysis. Note: Responses = 18. obviously puts a high demand on

5 Financial Times, “Vodafone Cost Cuts Accelerate in Europe,” November 2006. 6 Datamonitor, “E-Plus Deal Highlights Network Outsourcing Boom,” March 2007. 7 Computer Business Review Online, “Tech Mahindra Signs $1bn BT Deal,” 22 December 2006. 8 Ion Equity, “2006 European TMT M&A Sector Review,” January 2007.

50 business transformation that is The second aspect of organizational increasingly commonplace in telecom restructuring has to do with business companies. This involves designing simplification. Key examples are new organizational models as well as automation of processes such as operational restructuring to increase service activation, and self service customer integration, improve efficiency e-care. Generally these have important and reduce costs. In the past few years social and workforce implications. most operators have used a combination Incumbent operators, in particular, of both to improve their operations. have embarked on major restructuring in response to the increased level of As a business transformation tool, competition and the need to radically organization design has to be used adjust their cost structures to the sparingly as, if not properly reality of market pricing today. For implemented, it often leads to example, Deutsche Telekom is dysfunctional behaviors, turning the reportedly aiming to reduce its focus of the company inwards to the workforce by 32,000 employees detriment of its customers. Successful between 2005 and 2008, mainly from companies that are using its fixed-line division,10 while France organizational design as part of their Telecom plans to reduce its headcount transformation know that the “boxes by 17,000 through natural attrition by organizational change with synergy and wires” are only an approximation 2009.11 Telefónica, KPN, TeliaSonera realization and restructuring of the way the organization will and Swisscom have all initiated becoming large parts of the develop and operate in the future. similar projects in the last 2 years in transformation agenda. Organizational design is the an effort to restructure their framework within which goals, organizations and become leaner. In the constant quest to boost top-line measures, rewards and teams will growth, European operators are also develop organically to solve client In summary, business transformation building up their presence in fast- problems in an effective manner. has become a key element in how growing emerging markets. In 2006 Today, the integration of fixed and telecom operators are seeking cost Vodafone, for example, spent around mobile operations and the efficiencies as well as revenue growth. £3.3bn on stakes in Turkey, Africa, globalization of businesses through Change programs can be risky to Egypt and Eastern Europe,9 and acquisitions are two examples of implement, however, and in the next acquired India’s Hutchison Essar for drivers of organizational redesign for section we identify the critical success $11bn in 2007. In addition to the telecom companies. factors required for transformation cultural challenges of such expansion, programs to succeed. this growing trend for globalization is driving a new set of transformational needs for telcos as it requires them to adapt their organizations, harmonize business practices and leverage economies of scale. On average, telecom Moreover, with the large amount of investment money available on the and technology financial markets, private equity funds are now playing a larger role in the “ telecom space, adding to the pressure companies HAVE to change for some senior executives “ in telecoms (see separate article on UNDERTAKEN SEVEN Private Equity in Telecom and Media in this edition of Insight). transformation projects Organizational Restructuring Enterprise-wide organizational over the past 3 years. restructuring is another form of

9 Independent, “City Worried Vodafone May Overpay for Indian Foothold,” December 2006. 10 Global Insight, “Deutsche Telekom Denies Further Cuts,” March 2007. 11 Agence France Presse, “European Telecoms Giants Grapple with New World,” 14 February 2007.

51 Figure 2: Stages of a Business Transformation Project Where the Risks of Failure In terms of leadership capabilities, our are High (% of Respondents) interviewees agree that there is a difference between leadership skills No stage tends to be riskiest and management skills. Management New solution design has traditionally been a question of 4.8% monitoring and supervising staff. Recruitment and motivation 6.4% of project team Leadership, on the other hand, is 7.2% about inspiring employees to reach a positive outcome, rather than pushing Implementation Post-implementation them away from a negative one. The 8.8% 37.6% European Leadership Centre, a consortium of academic experts on 10.4% leadership, suggests that the most Planning of implementation effective leaders today are those that lead “from the back:” leaders who 12.0% 12.8% actively empower their staff to take risks, set ambitious targets, provide Formation of strategic and Communication of objectives transformation objectives them with the tools to achieve those targets and let them get on with the job. Source: Capgemini analysis.

Critical Success Factors for Business Transformation Figure 3: Principal Factors That Contribute to Successful Business Transformation Projects Projects (% of Respondents) Every transformation project consists of three key stages: identification of a need for change; formulation of the project’s objectives; and implementation of the project plan. The most challenging phase of a transformation project is the implementation stage with survey respondents regarding it as by far the riskiest phase (see Figure 2).

When our survey respondents were asked to identify the key factors that Communication of objectives will ensure success in business transformation projects, three clear leaders emerged: “support from senior management;” “alignment with overall strategy” and “buy-in from employees” (see Figure 3). In this section we Source: Capgemini analysis. examine the critical success factors that determine whether a transformation project will be implemented successfully as well as looking at how term success, the second most Alignment with Overall Strategy respondents measured the success of important was judged to be “having One of the most important success their transformation programs. executives in the company who factors in business transformation is champion business transformation.” to clearly demonstrate the strategic Support from Senior Management The need for having the entire senior purpose of the change demanded Support from senior management was management team aligned and from the organization. This can only judged to be by far the most actively supporting the transformation be achieved through continuously important factor behind successful objectives was seen as critical by the referring to the goals and the future transformation projects. And for long- majority of respondents. state of the organization.

52 CEOs and their management teams initiatives. These problems can Targeted training and incentive must therefore set a vision and a consequently increase the project’s schemes can also help to win direction for the business that costs and reduce its benefits, or even employee commitment. As part of its provides a context, a rationale and a lead to the abandonment of the entire NeXT transformation plan, France clear explanation for the work that program. A large European operator, Telecom reinforced its staff incentive lies ahead. This vision must be for example, recently faced a major program and increased its employee reiterated continuously up and down setback in the implementation of its training efforts by 25%.12 In 2006, the organization and throughout the enterprise-wide restructuring plan British Telecom awarded eligible life of the program. when staff representatives voted employees shares with an overall value against transferring a large number of of around £22 million in recognition The sense of vision is often lost employees to a new unit. of their contribution to the company’s during the implementation stages of transformation and growth.13 transformation projects as the day-to- Resistance to change was also an issue day problems become overwhelming. for the CEO of a European incumbent Measures of Success In addition, the project teams tasked who wanted to implement a large- It is critical to use appropriate to implement the change are often scale cost reduction plan. The CEO indicators to measure the extent to functional experts who do not have had struggled to win support for the which a transformation project is the skills or do not spend enough project from his business unit successful because these time “selling” the transformation managers. Capgemini helped the CEO measurements can have a major vision to lower tier staff in the to bring about a turnaround in influence on the way in which a organization. attitude through the use of project is implemented. The three collaborative workshops. By getting all success measures ranked most The importance of communicating a the key decision makers in the same important by our respondents were meaningful vision to all levels of the room, looking at the gloomy macro “increased revenues/profitability;” organization is paramount. Successful picture together and providing an “increased shareholder value;” and transformations have clearly defined open forum for debate, the workshops “recognized as a success by communication streams of work resulted in a significant change of customers” (see Figure 4). dedicated to this activity with strong mindset. Thanks to the commitment involvement from senior management of the managers, the resulting Increased profit is the ultimate goal of for the duration of the program. transformation plan delivered any business transformation project, significant financial benefits ahead and it is easy to see how it can be Buy-in from Employees of schedule. applied as a success criterion to Successful implementation of large- scale change depends on the commitment of all the employees affected by the project and its absence Figure 4: Key Measures of Success for Business Transformation Projects (% of can jeopardize the whole exercise. Respondents) Indeed, our survey found that the second most common reason for 69% project failure was “non-acceptance or Increased revenues and/or profitability non-adoption by employees.” A key Increased shareholder value 42% underlying reason for resistance among all employees, including Recognized as a success by customers 31% managers, is a lack of awareness of the business need for change. Effective Improved internal efficiency 29% communication of goals will ensure that everyone understands why Considered a success by employees 14% transformation is necessary and ultimately beneficial. Source: Capgemini analysis.

Employee buy-in can be challenging to achieve because resistance is a natural human response to change. Staff resistance can result in missed deadlines and substandard implementation of the project’s

12 Company press release, June 2005. 13 HRM Guide, “£22m Share Bonus for BT Staff,” 21 August 2006.

53 Tips for Successful Business Transformation two main areas require continuous attention to enable telcos to successfully achieve the next phases of transformation: the need to I Remember that business transformation is not a one-off exercise—it is essential to continuously scan the external business environment and assess the need for business embed pervasive leadership into transformation on an ongoing basis. transformation program implementation and the need to I Ensure that everyone in the organization understands the objectives of business transformation and what it means for them. It is the role of the chief executive to enhance transformation skills within provide the necessary context and rationale. the DNA of the organization.

I Remember that implementation is the riskiest stage of a business transformation project, so it is important to direct attention and energy here—not just to the setting of Need for Pervasive Leadership objectives. Executives who initiate business transformation projects should not expect As in so many areas of business, it is to take a back seat during implementation. They should continue to play an active role far easier to plan a transformation for the duration of the project. project than to make it work. A

I When determining the success of business transformation, it is important to look common shortcoming of many beyond the financials and consider the impact on shareholders, employees and, above companies is that they spend too long all, customers. setting objectives and not enough

I Ensure that you have strong communicators on a business transformation team who time and resources on the can promote the project and motivate employees. It is not enough to select only implementation stage. Consider, for “functional experts.” example, one operator who spent

I Promote a culture in the organization that eschews bureaucratic processes in favor of nearly a year planning for its more agile decision-making and create an environment in which employees feel transformation through multiple empowered to take initiative and share knowledge. strategic studies and senior executive

I Ensure that the organization has a flexible structure that means projects can be scaled retreats before it felt ready to launch up or scaled down as the need dictates. This requires the development of people who into the implementation proper. At can manage change, are good at multi-tasking and can be rotated from one project to that stage the business, carried by an another without losing focus. improving market, started to perform better and the CEO became reluctant to commit to more than a handful of people to support the implementation projects such as major outsourcing account the impact on customers and of his transformation plan (“We must initiatives of enterprise-wide employees when evaluating the not disrupt the day-to-day technology upgrades, which should performance of a transformation operations,” “We have a business to generate immediate, quantifiable project. Vodafone UK, for example, run,” etc.). The result was predictable: efficiencies upon completion. partnered with Capgemini to improve The people tasked to support the the customer experience and back- transformation could not maintain the However, financial objectives are not office efficiency of its Enterprise momentum and perform their day always sufficient in themselves. The Business Unit.14 The project was jobs so the program faded away bottom-line impact of, say, strategic judged a success not only because it within 6 months. changes or mergers and acquisitions generated quantified financial benefits, can be difficult to calculate, especially but also because it delivered tangible If they are to make business in the short term. Furthermore, a improvements in the unit’s employee transformation successful, however, transformation plan with the primary and customer satisfaction scores. senior executives will need to see their ambition of increasing shareholder role as broader than just setting value is unlikely to resonate with Mastering the Art of strategy. Making accurate diagnoses, lower tier employees who may not Implementation: Are identifying root causes of problems, even own shares and so will not see We Making Progress? tracking progress on a regular basis, themselves featured in the vision. For Reflecting on over 10 years of designing corrective actions and these reasons, financial goals should business transformation experience, it ensuring everyone shares a not be the only criteria by which a is clear to us that telecom companies commitment to the project are all project’s performance is judged. have made significant progress in both examples of what CEOs do to designing large transformation implement successful transformations. Rather than focusing only on financial programs and understanding the As a CFO of a major broadcaster numbers, a balanced scorecard factors that are critical to their concluded, “When CEOs shunt approach can help to take into success. From our research, however, transformation to others for

14 Vodafone UK & Capgemini UK, Project 21, 2006.

54 implementation and deployment, that experience could be given his or her successful business transformation is often where such projects go wrong.” own pilot project. Several of our requires strong leadership, clearly telecom and technology clients have stated objectives that are understood Enhancing Transformation Skills been asking Capgemini to structure by everyone involved or impacted by Ultimately, the success of a formal “Transformation Universities” the project and a strong focus on the transformation project depends on the designed to instill the basic mechanics implementation stage. flexibility of the people involved. and methods of transformation in Companies need people with diverse both their senior executives as well as As European telecoms companies skillsets who are good at multi-tasking their key operational managers. continue to grapple with the and can be moved between business challenges of slowing revenue growth, units rapidly and frequently with no Too often the belief is that increasing competition, and loss of focus. This type of flexibility transformation and change skills can convergence, the need for business results in quicker, deeper only be learned at the coal face. transformation is likely to remain high implementation of transformation Whereas fast learners who are able to on the corporate agenda. While projects with less resistance to change. deal with uncertainty can rapidly go change will remain a constant up the transformation learning curve, challenge in the years ahead, the Companies need to proactively the truth is that many managers will mechanics of business transformation enhance the transformation skills of drown under the complexity of are likely to evolve, with a move away their employees by introducing transformation and need to be trained from individual projects that have a training, and incentive and promotion and supported with the proper tools beginning and end towards an structures geared to “project-oriented” and methodology for coping with environment of constant change. people who can work effectively change under uncertainty. Spreading through change. British Telecom, for the good practices of transformation example, launched a major training can indeed be conducive to alleviating Dr Didier Bonnet is a vice president and program for its 7,000 internal IT staff the resistance to organizational change. the Managing Director of Capgemini’s as part of its transformation from a global Telecom, Media & Entertainment traditional telecoms service provider So, have the giants learned how to consulting practice. He was for many to a supplier of converged ICT dance? The answer is not totally clear; years a Vice President with Gemini services.15 The operator introduced while 86% of the respondents in our Consulting and prior to this with several 90-day cycles for projects to introduce survey agreed that business large and small strategy consulting firms. greater flexibility and increase transformation has become a central He is based in London. employees’ exposure to change. Staff way of working, only 30% claimed are regularly taken off project work that their organization was equipped Jean-François Lendais is a vice and put “on the bench,” where they to excel at transformation! Although president in Capgemini Consulting. He is receive further training between business transformation has become a leader in our Global Transformation assignments. The result is a workforce central to the way in which telecom Consulting practice. Jean-Francois is that has the skills to adapt swiftly to companies conduct their operations, based in Paris. evolving business requirements. it is rarely a natural capability for the individuals who are tasked with Alastair Nash is a consultant in Our survey found that some planning and implementing these Capgemini’s TME practice. As part companies keep their transformational projects. Business transformation of the TME Strategy Lab, he focused on skills fresh by moving managers from programs are inherently complex, evaluating telecom operators’ online one role to another. In practical terms, and the fear of change can create a communication strategies. Prior to joining this could mean a horizontal move for powerful state of inertia, deterring Capgemini, Alastair was responsible for someone senior who has been in the executives from making robust analyzing developments in the media same role for a long time and may decisions and creating a culture of sector for a business intelligence therefore be against change, or that a mistrust among those employees who organization. He is based in London. manager with no project-leadership are affected by the change. As a result,

15 IT Training, “BT Exact – Brave New World,” July 2006.

55 Private Equity: Outlook for Value Creation in Telecom and Media by Stanislas Pilot and Priya Mehra

Abstract: Private equity investments have scaled new highs in the past 2 years, showing a dramatic recovery from the economic downturn that plagued the beginning of this decade. The telecom and media sector especially has experienced large-sized buy-outs, with private equity players attracted to the stable cash flows and debt capacity of the leading industry players. Generating substantial returns from mega- sized investments is likely to present a challenge for these financial investors. Capgemini Consulting and the TME Strategy Lab investigated the challenges as well as the routes to unlocking value creation in the telecom and media sector. In addition to financial and operational restructuring, private equity players will need to focus on strategic and top-line growth opportunities in the acquired companies. Moreover, the financial investors will need to develop significant domain expertise to pursue the appropriate value creation strategies in the complex telecom and media sector.

Private equity has not looked so The scale at which private equity promising since the glory days of the firms are operating is also on the rise. 1990s. Private equity firms1 raised a In 2006, fourteen funds raised over landmark ?320bn globally in 2006, $5bn while three went over $15bn.4 up from ?235bn in 20052—which This compares to eight funds in 2005 itself was already a record year. In and only one in 2004 able to raise Europe, 2006 set a new high with more than $5bn. The availability of ?90bn of private equity funds raised, large amounts of capital combined exceeding last year’s milestone with exceptional liquidity in the debt performance of ?72bn (see Figure 1). markets is enabling private equity firms to make large acquisitions, The current low interest rate gaining majority control in companies environment is driving large through “leveraged buy-outs” (LBOs)5. institutional investors such as pension Globally, the LBOs’ share of private funds as well as high-net-worth equity investments by value has individuals away from lower yield increased from 21% to 66% between bond investments and towards better- 2000 and 2005.6 By contrast, the performing private equity share of venture capital funds raised investments. Consider that in the UK, has declined over time, as investors 10-year returns on private equity are far more cautious of this route investments were around 16% as of since the boom days of the late 1990s. 2005, compared with 8–9% for UK bonds and public equity.3

1 Private Equity typically refers to equity investments in firms made through privately-raised funds. Some examples of investors who act as sources of funds raised are pension funds, banks, insurance companies, government agencies as well as private individuals. 2 Private Equity Intelligence, “2007 Global Fundraising Review,” February 2007. Funds raised reported as $432bn in 2006; $ to ? conversion rate of 0.75 used. 3 International Financial Services, “City Business Series: Private Equity,” October 2006. 4 KKR Fund 2006, Blackstone Capital Partners V and Texas Pacific Group V. 5 Leveraged buy-outs (LBOs) are usually made through a mix of debt and equity (funds raised), usually with a 70%:30% debt–equity ratio. 6 International Financial Services, “City Business Series: Private Equity,” October 2006.

56 Figure 1: Funds Raised by Private Equity in Europe (?bn) challenges that private equity firms can expect to face going forward and

90 how they can overcome them.

TME: A Hot Sector for Private 72 Equity Funds The European telecom, media and entertainment (TME) sector has 48 witnessed increasing merger and 40 acquisition (M&A) activity in the last couple of years, finally breaching the ? 28 27 28 100bn mark in 2005. Last year, total investment in M&A activity was ?150bn, but this is still far lower than the record ?530bn seen in 2000.8 The sector is also seeing increasing interest 2000 2001 2002 2003 2004 2005 2006 amongst the private equity players. In Europe, private equity deals Source: Capgemini TME Strategy Lab analysis; EVCA, Thomson Financial, 2007. comprised 32% of total deals by value in 2006, compared with 20–25% over the previous 5 years. The total Equity firms are also joining forces to study, Capgemini Consulting and the transaction value of deals backed by participate in mega deals. Consider TME Strategy Lab assess what is them was nearly ?50bn in 2006, up the $45bn buy-out of TXU in the US, driving the spate of activity in the from ?31bn in 2005 (see Figure 2). which is the largest private equity telecom and media space by private buy-out announced in history and is equity players. We also present key In this section we analyze recent sponsored by KKR, Texas Pacific value-creation strategies being used by private equity activity in the telecom, Group and the private equity arm of private equity players to garner and media and entertainment sectors. investment bank Goldman Sachs.7 substantial returns on their investments Overall, no fewer than twenty-three within the telecom and media sector. buy-outs of over ?1bn, with seven mega Last, we identify some important deals over ?3bn, were reached in 2006.

Even this may not be ambitious enough for some Wall Street Figure 2: Private Equity Investments in Telecom, Media and Entertainment in Europe ? 9 mammoths: Home Depot, the US ( bn) home improvement chain, was 32% recently flagged up as a possible target for a private equity offer, valuing the 27% company at close to $80bn. Market 24% practitioners are openly predicting 22% that a deal worth up to $100bn will 20% 20% happen within the next 2 years. In 49 fact, all indications show that 2007 45 2 39 could see a record amount of money 19 raised by private equity funds around 9 31 the world. 8% 26 9 10 15 13 So private equity players, flush with 5 funds, are eagerly deploying their 7 30 capital to buy out large industry 43 30 10 16 6 22 players. However, managing returns 2000 2001 2002 2003 2004 2005 2006 on these large-scale investments, in Telecom Media & Entertainment % of Private equity deals (in value) line with past performance, is likely to in total M&A activity throw up some challenges. In this Source: Capgemini TME Strategy Lab analysis; Thomson Financial.

7 CNNMoney.com, “Record Buy-Out for TXU,” 26 Februrary 2007. 8 Thomson Financial; Dealogic 2007; M&A Global 2007. 9 Investments in the telecom sector include wireless, fixed-line, satellite and cable carriers and communication equipment service providers.

57 Figure 3: Major Private Equity Backed Deals in Telecom and Media in Europe (?bn, 2004–2007)

Satellite Cable

Radio & TV Eutelsat, Telenor Com Hem, Mobile Satellite Sweden Broadcast France UPC, France TIM Hellas, Services, 0.9 0.9 Greece Norway 1.2 3.4 0.3 TDF, ProSieben, Sat France FT Mobile Satellite Germany Fixed & Services, France 2.6 Business Broadband 2.1 5.5 5.9 Eircom, Ireland 0.06 Casema, Kabelkom, Publishing & Services Netherlands Netherlands Trader Media, UK Classifieds 4.4 2.0 Incisive Media, UK TIM Hellas, Multikabel, 0.3 TDC, Denmark 0.5 Greece Netherlands VNU, Netherlands 10.3 1.6 8.7 Intelsat, 12.1 Bermuda PagesJaunes, France Telecom Editis, Directory Networks & 4.0 France Wind, Italy 5.7 Services Equipment PCM Uitgevers, Yellow Brick Road, Netherlands 0.7 Pan-European Sogetrel, France Pirelli Cavi, Italy 0.7 1.82 0.65 TDC Forlag, 0.1 Telegraph Group, Denmark 1.3 1.1 UK 2.1 VNU, Netherlands 2007H12006 2005 2004 2004 2005 2006 2007H1

x Enterprise value of the acquired firm in E billion

Source: Capgemini TME Strategy Lab analysis; Thomson Financial; company websites and news releases.

Telecom and regulatory environment, telecom Consolidation is also giving rise to A majority of the deals in telecom companies meet the key criteria buy-out activity in the cable market. were driven by large European needed for funds to chip in. Maturing markets and a fiercely incumbents, but private equity firms competitive environment are making it have also started participating The long-term and stable cash flows tougher for smaller players to survive significantly in the past 2 years (see of the satellite industry have also led in this sub-sector. Private equity player Figure 3). The scale of transactions by to significant private equity interest in Cinven acquired and merged three financial investors in the telecom recent years. While recurring cash cable operators in the Netherlands sector has been significant, rising from flows allow for significant leverage, over 2005 and 2006, betting that a less than 10% of the total investment rising capacity demand, High larger entity would compete more value in 2005 to 27% in 2006.10 At Definition TV and VoD developments effectively against the incumbent. around ?30bn in 2006, investments in are likely to promise potential revenue the telecom sector comprise the growth for investors. Recent activity in Media and Entertainment largest share of private equity this sector has also been driven by The overall value of M&As in the investments in TME as a whole. consolidation, which has thrown up media and entertainment sector in opportunities for cost savings and Europe is lower, at nearly ?43bn in Several private equity players have efficiencies due to economies of scale. 2006, compared with nearly three recently engaged in large scale deals, Intelsat, owned by private equity times as much in telecom. However, acquiring leading telecom players firms, acquired PanAmSat in July private equity interest in this space such as TDC, Wind and Eircom (see 2006 to create the largest satellite has accounted for nearly 40% of the Figure 3). From an investor’s operator in the world. The deal value in the past 5 years, with perspective, the financial model of consolidated entity is expected to around ?19bn invested in 2006.11 these telecom companies is highly benefit significantly from reduced Private equity players have acquired attractive. Usually with high EBITDA costs, shared overheads and greater assets across various media sub- margins, recurring cash flows, high bargaining power in relation to sectors ranging from radio, television, debt capacity and high barriers to customers in a fragmented market. movies and music, to newspapers and entry due to technological complexity directories (see Figure 3).

10 Thomson Financial. 11 Thomson Financial.

58 Traditional media companies in the buy-outs by private equity will be addition to financial engineering and publishing and directories business, more likely in the future. Already, leveraged recapitalization14 to improve with their stable cash flows, have some activity is seen in this direction. returns, private equity players need to attracted significant private equity in US Web advertising company focus on creating value post- the past few years. KKR and Goldman DoubleClick’s acquisition by private transaction and look at opportunities Sachs Capital Partners acquired a equity firms Hellman & Friedman and to realize greater efficiencies as well as majority stake in PagesJaunes in JMI Equity for $1.1bn in 2005, top-line growth. France in October 2006; Macquarie followed by its sale to Google for Capital Alliance consortium put in $3.1bn in 2007, indicates Cost Efficiency ?1.82bn for the acquisition of pan- considerable potential in this area. After a buy-out, private equity players European directories business Yellow initially focus on extracting significant Brick Road, adding on Nordic To summarize, the TME sector has value through operational improvements directories business TDC Forlag for witnessed a significant number of via cost savings, outsourcing and ?650m in 2005; Apax Partners and large buy-out deals in the last few divestment of select assets. Cinven Ltd. secured a ?2.1bn deal for years. For instance, in 2006 the Dutch publisher VNU’s Yellow Pages telecom sector had the highest average A case in point is the ?10.3bn directories unit in 2004. deal size at ?1bn.12 This trend of large- buy-out of Denmark’s incumbent

sized deals is expected to continue in operator TDC in February 2006 Private equity firms have also recently the near future, with the private by a consortium of private equity shown interest in content companies. equity community continuing to players such as Apax Partners,

EMI, for instance, rejected an display a healthy appetite for Blackstone Group, KKR, Permira and Providence Equity. After the buy-out, in order to reduce costs, TDC announced annual 5–7% job cuts. It “ also outsourced the full range of IT High EBITDA and infrastructure services using a 7-year contract and transferred around 150 STEADY CASH FLOWS are driving employees to its third-party services private equity interest in provider, CSC. “ Further, a decision has been made to focus only on the Nordic region telecom and media. with TDC’s non-Nordic assets considered non-strategic and therefore set to be sold off. At face value, this seems to be working as TDC reported unsolicited ?3.7bn bid from a private acquiring large assets. Some of the a 5% rise in EBITDA on relatively flat equity firm in 2006. Endemol mega deals being rumored include an sales for 2006.15 attracted some of the biggest private $80bn buy-out of US telecom major equity buyers such as KKR and Apax Sprint Nextel.13 Similarly, Babcock & Brown, which partners in early 2007. This recent bought a 65% stake in Ireland’s attention is possibly due to These examples indicate that private Eircom for an enterprise value of opportunities driven by digital equity players are likely to continue ?4.4bn in 2006, has embarked on content distribution. Companies with to show interest in TME businesses stringent cost cutting, including compelling and successful content as they offer the potential for selling off Eircom’s new head office assets, which can be extended to new significant returns through various building for ?190m in a sale and distribution platforms, therefore, are value-creation initiatives. leaseback deal.16 likely to continue to see merger and acquisition interest. Strategic Route to Value While immediate gains can be Creation extracted from making cost In the online space, companies are Private equity players are entering into efficiencies and divestiture of assets, currently funded primarily by venture mega-sized deals at high valuations, investors are also looking at more capital. However, as these Internet ensuring they have to work hard to medium- and long-term horizons for companies’ business models mature, generate appropriate returns. In value creation.

12 Thomson Financial. 13 Business Week, ”Why $80bn for Sprint May Make Sense,” March 2007. 14 A leveraged recapitalization is a dividend distribution or a share buy-back to the private equity shareholders funded by additional debt incurred by the company they invested in. The recapitalization typically covers between 0.5x and 1.5x of the initial private equity investment. 15 Reuters News, “Denmark’s TDC Posts 5 pct Full-Year Core Profit Rise,” February 2007. 16 Global Insight Daily Analysis, “Under the Spotlight: Orascom CEO Adds TIM Hellas to Burgeoning Mediterranean Empire,” February 2007.

59 Consolidation into one Dutch cable company. This This created the largest satellite entity Another strategy focuses on increasing helped consolidation in a fragmented in the world with the ability to the firm’s scale of operations through industry and through increased provide almost all services in the mergers and acquisitions. This entails operational synergies put the satellite industry to customers more risk than extraction of simple combined company in a good worldwide. Additionally, the cost efficiencies, as it requires a competitive position to offer triple- combined entity was able to reap the further infusion of capital and expert play services, rivalling the incumbent benefits of economies of scale by operational management to create KPN. Similarly, in France, Cinven eliminating common overheads, value. It also requires the private created Noos-Numericable from streamlining processes and equity players to know the business several existing cable companies to rationalizing marketing expenses. and competitive scenario thoroughly create a similar advantage. and take a long-term view of their By consolidating companies, investors investments. Therefore, this strategy is Another example is Intelsat’s can potentially increase their returns not as common as the deployment of acquisition of PanAmSat. In August by selling the bigger entity at higher cost-efficiency improvisation measures. 2004, a group of private equity multiples than they originally bought However, several private equity firms investors including Apax, Apollo, the parts. have used it very successfully. Madison, Dearborn and Permira bought the satellite operator Intelsat Invest in Future Growth Areas For example, in the Netherlands, for an enterprise value of ?4bn. Two Private equity players can also infuse private equity players Cinven and years later, Intelsat bought PanAmSat, further capital into the acquired firm Warburg Pincus bought and another large satellite operator, for an or use internal accruals to fund the combined three cable operators— enterprise value of ?6.4bn. firm’s capital expenditures for long- Multikabel, Casema and Kablecom— term growth and expansion. Although

60

With the pool of this route seems to be used sparingly, it can generate significant returns for suitable candidates in private equity players with medium- to long-term investment horizons and developed countries drying the ability to anticipate evolving “ “ customer needs and the competitive environment. up, private equity firms

For example, in March 2006, when will have to CONSIDER Netherlands-based media firm VNU was evaluating multiple alternatives to MOVING TOWARDS fund its future expansion, including a break-up of the company, it received a buy-out offer from a private equity EMERGING MARKETS. consortium17 that insisted on keeping VNU substantially together as an integrated company. Their vision for Private equity players can benefit MVNOs that launched price- VNU entailed pursuing a long-term significantly by supporting the growth competition offensives backed by growth strategy of improving plans of acquired firms, coupled with Telfort’s low wholesale prices. Faced operational efficiency and investing in strategies like cost-cutting, operational with falling average revenues per user product development and innovation. improvement and consolidation. and increased customer churn, KPN They also outlined measures to extend decided to buy Telfort for nearly market coverage, expand into Strategic Course Correction ?1bn in June 2005, thereby generating developing markets, innovate in At times, to turn around the fortunes significant value for the private technology and services, and develop of the acquired company, a private equity firm. integrated business solutions for equity player may need to correct the clients. The board of directors course of its strategic direction set by Challenges to Private recommended the buy-out offer to the predecessors. This needs extensive Equity Firms shareholders based on the industry expertise and foresight of Given the attractive returns on private commitment shown by the private evolving dynamics of consumer equity investments, it’s unsurprising equity players towards the future behavior, industry competition and that large amounts of funds are being growth of VNU. regulatory changes. But, if channeled into this asset class. With implemented correctly, the benefits increased liquidity at their disposal, A similar example can be found in the can be huge. more and more private equity firms October 2006 acquisition of France- are pursuing buy-out targets. based TDF, which owns more than Consider the case of Netherlands- However, the increased activity in this 7,500 radio and TV towers, by AXA based mobile operator Telfort. In space is giving rise to numerous Private Equity and Texas Pacific 2003, Telfort was making losses and challenges in terms of acquiring the Group. The private equity investors was sold to Greenfield Capital right target, at the right price and committed funds to the company’s Partners, a private equity firm, for generating adequate returns. organic growth amounting to ?1bn ?25m. The private equity firm over 5 years and a potential maximum redirected Telfort’s strategy and started Competition amount of ?1bn to finance mergers or offering low-cost wholesale services in Private equity players face acquisitions. This provided TDF with addition to its retail mobile services competition not only from each other the funds required to implement its using two distinct business units. The but also from industry players. For plans to develop near-term DTT increased focus on wholesale services example, in 2005 both France infrastructure expansion in France made Telfort very successful in Telecom and Telefónica had to battle including High-Definition DTT and attracting MVNOs18 to its network. it out with private equity players to mobile DTT transmission. On the As a result its total subscriber base acquire Amena and Cesky Telecom back of this capital infusion, TDF is increased and it became profitable respectively. Therefore, with multiple expected to grow steadily and within a couple of years. In turn, suitors pursing a common target, a consolidate its position in France. incumbent KPN felt pressure from bidding war or a price-auction often

17 The private equity consortium that bought VNU comprised AlpInvest, Blackstone, Carlyle, Hellman & Friedman, KKR and Thomas H. Lee Partners. 18 MVNO: Mobile Virtual Network Operator.

61 ensues, driving the selling price to Clearly, some private equity firms are services and business models will be very high levels. This can make it very ahead of others regarding investing in critical for growth. Partnering with difficult to generate returns of emerging markets; the rest may have industry experts would help private 15–20% on investments. to follow soon or risk being left with equity firms take the right course of less attractive targets. action and create significant value The increased levels of competition from their investments. can also accelerate the buy-out activity Depth of Sectoral Knowledge and leave very few good acquisition To create value post-transaction, Other Challenges targets on the table. With the pool of private equity players need to Private equity players must take steps suitable candidates in developed understand the industry dynamics in to minimize resistance to their markets drying up, private equity order to meaningfully set a new acquisition activities, be it from firms will have to consider moving strategic course and drive operational employee unions or government towards emerging markets, which will restructuring. This is especially true regulations. Some private equity firms throw up further challenges of for the telecom and media markets, have been trying to encourage identifying appropriate targets and given that substantial sector employee buy-in by offering equity. due diligence. Private equity players knowledge is required to grapple with For example, in 2005 Onex, a who get their foot in the door first are complex regulatory, technological and Toronto-based private equity firm, likely to benefit from attractive operational challenges. bought some of Boeing’s loss-making valuations by selling them to industry plants. Onex realized that it had to players when they want to move in. Moreover, the sector is at a very make some tough decisions on For example, in India, private equity crucial juncture with the phenomena employee headcount and wages over firm Warburg Pincus spent of convergence, digitized the short-term, but secured employee approximately $300m (over communication and changes in media and union co-operation by offering 1999–2001) financing mobile consumption patterns potentially stock in the new company and operator Bharti’s growth through the altering the industry landscape promised future salary increases. In acquisition and expansion of existing dramatically. Consider for instance the little over a year, Onex had made the properties. By 2005, Warburg Pincus emergence of WiFi mesh networks company profitable and also increased was able to exit Bharti for more than and WiMAX, which have the potential headcount. In November 2005, Onex $1.9bn by selling its shares on stock to change the competitive landscape took the company public and exchanges and to a strategic investor in the wireless industry. Similarly, in employees reaped the rewards (Vodafone).19 A similar story may the media space, the growing through capital gains.20 unfold in coming years with proliferation of user-generated and Providence Equity Partners recently Internet-distributed content may Private equity firms can also benefit securing a 12.7% stake in Indian disrupt the traditional media players’ by involving and working with mobile operator Idea Cellular through established revenue streams. Betting employee unions right from the start a $400m commitment. on the right future technologies, of the bid, once the need for

PRIVATE EQUITY PLAYERS CAN BENEFIT by supporting the “ “growth plans of acquired firms, with strategies like cost-cutting, operational improvement and consolidation.

19 Economic Times, “Warburg Pincus Hits the Jackpot,” 29 October 2006; ciol.com, “Warburg Pincus Sells 6% of Bharti,” 14 March 2005. 20 Behind The Buyouts Case Study, “Come Fly with Me: Creating Opportunities for Workers,” 2007. 21 NCEO, “ESOPs in Mergers and Acquisitions: Wave of the Future?,” April 2007; Financial Times, “Daimler Pays to Back Out of Chrysler,” 14 May 2007.

62 organization restructuring is clear. For media players to partake in the value example, in a recent bid for US car created from future growth prospects maker Chrysler, rival private equity as well as acquire the new breed of players Cerberus, Blackstone and firms who bring in new technologies, others involved union officials from business models and new the beginning. The union was made content services. aware of the issues facing Chrysler and the need to make difficult However, given the rapidly changing decisions including reducing telecom and media environment, Chrysler’s billions of dollars of driven by new consumer behavior as pension and healthcare liabilities, well as technology developments, which had been a drag on profit. investing in the right targets and the Consequently, the union offered appropriate strategy can be complete support to the winning bid challenging. Private equity investors of Cerberus and the private equity must develop sector knowledge and firm can now expect employees’ ally with domain experts to make the support in turning the company’s right bets and implement the right fortunes around.21 approach to value creation.

Conclusion Stanislas Pilot is the Leader of The dramatic recovery of private Capgemini’s TME Private Equity equity investments in the telecom and Practice. Stanislas has more than 10 media sector over the past few years years’ experience in strategic analysis, will continue strongly. Although M&A and shareholder value creation in private equity activities dropped the telecom and media sectors. Prior to following the economic downturn in joining Capgemini, Stanislas was a 2000, the number of mega-deals, Principal with APAX Partners. He is including large-sized buy-outs, agreed based in Paris. in the last couple of years indicates that serious private equity investments Priya Mehra is a manager in the TME are chasing telecom and media Strategy Lab. Her recent work includes businesses. assessing the case for WiMAX and fiber roll-out in Europe, evaluating online Some very large deals may well be on service strategies for operators as the horizon, especially following the well as estimating the revenue and renewed focus on fixed-mobile cannibalization impact of mobile IM. convergence and domestic as well as Prior to joining the Lab, Priya worked pan-European consolidation in the for a mobile operator where she helped face of intense competition. Moreover, launch voice and data products for telecom companies in the US and the Enterprise market. She is based Europe are flush with cash and have in Mumbai. started looking at high-growth emerging markets to deploy their funds. This interest is likely to drive private equity players to look at international acquisitions to get in the game early.

Similarly, in the media sector, the de- coupling of the distribution and content business is also making it necessary for traditional print and broadcast companies to gain online presence and scale. This will drive private equity companies to buy large

63 light Strategizing in an Uncertain World

BITES Continuously challenge preconceived ideas ... “[Television] won’t be able to hold on to any market it captures after the first 6 months. People will soon get tired of staring at a plywood box every night.” – Darryl Zanuck, movie producer, 20th Century Fox, 1946

“Transmission of documents via telephone wires is possible in principle, but the apparatus required is so expensive that it will never become a practical proposition.” – Dennis Gabor, British physicist and author of Inventing the Future, 1962

“Remote shopping, while entirely feasible, will flop—because women like to get out of the house, like to handle merchandise, like to be able to change their minds.” – Time, 1966, in one sentence writing off e-commerce long before anyone had ever heard of it

“The popularity of email was not foreseen by the ARPANET’s planners. Roberts had not included electronic mail in the original blueprint for the network. In fact, in 1967 he had called the ability to send messages between users ‘not an important motivation for a network of scientific computers.’” – J Abbate, Inventing the Internet, 1999

The iPod: One of the “Top Five Worst Tech Gifts” to get for Christmas in 2001. – TechTarget poll, 2001

Gain deeper understanding of usage trends… In China, the average time spent per gamer per week on online games is 11 hours, compared with a mere 2 hours in the UK. – CNNIC Survey

In South Korea, active mobile TV users spend nearly 1.5 hours per day viewing TV on their mobiles. – Capgemini analysis

Around 50% of YouTube’s audience is in the 35–64 age group. – AC Nielsen

The percentage of visitors on Second Life, an interactive virtual world, between the ages 18 and 34 actually decreased, with the 18 to 24 range dropping a full 7%. Instead, big increases are being seen in the 45+ age bracket, with visitors aged 45 to 54 increasing by 3% and visitors over 55 increasing by about 10%. – http://blog.ipglab.com/index.php?tag=second_life

A new study from a research team at Nottingham Trent University in the UK that polled 7,000 online gamers found that one out of nine players studied showed at least three of the symptoms of addiction as defined by the World Health Organization, including craving, withdrawal symptoms, loss of control and neglect of other activities. – http://www.fiercegamebiz.com/story/study-one-in-nine-mmo-players-are- addicts/2006-11-29

Take action … During Bill Clinton’s entire 8-year presidency, he only sent two e-mails. One was to John Glenn when he was aboard the space shuttle, and the other was a test of the email system. – CNN, 28 January 2004

Tony Blair has taken a giant leap into cyberspace—by using the YouTube website to congratulate France’s new leader Nicolas Sarkozy on his poll win. – BBC, 7 May 2007

64 We value your comments and ideas. Please contact us at [email protected]

Insights is published by Capgemini’s Telecom, Media & Entertainment (TME) consulting practice. We are the leading global management consulting group dedicated to helping CEOs and senior executives in the converging communications industries address their most critical strategic and operational challenges.

For further information visit: www.capgemini.com/tmeconsulting

Editorial Team: Benjamin Braunschvig Jerome Buvat Priya Mehra Joe Morris Design: Kristin Waring

Atlanta Düsseldorf Helsinki Lisbon London Madrid Milan Mumbai New York Oslo Paris Rome Shanghai Stockholm Sydney Utrecht

© 2007 Capgemini. No part of this document may be modified, deleted or expanded by any process or means without prior written permission from Capgemini. Capgemini’s telecom, meddaia& ennttetratainmennt jouurnrnaall volume 3: spring|summer.07 ” EXPECT PREMIUM EXPECT PREMIUM

to be free and are

— Endemol Peter Bazalgette, Chief Creative Officer, happy to watch ads. Consumers

CONTENT “