Strategy research The value of 'Smart' Pipes to mobile network operators Regardless of business strategy, the development of more intelligent networks will be a key driver of shareholder returns from operators Chris Barraclough, MD and Chief Strategist, STL Partners/Telco 2.0 [email protected] November 2011 This report has been produced 100% independently by STL Partners and has been kindly sponsored by: The value of 'Smart' Pipes to mobile network operators | November 2011 Preface Rationale and hypothesis for this report It is over fourteen years since David Isenberg wrote his seminal paper The Rise of the Stupid Network in which he outlined the view that telephony networks would increasingly become dumb pipes as intelligent endpoints came to control how and where data was transported. Many of his predictions have come to fruition. Cheaper computing technology has resulted in powerful „smartphones‟ in the hands of millions of people and new powerful internet players are using data centres to distribute applications and services „over the top‟ to users over fixed and mobile networks. The hypothesis behind this piece of research is that endpoints cannot completely control the network. STL Partners believes that the network itself needs to retain intelligence so it can interpret the information it is transporting between the endpoints. Mobile network operators, quite rightly, will not be able to control how the network is used but must retain the ability within the network to facilitate a better experience for the endpoints. The hypothesis being tested in this research is that „smart pipes‟ are needed to: 1. Ensure that data is transported efficiently so that capital and operating costs are minimised and the internet and other networks remain cheap methods of distribution. 2. Improve user experience by matching the performance of the network to the nature of the application or service being used. „Best effort‟ is fine for asynchronous communication, such as email or text, but unacceptable for voice. A video call or streamed movie requires guaranteed bandwidth, and real-time gaming demands ultra-low latency; 3. Charge appropriately for use of the network. It is becoming increasingly clear that the Telco 1.0 business model – that of charging the end-user per minute or per Megabyte – is under pressure as new business models for the distribution of content and transportation of data are being developed. Operators will need to be capable of charging different players – end-users, service providers, third- parties (such as advertisers) – on a real-time basis for provision of broadband and guaranteed quality of service (QoS); 4. Facilitate interactions within the digital economy. Operators can compete and partner with other players, such as the internet companies, in helping businesses and consumers transact over the internet. Networks are no longer confined to communications but are used to identify and market to prospects, complete transactions, make and receive payments and remittances, and care for customers. The knowledge that operators have about their customers coupled with their skills and assets in identity and authentication, payments, device management, customer care etc. mean that „the networks‟ can be „enablers‟ in digital transactions between third-parties – helping them to happen more efficiently and effectively. Overall, smarter networks will benefit network users – upstream service providers and end users – as well as the mobile network operators and their vendors and partners. Operators will also be competing to be smarter than their peers as, by differentiating here, they gain cost, revenue and performance advantages that will ultimately transform in to higher shareholder returns. © STL Partners STRATEGY RESEARCH 2 The value of 'Smart' Pipes to mobile network operators | November 2011 About STL Partners STL Partners is a research, consulting and brainstorming events business focused on business model innovation and analysis in telecoms, media and technology (TMT). In particular, the Telco 2.0 Initiative has focused on the opportunities for growth through new telecoms business models, and through our New Digital Economics Executive Brainstorms we have been working on cross-TMT business model opportunities in Telco 2.0, Digital Entertainment 2.0, M2M 2.0, Mobile Apps 2.0 and Personal Data 2.0 Sponsorship and editorial independence This report has kindly been sponsored by Tellabs and is freely available. Tellabs developed the initial concepts, and provided STL Partners with the primary input and scope for the report. Research, analysis and the writing of the report itself was carried out independently by STL Partners. The views and conclusions contained herein are those of STL Partners. About Tellabs Tellabs innovations advance the mobile Internet and help our customers succeed. That‟s why 43 of the top 50 global communications service providers choose our mobile, optical, business and services solutions. We help them get ahead by adding revenue, reducing expenses and optimizing networks. Tellabs (Nasdaq: TLAB) is part of the NASDAQ Global Select Market, Ocean Tomo 300® Patent Index, the S&P 500 and several corporate responsibility indexes including the Maplecroft Climate Innovation Index, FTSE4Good and eight FTSE KLD indexes. http://www.tellabs.com © STL Partners STRATEGY RESEARCH 3 The value of 'Smart' Pipes to mobile network operators | November 2011 Contents Executive Summary ......................................................................................................................................... 7 Mobile network operator challenges ........................................................................................................... 14 The future could still be bright ..................................................................................................................... 18 Defining a ‘smart’ network ............................................................................................................................ 26 Understanding operator strategies .............................................................................................................. 32 Video: Case study in delivering differentiation and cost leadership ....................................................... 49 The benefits of Smart on CROIC .................................................................................................................. 53 Implementing a ‘smart’ strategy .................................................................................................................. 57 Conclusions and recommendations ............................................................................................................ 62 The Telco 2.0™ Initiative ............................................................................................................................... 64 © STL Partners STRATEGY RESEARCH 4 The value of 'Smart' Pipes to mobile network operators | November 2011 Table of Exhibits Figure 1: Pressure from all sides for operators ............................................................................................... 14 Figure 2: Vodafone historical dividend yield – from growth to income ............................................................ 15 Figure 3: Unimpressed capital markets and falling employment levels .......................................................... 16 Figure 4: Porter and Telco 2.0 competitive strategies ..................................................................................... 19 Figure 5: Defining Differentiation/Telco 2.0 ..................................................................................................... 20 Figure 6 – The Six Opportunity Areas – Approach, Typical Services and Examples ..................................... 23 Figure 7: Defining Cost Leadership/Happy Pipe ............................................................................................. 25 Figure 8: Defining „smartness‟ ......................................................................................................................... 28 Figure 9: Telco 2.0 survey – Defining smartness ............................................................................................ 30 Figure 10: NTT‟s smart content delivery system – a prelude to mobile CDNs?.............................................. 33 Figure 11: Vodafone India‟s ARPU levels are now below $4/month, illustrating the need for a „smart network‟ approach .......................................................................................................................................................... 35 Figure 12: China Mobile‟s WLAN strategy for coverage, capacity and cost control........................................ 37 Figure 13: GCash – Globe‟s text-based payments service ............................................................................. 38 Figure 14: PowerOn – SingTel‟s on-demand business services ..................................................................... 40 Figure 15: Telefonica‟s Full-service Telco 2.0 strategy ................................................................................... 43 Figure 16: Vodafone – main messages are about being an efficient data pipe .............................................. 44 Figure 17: Collaboration with other operators key to smart services strategy ................................................ 45 Figure 18: Verizon Wireless and Skype offering