The Value of 'Smart' Pipes To Mobile Network Operators

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 chris.barraclough@stlpartners.com November 2011
This report has been produced 100% independently by STL Partners and has been kindly sponsored by:
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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, thirdparties (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.
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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. Thats 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
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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
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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: NTTs smart content delivery system a prelude to mobile CDNs?.............................................. 33 Figure 11: Vodafone Indias ARPU levels are now below $4/month, illustrating the need for a smart network approach .......................................................................................................................................................... 35 Figure 12: China Mobiles WLAN strategy for coverage, capacity and cost control........................................ 37 Figure 13: GCash Globes text-based payments service ............................................................................. 38 Figure 14: PowerOn SingTels on-demand business services ..................................................................... 40 Figure 15: Telefonicas 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 ............................................................................................. 48 Figure 19: Content delivery with and without a CDN ....................................................................................... 50 Figure 20: CDN benefits to consumers are substantial ................................................................................... 51 Figure 21: Cash Returns on Invest Capital of different Telco 2.0 opportunity areas ...................................... 54 Figure 22: The benefits of smart to a MNO are tangible and significant ........................................................ 55 Figure 23: Telco 2.0 Survey benefits of smart to MNOs .............................................................................. 56 Figure 24: Telco 2.0 survey MNO chances of success with smart strategies .............................................. 57
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Figure 25: Telco 2.0 survey lots of moving parts required for smartness ................................................... 59 Figure 26: Telco 2.0 survey Differentiation via smart services is particularly challenging ........................... 60 Figure 27: Telco 2.0 survey Implementing changes is challenging .............................................................. 61 Figure 28: Telco 2.0 survey Prioritising smart implementation activities ...................................................... 63
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Executive Summary
Mobile operators no longer growth stocks
Mobile network operators are now valued as utility companies in US and Europe (less so APAC). Investors are not expecting future growth to be higher than GDP and so are demanding money to be returned in the form of high dividends.
Two smart pipes strategies available to operators

In his seminal book, Michael Porter identified three generic strategies for companies Cost leadership, Differentiation and Focus. Two of these are viable in the mobile telecommunications industry Cost leadership, or Happy Pipe in STL Partners parlance, and Differentiation, or Full-service Telco 2.0. No network operators have found a Focus strategy to work as limiting the customer base to a segment of the market has not yielded sufficient returns on the high capital investment of building a network. Even MVNOs that have pursued this strategy, such as Helio which targeted Korean nationals in the US, have struggled. Underpinning the two business strategies are related smart pipe approaches smart network and smart services: Porter Strategy Cost leadership Telco 2.0 strategy Happy Pipe Full-service Telco 2.0 Nature of smartness Smart network Characteristics Cost efficiency minimal network, IT and commercial costs. Simple utility offering. Technical and commercial flexibility: improve customer experience by integrating network capabilities with own and third-party services and charging either end user or service provider (or both).
Source: STL Partners
Differentiation
Smart services
It is important to note that, currently at least, having a smart network is a precursor of smart services. It would be impossible for an operator to implement a Full-service Telco 2.0 strategy without having significant network intelligence. Full-service Telco 2.0 is, therefore, an addition to a Happy Pipe strategy.
Smart network strategy good, smart services strategy better

In a survey conducted for this report, it was clear that operators are pursuing smart strategies, whether at the network level or extending beyond this into smart services, for three reasons: Revenue growth: protecting existing revenue sources and finding new ones. This is seen as the single most important driver of building more intelligence. Cost savings: reducing capital and operating costs. Performance improvement: providing customers with an improved customer experience.
Assuming that most mobile operators currently have limited smartness in either network or services, our analysis suggests significant upside in financial performance from successfully implementing either a Happy Pipe or Full-service Telco 2.0 strategy. Most mobile operators generate Cash Returns on Invested Capital of
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between 5 and 7%. For the purposes of our analysis, we have a assumed a baseline of 5.8%. The lower capital and operator costs of a Happy Pipe strategy could increase this to 7.4% and the successful implementation of a Full-service Telco 2.0 strategy would increase this to a handsome 13.3%: Telco 2.0 strategy As-is Telco 1.0 Happy Pipe Full-service Telco 2.0 Nature of smartness Low relatively dumb Smart network Smart services Cash Returns on Invested Capital 5.8% 7.4% 13.3%
STL Partners has identified six opportunity areas for mobile operators to exploit with a Full-service Telco 2.0 strategy. Summarised here, these are outlined in detail in the report:
Opportunity Type
Core Services Vertical industry solutions (SI) Infrastructure services Embedded communications Third-pary business enablers Own-brand OTT services
Approach
Improving revenues and customer loyalty by better design, analytics, and smart use of data in existing services. Delivery of ICT projects and support to vertical enterprise sectors. Optimising cost and revenue structures by buying and selling core telco ICT asset capacity. Enabling wider use of voice, messaging, and data by facilitating access to them and embedding them in new products. Enabling new telco assets (e.g. Customer data) to be leveraged in rd support of 3 party business processes. Building value through Telco-owned online properties and Over-the-Top services.
Typical Services
Access, Voice and Messaging, Broadband, Standard Wholesale, Generic Enterprise ICT Services (inc. SaaS) Systems Integration (SI), Vertical CEBP solutions, Vertical ICT, Vertical M2M solutions, and Private Cloud. Bitstream ADSL, Unbundled Local Loop, MVNOs, Wholesale Wireless, Network Sharing, Cloud - IaaS. Comes with data, Sender pays delivery, Horizontal M2M Platforms, Voice, Messaging rd and Data APIs for 3 Parties. Telco enabled Identity and Authorisation, Advertising and Marketing, Payments. APIs to non-core services and assets. Online Media, Enterprise Web Services, Own Brand VOIP services.
Regional approaches to smartness vary

As operators globally experience a slow-down in revenue growth, they are pursuing ways of maintaining margins by reducing costs. Unsurprisingly therefore, most operators in North America, Europe and AsiaPacific appear to be pursuing a Happy Pipe/smart network strategy. Squeezing capital and operating costs and improving network performance is being sought through such approaches as: Physical network sharing usually involving passive elements such as towers, air-conditioning equipment, generators, technical premises and pylons. Peering data traffic rather than charging (and being charged) for transit. Wi-Fi offload moving data traffic from the mobile network on to cheaper fixed networks.
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Distributing content more efficiently through the use of multicast and CDNs. Efficient network configuration and provisioning. Traffic shaping/management via deep-packet inspection (DPI) and policy controls. Network protection implementing security procedures for abuse/fraud/spam so that network performance is maximised. Device management to ameliorate device impact on network and improve customer experience
Vodafone Asia-Pacific is a good example of an operator pursuing these activities aggressively and as an end in itself rather than as a basis for a Telco 2.0 strategy. Yota in Russia and Lightsquared in the US are similarly content with being Happy Pipers. In general, Asia-Pacific has the most disparate set of markets and operators. Markets vary radically in terms of maturity, structure and regulation and operators seem to polarise into extreme Happy Pipers (Vodafone APAC, China Mobile, Bharti) and Full-Service Telco 2.0 players (NTT Docomo, SK Telecom, SingTel, Globe). In Telefonica, Europe is the home of the operator with the most complete Telco 2.0 vision globally. Telefonica has built and acquired a number of smart services which appear to be gaining traction including O2 Priority Moments, Jajah, Tuenti and Terra. Recent structural changes at the company, in which Telefonica Digital was created to focus on opportunities in the digital economy, further indicate the companys focus on Telco 2.0 and smart services. Europe too appears to be the most collaborative market. Vodafone, Telefonica, Orange, Telecom Italia and T-Mobile are all working together on a number of Telco 2.0 projects and, in so doing, seek to generate enough scale to attract upstream developers and downstream end-users. The sheer scale of the two leading mobile operators in the US, AT&T and Verizon, which have over 100 million subscribers each, means that they are taking a different approach to Telco 2.0. They are collaborating on one or two opportunities, notably with ISIS, a near-field communications payments solution for mobile, which is a joint offer from AT&T, Verizon and T-Mobile. However, in the main, there is a high degree of what one interviewee described as Big Bell dogma the view that their company is big enough and powerful enough to take on the OTT players and control the experiences of end users in the digital economy. The US market is more consolidated than Europe (giving the big players more power) but, even so, it seems unlikely that either AT&T or Verizon can keep customers using only their services the lamented wall garden approach.
Implementing a Telco 2.0 strategy is important but challenging

STL Partners explored both how important and how difficult it is to implement the changes required to deliver a Happy Pipe strategy (outlined in the bullets above) and those needed for Full-service Telco 2.0 strategy, via industry interviews with operators and a quantitative survey. The key findings of this analysis were: Overall, respondents felt that many activities were important as part of a smart strategy. In our survey, all except two activity areas Femto/pico underlay and Enhanced switches (vs. routers) were rated by more than 50% of respondents as either Quite important or Very important (see chart below). Activities associated with a Full-service Telco 2.0 strategy were rated as particularly important: Making operator assets available via APIs, Differentiated pricing and charging and Personalised and differentiated services were ranked 1, 2 and 3 out of the thirteen activities.
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Few considered that any of the actions were dangerous and could destroy value, although Physical network sharing and Traffic shaping/DPI were most often cited here.
How important to MNOs are the following forimplementing a smart network or smart services strategy? Very important Least important Enhanced switches (vs routers) Peering (vs transit) Femto/Pico underlay Physical network sharing Multicast and CDNs Wi-fi offload Traffic shaping via DPI & policy controls Device management Network protection
Efficient network configuration and Differentiated pricing & charging
operators must do this to remain relevant and/or to maintain or grow current revenues
Quite important - those operators that can implement this will benefit Not that important - a marginal cost reduction or revenue growth benefit only
Unimportant - this will not move the needle
Network & other APIs Most important Personalised & differentiated services
0% 20% 40% 60% 80% 100%
Dangerous - this is more likely to destroy operator shareholder value than add to it.
Source: STL Partners/Telco 2.0 & Tellabs Smart pipes survey, July 2011, n=107 NOTE: Overall ranking was based on a weighted scoring policy of Very important +4, Quite important +3, Not that important +2, Unimportant +1, Dangerous -4.
Overall, most respondents to the survey and people we spoke with felt that operators had more chance in delivering a Happy Pipe strategy and that only a few Tier 1 operators would be successful with a Full-Service Telco 2.0 strategy. For both strategies, they were surprisingly sceptical about operators ability to implement the necessary changes. Five reasons were cited as major barriers to success and were particularly big when considering a Full-Service Telco 2.0 strategy: 1. Competition from internet players. Google, Apple, Facebook et al preventing operators from expanding their role in the digital economy. 2. Difficulty in building a viable ecosystem. Bringing together the required players for such things as near-field communications (NFC) mobile payments and sharing value among them. 3. Lack of mobile operators skills. The failure of operators to develop or exploit key skills required for facilitating transactions such as customer data management and privacy. 4. Culture. Being too wedded to existing products, services and business models to alter the direction of the super-tanker. 5. Organisation structure. Putting in place the people and processes to manage the change.
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Looking at the specific activities required to build smartness, it was clear that those required for a Full-service Telco 2.0/smart services strategy are considered the hardest to implement (see chart below): Personalised and differentiated services via use of customer data content, advertising, etc. Making operator assets available to end users and other service providers location, presence, ID, payments Differentiated pricing and charging based on customer segment, service, QoS
How challenging is it for operators to implement the changes required to become smart?
Easiest
Efficient network configuration Wi-fi offload Peering (vs transit)

Enhanced switches (vs routers)
Very easy - low capex, no regulatory implications and/or simple technical, commercial & organisational implementation Relatively straightforward
Multicast and CDNs

Device management Manageable
Femto/Pico underlay Network protection Physical network sharing Traffic shaping via DPI & policy controls Network & other APIs Differentiated pricing & charging Hardest Personalised & differentiated services
0% 20% 40% 60% 80% 100%
Quite difficult
Very difficult - high capex and/or signifcant regulatory challenges and/or very challenging technical, commercial or organisational implementation
Source: STL Partners/Telco 2.0 & Tellabs Smart pipes survey, July 2011, n=100 NOTE: Overall ranking was based on a weighted scoring policy of Very easy +5, Relatively straightforward +4, Manageable +3, Quite difficult +2, Very difficult -2.
Conclusions and recommendations

By comparing the relative importance of specific activities against how easy they are to implement, we were able to classify them into four categories:
Category
Must get right Strive for new role Housekeeping Forget
Importance for delivering smart strategy

High High Low Low
Relative ease of implementation

Easy Difficult Easy Difficult
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More important for being smart Telco assets via APIs
Smart services Telco 2.0 Smart network Happy pipe
Strive for new role
Service differentiation
Differentiated pricing Network security Device management Traffic shaping & DPI
Efficient network configuration
Must get right
Hard to implement
Multicast and CDNs
Easy to implement
Forget
Physical network sharing
Femto/Pico underlay Enhanced switches (vs routers)
Wi-fi offload Peering (vs transit)
Housekeeping
Less important for being smart

Source: STL Partners/Telco 2.0 & Tellabs Smart pipes survey, July 2011, n=100
Unfortunately, as the chart above shows, no activities fall clearly into the Forget categories but there are some clear priorities: A Full-service Telco 2.0 strategy is about striving for a new role in the digital economy and is probably most appropriate for Tier 1 MNOs, since it is going to require substantial scale and investment in new skills such as software and application development and customer data. It will also require the development of new partnerships and ecosystems and complex commercial arrangements with players from other industries (e.g. banking). There is a cluster of smart network activities that are individually relatively straightforward to implement and will yield a big bang for the buck if investments are made the Must get right group: More efficient network configuration and provisioning; Strengthen network security to cope with abuse and fraud; Improve device management (and cooperation with handset manufacturers and content players) to reduce the impact of smartphone burden on the network;
Although deemed more marginal in our survey, we would include as equally important: Traffic shaping and DPI which, in many cases, underpins various smart services opportunities such as differentiated pricing based on QoS and Multicast and CDNs which are proven in the fixed world and likely to be equally beneficial in a video-dominated mobile one.
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There is second cluster of smart network activities which appear to be equally easy (or difficult) to implement but are deemed by respondents to be lower value and therefore fall into a lower Housekeeping category: Wi-Fi offload we were surprised by this given the emphasis placed on this by NTT Docomo, China Mobile, AT&T, O2 and others; Peering (vs. transit) and Enhanced switches this is surely business-as-usual for all MNOs; Femto/Pico underlay generally felt to be of limited importance by respondents although a few cited its importance in pushing network intelligence to the edge which would enable MNOs to more easily deliver differentiated QoS and more innovative retail and wholesale revenue models; Physical network sharing again, a surprising result given the keenness of the capital markets on this strategy.
Overall, it appears that mobile network operators need to continue to invest resources in developing smart networks but that a clear prioritisation of efforts is needed given the multitude of moving parts required to develop a smart network that will deliver a successful Happy Pipe strategy. A successful Full-Service Telco 2.0 strategy is likely to be extremely profitable for a mobile network operator and would result in a substantial increase in share price. But delivering this remains a major challenge and investors are sceptical. Collaboration, experimentation and investment are important facets of a Telco 2.0 implementation strategy as they drive scale, learning and innovation respectively. Given the demands of investors for dividend yields, investment is only likely to be available if an operator becomes more efficient, so implementing a Happy Pipe strategy which reduces capital and operating costs is critical.
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Mobile network operator challenges

Telco 1.0 business model under pressure
Pressure on Mobile Network Operators (MNO) traditional markets and value propositions is coming from all sides - not just from the web service providers (so-called over-the-top players), but also from device manufacturers, third-party infrastructure operators and wholesalers, network and device vendors, governments, and even end-users themselves: Web service and device players, such as Google, Facebook and Apple, are developing their own communications & content ecosystems that compete head-on with MNOs; Regulators have pushed for structural separation and governments are funding wholesale networks; Network equipment vendors are helping operators convert capex to opex by running networks but in the process are themselves capturing more value and exerting more control; End-users have developed work-arounds to reduce their expenditure on telco services (e.g. texting rather than calling, use of Wi-Fi rather than mobile network).
Figure 1: Pressure from all sides for operators
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Source: STL Partners/Telco 2.0
Investors want their money back

Vodafone: no longer a growth stock
As little as five years ago in Europe and two years ago in the US, the MNOs were stock market darlings. Share prices were increasing fast and MNOs were reinvesting profits in the business for future growth. As revenue and profit growth has slowed, so investors have demanded that money be returned to them in the form of higher dividend yields. Vodafone (Figure 2) is a good example of this. In 2004, its dividend yield was around 1% at a time when the bank base rate (virtually risk-free) in the UK was around 4.5%. By 2010, Vodafone was yielding around 5% and the bank base rate had dropped to only 0.5%. Vodafones dividend is supporting the share price if the company chooses to retain profits within the company then investors will sell shares and the price will reduce to retain a 5% yield. Investors do not see future growth in Vodafone and want to invest their money in other areas.
Figure 2: Vodafone historical dividend yield from growth to income
Source: London Stock Exchange; Vodafone annual reports
Other MNOs in Europe and the US in the same situation

Vodafone is not unusual. We examined seven other European markets as well as the US and, as shown in the first chart of Figure 3, mobile (or converged) operators feature heavily in the top twenty yielding stocks in
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every market. We have shown Nokia too in the Finnish market which is yielding a whopping 13.5%, illustrating that the capital markets are highly sceptical that the company will survive in its current form. Our analysis of the Standard & Poors 500 in the US (the second chart in Figure 3) is particularly revealing as it shows five telecoms stocks appear in the top twenty yielding stocks (although only AT&T and Verizon have a substantial mobile subscriber base). Also Sprint does not appear because it has been forced to suspend its dividend completely. The other high-yielding stocks are mainly utility companies providing electricity, gas and water. So are mobile (and fixed) telecoms simply becoming another utility? Exploring the employment levels of telecommunications in the US compared with all other utilities suggests that the industry is moving in that direction. Headcount has come down in telecoms in each of the last nine years whereas the more mature utilities have remained flat. A key question is whether the 60% higher headcount in telecoms in 2010 is to be maintained or whether the US operators will need to continue to cut heads to maintain profits as growth slows.
Figure 3: Unimpressed capital markets and falling employment levels
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Source: Relevant stock exchanges (May 2011); US Bureau of Labor Statistics
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The future could still be bright

Michael Porters generic strategies applied to MNOs
In 1980, Michael Porter wrote his seminal book Competitive Strategy: Techniques for Analysing Industries and Competitors. In it, he outlined three generic strategies: Differentiation, Cost Leadership and Focus. His 1 work has been refined (and criticised) by others but, because they are logical, clear and simple, the three generic strategies remain popular among managers in all industries. This report is not a critique of Porters work but it is worth applying his strategies to the mobile telecommunications market. What is most obvious, perhaps, is the lack of MNOs pursuing a Focus strategy in which they seek to provide services for only a single customer segment. The principle reason for this is that building a mobile network requires a very large capital investment and focusing on a specific segment only is unlikely to yield enough returns on that investment. We have seen some fixed operators, such as Cable and Wireless and Level 3, pursue the high-value enterprise market, but in mobile a focus strategy has largely been confined to a handful of MVNOs, such as Lebara, which concentrate on international calling for the diaspora community in Europe. An analogous strategy to Cost Leadership is a Telco 2.0 Happy Pipe. With this approach (outlined briefly in Figure 4 and in more detail in Figure 7), the MNO focuses on transport rather than services. As services become disconnected from the network and voice just another application, the MNO stops providing the services directly and focuses on being an efficient and effective distribution mechanism for the services provided by third--parties. Connectivity is king in this strategy but the operator is not dumb because the quality of service is altered according to the demands of and payments made by: 1. The end customer who may pay for a basic or premium service. This could be delivered permanently or on a temporary basis for example, when they make video call or are playing an online game; and/or 2. The upstream service provider who may pay for guaranteed quality of service for their particular application for example, for a streamed video. The notion of charging the upstream customer is extended with the Telco 2.0 equivalent of a Differentiation strategy: Full-Service Telco 2.0. In this two-sided business model, MNOs have two clear customer groups: end-users and other service providers. MNOs seek to compete with each other and with others, such as the internet players, by differentiating both in the end-user services (communications, content, etc.) and with the enabling services they provide to other service providers (identity and authentication, customer targeting/marketing services, payments, customer care, and so forth).
Michael Treacy and Fred Wiersema modified Porter's three strategies in their book The Discipline of Market Leaders (1993), into three "value disciplines". The three value disciplines are operational excellence, product leadership, and customer intimacy.
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Figure 4: Porter and Telco 2.0 competitive strategies
Source: Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter, The Free Press (1980), p.39; STL Partners/Telco 2.0
A Differentiation strategy in Telco: Full-Service Telco 2.0

Introduction
As shown in Figure 5 below, STL Partners defines six opportunity areas for the two-sided Full Service Telco 2.0 player: 1. Core services, which encompasses redefining the existing end-user experience through structural and strategic improvements to existing wholesale and retail services; 2. Explicitly identifying the integration of telecoms, IT and networking being undertaken by operators in the corporate space Vertical industry solutions (SI); 3. A separated and richer tier of Infrastructure services which include the sharing of physical networks and supporting other operators to deliver service efficiently and effectively via such things as data centres and Infrastructure as a Service (IAAS); 4. Embedded Communications, in which the MNO incorporates its core services (voice, messaging, connectivity) into the applications and services of others e.g. in enterprise apps or consumer games;
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5. Third-party business enablers the leveraging of MNO assets which are used to deliver core services, such as AAA, customer data, billing and payments and customer care, to support third-party service providers; 6. Own-brand OTT services in which the MNO delivers services independently of its own network to endcustomers (similar to an internet competitor).
Figure 5: Defining Differentiation/Telco 2.0
Full-Service Telco 2.0 opportunity areas

In this section, we detail the six opportunity areas for a MNO pursuing a differentiation or Full-Service Telco 2.0 strategy: 1. Core services, which encompasses transformational structural and strategic improvements to existing mainstream Telco 1.0 offerings such as subscriptions, telephony and broadband access. These will remain at the core of telco revenues irrespective of other shifts, enhanced by the smart and targeted delivery of improved offers, manifesting in benefits via revenue addition, up-sell, and customer satisfaction. Our research identifies a portfolio of approaches here, such as: Incremental improvements to basic products quality or speed; Exploitation of new device categories driving service adoption and usage;
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Supply of added-value content and services; Better segmentation and customisation; More targeted, personalised and granular pricing; Better channels to market; Efforts to gain improved (and genuine) loyalty and value perception; Innovative ways to drive incremental usage and spending, for example through incentives and promotions. O2 Top Up Surprises, a popular campaign in the UK that rewards the consumer with a prize whenever they put money on their pre-paid balance. O2 offers prizes that are tiered according to the amount the consumer spends (e.g. bigger prizes for topping up more than 15), so that spending is encouraged and, cleverly contains the cash cost of the programme by mainly offering network prizes consisting of minutes, texts and browsing time and only having a few headline-grabbing prizes such as cash, cars and computer games. The results of the Top Up Surprises campaigns are not public but, according to O2, have been hugely successful and have demonstrated a clear business benefit from building some excitement into a relatively unfulfilling and mundane activity. The fact that O2 chose to extend the first campaign beyond its planned timescale, invest 5.5m in a marketing campaign to support it and have had follow-up campaigns, would seem to bear this out. TDC Play TDC purchased access to more than 9 million music tracks from the music labels and offered free download and streaming for all TDC customers across PC, mobile and TV. The business case for TDC was built on customer churn reduction and customers benefited from targeted music recommendations and other related offerings.
Examples of innovation in core services include:
2. Vertical industry solutions have been developed by fixed operators over the last decade and are now starting to be demanded by customers for mobile solutions too. They comprise telephony services (voice and data) being integrated with IT with the operator acting in a systems integrator role to provide a complete solution. These solutions are tailored and packaged for specific vertical industries transport, logistics, banking, government, manufacturing, utilities, etc. Companies such as BT (with BT Global Services), Orange (with Business Services) and Deutsche Telekom (with T-Systems) are examples of companies that have moved aggressively into this area.
3. A separated and richer tier of Infrastructure services, which includes telecom capacity bulk wholesale, as well as more granular distribution two-sided business models and aspects of hosting/cloud services. Some of these offerings have been around for a long time bitstream ADSL, unbundled local loop sales and so forth. Others (data MVNOs, wholesale wireless networks) are relatively new. At the same time, operators are cutting new deals with each other for network sharing, backhaul provision, national roaming and so forth. This opportunity area illustrates the close relationship between Differentiation and Cost Leadership strategies in telecommunications which we revisit later with Content Delivery Networks (CDNs) as MNOs have the opportunity to both open up new and differentiated revenue streams AND reduce their cost base. Examples include: Lightsquared the US start-up which is building a wireless broadband network that will offer network capacity to enterprises on a wholesale basis;
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Verizon Global Wholesale, which provides Infrastructure as a Service (IaaS) enabling its enterprise and network operator customers to customize their own access to bandwidth, servers, storage and firewalls.
4. Embedded communications essentially the delivery to consumers of basic telecom services, primarily voice telephony, SMS and broadband data access, through new routes such as applicationembedded functions or devices which come with data pre-provisioned. Examples include: Amazon Kindle, where the cost of 3G connectivity is bundled in with the price paid for the eBook. The Kindle user does not pay for connectivity separately because Amazon manages this cost directly with the MNO (via a MVNO deal) and bundles in the data charge with that of the book; BT Ribbit operates in the enterprise space and integrates voice features and functionality, such as text to speech, into business applications such as salesforce.com so that salespeople can receive emails and texts as voicemail.
5. Third-party Business Enablers the provision of extra capabilities derived from the operator's platform rather than just network transport. This includes functions such as billing-on-behalf, location, authentication and call-control, provided as basic building blocks to developers and businesses, or abstracted to more complex and full-featured enablers (for example, a location-enabled appointment reminder service). Another class of third-party enablers originates in the huge customer databases that Telcos maintain in theory, it should be possible to monetise these through advertising or provision of aggregated data to 3rd parties subject to privacy constraints. There are many different examples of operators offering third-party business enablers and operators vary in their approach to how complete their service offerings are. Some settle for exposing raw APIs to particular functionality (such as location), while others seek to provide a more valuable retail solution. A couple of examples in the area of payments are: Safaricoms mPesa which provides remittance and, increasingly, payment services in Kenya. ISIS a joint venture between AT&T, Verizon and T-Mobile in the US which has done deals with the major credit card companies to deliver payments from the mobile phone. The five biggest operators in Europe are launching something similar.
6. Own-brand OTT services. Many operators are starting to exploit the scale of the wider Internet or smartphone universe, by offering content, communications and connectivity services outside the perimeter of their own access subscriber base. With a target market of one to two billion people, it is (in theory) much easier to lower per-unit production costs for new offerings and gain viral adoption. It avoids the politics and bureaucracy of partnerships and industry-wide consortia and potentially has the pot-of-gold of creating huge value from minimal capital investment. On the downside, the execution risks are significant as is the potential for both self-cannibalisation of existing services and retaliatory responses from other MNOs. Examples include: Cyworld, a virtual world acquired by SK Telecom which generates income from sale of virtual goods and music.
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Telenor Objects a platform for M2M developers to create vertical solutions which operates independently of the Telenor network.
Figure 6 The Six Opportunity Areas Approach, Typical Services and Examples
Opportunity Type Approach
Improving revenues and customer loyalty by better design, analytics, and smart use of data in existing services.
Typical Services
Access, Voice and Messaging, Broadband, Standard Wholesale, Generic Enterprise ICT Services (inc. SaaS)
Industry Examples
Core services
Vertical industry solutions (SI)
Delivery of ICT projects and support to vertical enterprise sectors.
Systems Integration (SI), Vertical CEBP solutions, Vertical ICT, Vertical M2M solutions, and Private Cloud. Bitstream ADSL, Unbundled Local Loop, MVNOs, Wholesale Wireless, Network Sharing, Cloud - IaaS. Comes with data, Sender pays delivery, Horizontal M2M Platforms, Voice, Messaging and Data rd APIs for 3 Parties.
Infrastructure services
Optimising cost and revenue structures by buying and selling core telco ICT asset capacity. Enabling wider use of voice, messaging, and data by facilitating access to them and embedding them in new products.
Embedded communications
Third-party business enablers
Enabling new telco assets (e.g. Customer data) to be leveraged in rd support of 3 party business processes.
Telco enabled Identity and Authorisation, Advertising and Marketing, Payments. APIs to non-core services and assets. Online Media, Enterprise Web Services, Own Brand VOIP services.
Own brand OTT services
Building value through Telco-owned online properties and Overthe-Top services.
Source: STL Partners/Telco 2.0 analysis
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Cost Leadership in Telco: The Happy Pipe

Mobile network operators that pursue this strategy (and STL Partners believes that many will not make the Full-service Telco 2.0 leap in a meaningful way) will focus on retail or wholesale connectivity to upstream and/or downstream customers rather than on higher-level (value-added) services. This will be a tough market with margins that collectively enable this group to provide modest total returns to shareholders. A 2 recent study by the Department of Revenue in Washington calculated the weighted average cost of capital for US Telecom stocks to be 8.7% and the mean dividend yield to be 5.6%. If these players return the cost of capital to shareholders, this suggests annual share price increases for this collection of stocks of around 3.1%. This is an indicative number for the group as a whole and outperformance will come from companies that can develop a competitive advantage. STL Partners believes that network intelligence will be instrumental in delivering such advantage for three reasons: 1. It will enable more efficient transport of bits and bytes and so provide operating and capital cost reductions; 2. MNOs with this capability will be able to grow revenue by offering enhanced connectivity options. This can involve granular wholesale of data capacity, rich bulk-wholesale options with significant levels of configurability for client virtual operators, and more intelligently-managed retail Internet access. 3. The superior performance of a better-managed network will result in a better customer experience for end users and upstream service providers so MNOs with an advantage here will attract more new subscribers as well as retain existing ones better than dumber competitors. The critical element here is that the business model is centred on connectivity, not upper-level services. It is worth noting that although simplicity and cost control are key themes of the Happy piper, there remains scope for revenue growth through providing enhanced connectivity options. There remains an open question about whether operators will be able to monetise their network API-type platforms. There is a distinct risk that these face substitution by APIs and capabilities elsewhere in the communications ecosystem, on devices, in non-operator clouds, such as iTunes or Facebook, via the Internet, or even in operators' own alternative systems. Several pipers may choose to offer only limited APIs and/or allow third-parties to manage this process. Whichever API strategy they choose, unlike Full-Service Telco 2.0 players, this group will focus on making only the raw materials (location, presence, SMS, voice, etc.) available rather than trying to develop either a downstream (e.g. IPTV) or upstream (e.g. authentication or advertising platform) solution with all the integration and development work that this entails. As we show in Figure 7, below, STL Partners forecasts that connectivity will be the main element of service offered by Happy Pipers. Many will continue to offer voice and messaging (and other services) but these will diminish in importance. Similarly, a sizeable proportion of services to both upstream and downstream customers will be delivered by third-parties as wholesale becomes more important. This is not dissimilar to fixed telecommunications in many markets where the national incumbent provides raw services to retail players. The incumbent usually competes with these players at the retail level and is obliged under regulation to provide wholesale services at the same price to all players.
http://dor.wa.gov/Docs/Pubs/Prop_Tax/CostStudy/2011ayCostofCapital-Telecomsfinal.pdf
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Figure 7: Defining Cost Leadership/Happy Pipe

Upstream Customers Web Players Media
MVNOs, MVNEs, resellers Voice and messaging
Telco
Downstream Customers
Government Retailers Devices Healthcare Industrial Other Telcos

SIs, ISVs, VARs
Consumers
Connectivity
SMEs Enterprises Devices
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Defining a smart network

Introduction
It is commonplace to hear they terms smart pipes and dumb pipes being bandied around to describe the future market position of MNOs. But are these terms meaningful do they adequately reflect the current or potential role of MNOs? As outlined briefly in the Preface to this report, the hypothesis to this research was that MNOs cannot afford to be dumb. Even if MNOs only act as distributors of services and content through their networks and do not themselves provide any services (even voice and messaging), then they need to understand which customers are using what services on their networks and how and when the needs of customers and services differ. At the very least, this will enable them to provide customers with a better experience at lower operating and capital cost they must have smart networks. If MNOs are to grow faster than inflation (by increasing their share of end-users wallets), they must participate more actively in the communications and transactions that are taking place over their networks in the digital economy. To achieve this, they must develop a suite of valuable and relevant end-user services and similar enabling services, such as payment services, for other upstream service providers they must have smart services.
Smart MNOs: Why?

MNOs can be smart...
In the future, many MNOs may only act as distributors and be akin to other utility players that distribute gas, water and electricity to end users. However, what differentiates MNOs is that they can determine much more about the applications and services being used over their networks, who is using them and when they are using them than gas, water or electricity distributors. A water company, for example, can see that a household consumes 20 litres per minute for 15 minutes on Thursday at 10am but cannot tell: Whether the application that is consuming the water is a bath, shower, garden hose or a combination of sinks and basins; or Who within the family is using the application mum, dad, son, daughter, granny, nanny.
Additionally, the water company is very limited in what it can do to alter its service in response to such knowledge. For example, it cannot: Provide greater water throughput for the period a shower is on, giving a power shower experience; or Use cheaper non-drinking water during the period that a user is watering the garden.
MNOs do not have perfect knowledge or perfect control over all aspects of their network or of the customer experience but they can determine much more than utility companies about who is doing what and can adjust the behaviour of the network reduce latency, greater bandwidth to some degree.
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... so they must have a smart network

Because MNOs can differentiate the quality of experience they offer to customers, some MNOs will pursue this strategy to give them a competitive advantage by providing a better user experience and/or reducing their capital and operating costs relative to their peers. At an industry level, this may be a zero-sum game: other MNOs will follow and the cost advantage will be eroded. The industry will be recalibrated at a lower opex and capex level and prices for broadband will come down. However, for individual MNOs it will not be zero-sum those that can innovate faster than their peers will profit.
This will force operators, at the most basic level, to compete around network smartness.
Revenue growth requires smart services

MNO executives around the world have ridden the crest of a wave over the last fifteen years. The industry has grown phenomenally fast. In many markets, it is now reaching maturity. Device penetration is above 100%, voice and messaging revenues and margins are being forced down through fierce competition from existing competitors as well as the adoption of new substitute products. If growth is to be maintained and the two-sided business model outlined above is to be realised, then operators need to be able to: Provide compelling new content and communications services ones that are relevant to, and personalised for, end users. Relevance will require integration between the services of the internet and telecommunications between, for example, Facebook and mobile telephony. Personalisation will require services to be targeted according to such things as geo-demographics, availability (in a meeting vs. free), location, interests (pop music vs. house vs. classical), spend, and so on. This requires stronger innovation and customer management and analytics skills than operators currently possess. Be able to dynamically price, bill and collect payment from both upstream and downstream customers that use MNO enabling and end-user services. To deliver this broad range of retail and wholesale business models, MNOs need to be able to coordinate activities between network, OSS, BSS functionality and the technical and commercial processes.
Many operators will seek to move up the stack and pursue this smart services strategy.
Smart networks and smart services

Smart network and smart services strategies support the two Telco 2.0 strategies outlined earlier and are summarised in Figure 8 below: A smart network strategy supports a Telco 2.0 Happy Pipe. The network is far from dumb and uses its intelligence to both route traffic efficiently and improve customer experience. Money is made from distributing bits and bytes. A smart services strategy supports a full service Telco 2.0 model incorporating the two-sided business model. In this strategy the MNO: Continues to compete hard in the service layer by improving the customer experience for core voice and messaging services; Develops new communications and content services for users;
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Provides enabling services to third-party service providers QoS, ID, marketing services, billing, payments, customer care; Provides a range of retail and wholesale business models to support the range of services.
As the second chart in Figure 8 illustrates, a smart services strategy is an extension of a smart network. It requires the core network and OSS activity but couples this with higher-level BSS activities and commercial processes.
Figure 8: Defining smartness
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We tested the definitions above with a cross-section of the telecoms industry with an online survey. Overall, 94% of participants felt the definitions were valid (Pretty good or Very good) and useful (see Figure 9. The biggest group, representing 66% of respondents, were those that felt that the definitions were Pretty good makes sense but a few things missing. They wanted a more complete definition of smart services and the revenue opportunities that are available to MNOs. Given the limited space in an online survey, this was a justifiable complaint and one that STL Partners has sought to address in this report. Of the 5% that felt that the definition was Inadequate makes sense but key things missing a variety of missing items were cited with most people complaining, justifiably, that the two charts were unable to demonstrate the subtleties of the issues faced by MNOs. One respondent felt the definition was Woeful misses the point completely because it did not specifically focus on video.
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Figure 9: Telco 2.0 survey Defining smartness
How well do these charts [in Figure 8] define network and services 'smartness'?
Inadequate makes sense but key things missing Woeful - misses the point completely Very good logical and complete
Pretty good makes sense but a few things missing
Smart services (Full-service Telco 2.0) are currently an extension to smart network (Happy Pipe)...
As Figure 8 implies, STL Partners believes that a Telco 2.0 strategy is founded on a smart network coupled with additional capabilities that yield smart services. As things stand, it would be extremely challenging for operators to develop a Telco 2.0 strategy without managing its network intelligently. As such, a smart network is a subset of smart services.
...but this may not be true going forward

One point that a few survey respondents asked and which STL Partners has been pondering is whether an integrated mobile network operator will exist in the future. Since services and the network are becoming disconnected, there is a case to be made that the existing organisations that combine both network operations and product development and delivery may be split. Regulation could be used to impose structural separation on mobile network operators, although this has not been adopted in fixed telecommunications despite much debate. Ofcom, in the UK, has probably gone furthest in adopting a watered down version called functional separation in which the local network parts of incumbent BT, Openreach, must operate at arms length from the retail divisions that provide services. New Zealand has adopted a similar model. Given the position adopted in fixed telecommunications, that regulation will be used in mobile to drive the network and services sides of MNOs apart. However, commercial pressures and the capital markets could encourage less dependence between the two in the future:
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Commercial pressures include the fact that network equipment providers such as Ericsson and Alcatel Lucent may offer operators attractive deals to outsource network operations to them. The benefit of this in the near-term to operators will be cost-savings. However, such a move would limit a former MNOs control over the network. For example, one benefit cited for the Rich Communications Suite (RCS) being implemented by the large European operators is that the network will be able to let the user know whether it can support such thing as video calling before the call. Ultimately, therefore, outsourcing network operations may end up costing MNOs more than keeping it in-house; Capital markets prefer businesses that have a homogenous operational and capital structure because they are easier to understand and value. This is the reason that conglomerates often trade at a discount to the sum of the parts and end up being broken up. MNOs essentially have a highly capital intensive infrastructure-based portion of the business (deploying and running the network) and a low capex, innovation-focused services portion. Splitting these two parts could be perceived by investment bankers to be logical as it would enable management to focus, make performance more transparent, and valuation easier.
Whether the current MNOs remain integrated or not, we suspect that pressure will mount for a functionally separated approach in which the services business is seen to be more independent. As one participant in our survey put it:
Smart services should not have a dependency on smart pipes, especially at a commercial level. Some separation is going to make both halves operate better.
Senior Principal, IT Vendor
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Understanding operator strategies

Introduction and summary
In this section we look at the strategies of a number of operators in three regions of the world Asia, North America and Europe. These reviews are very brief and focus specifically on the commercial strategies of operators using the Porter/Telco 2.0 frameworks outlined in this report. They are not exhaustive and cite only a few examples of activities being carried out and propositions being offered by each operator. The idea here is to demonstrate the range of activities being conducted in different markets, to identity key patterns and to highlight key successes (and failures). Overall, we conclude that: 1. Few MNOs are currently pursuing a single strategy as envisaged by Porter most are seeking to reduce costs significantly and, at the same time, trying to develop smart services that are differentiated both from other MNOs and from new OTT competitors. 2. Nearly all operators globally seem to see a strong need to execute a Happy Pipe/Smart network strategy aimed at reducing costs and improving customer experience by delivering a consistent service that is matched to the application. 3. Asia-Pacific is the least homogenous market and operators seem to polarise strongly into Happy Pipers and Full-service Telco 2.0 players. Overall, operators in this market are most confident about their future growth prospects and role in the digital economy. 4. European operators generally seem to be least confident about their ability to deliver a smart services/Telco 2.0 strategy. Several are continuing to pursue opportunities in this space but are focusing resources in specific areas such as mobile money and near-field communications (NFC) payments and limiting efforts in areas that have proved challenging to monetise or have not had strong appeal with customers, such as mobile advertising. Telefonica appears to be the most advanced Telco 2.0 player globally. 5. The major US operators are still dominated by what one interviewee called Big Bell dogma the view that their company is big enough and powerful enough to take on the OTT players and control the experiences of end users in the digital economy. Despite the greater consolidation in the US mobile market, STL Partners believes that, ultimately, mobile operators will face similar issues to those in Europe.
Asia: Polarisation between Telco 2.0 and Happy Pipe

We start with the Asian market because, although it contains hugely disparate markets (different levels of maturity, regulation, and so forth) and consequently has a wide variety of MNO strategies, it does (unlike other regions) contain several operators with a single strategy approach. The first two MNOs we cover below NTT and Vodafone APAC are good examples of Full-service Telco 2.0 (Differentiation) and Happy Pipe (Cost Leadership) respectively.
NTT, Japan Full-Service Telco 2.0 Platform

NTT (fixed) and NTT DoCoMo (mobile) operate in highly saturated, high-income markets and, despite growing competition, have retained a strong market share (49% of mobile, 77% of fixed). Next Generation Access deployments are advanced, as is the phase-out of legacy voice systems, which is expected to be complete by 2025. As Figure 10 (below) shows, a rapid build-up of DSL subscribers is now being overtaken
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by the transition to FTTH. This is in many ways the fruit of the super-dense Japanese urban environment and the relatively high prices NTT is still permitted to charge by its regulator. NTT has created a Service Creation Business Group which exists in order to manage its relationships with upstream customers and assist them with rapid application development based on NTT's network resources. From a technical point of view, their IP-NGN supports very fine-grained quality-of-service classes including geographical targeting. For example, this could be used (to borrow an NTT Research use case) to ensure that vital traffic such as voice or VPNs for critical infrastructure get through during an earthquake, or equally to sell improved content delivery to upstream customers. This can be seen as a classic Telco 2.0 platform approach creating a full-service platform for networkbased applications, with monetisation from both wholesale and retail customers, and a high level of network intelligence. Over time, this may evolve into a house of brands approach with an underlying operator supporting many highly differentiated brands, each focusing on a very specific use case and target market. Telco 2.0 strategy Smart strategy Customer segmentation Very granular strong analytics focus Voice, Data or Messaging Data-heavy voice is an application Smart use case
Full-Service Telco 2.0
Smart Services
Geo-targeted QoS levels
Figure 10: NTTs smart content delivery system a prelude to mobile CDNs?
Source: NTT website
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Vodafone APAC: Happy Pipe

An alternative to NTT Docomos Telco 2.0 approach is typified by Vodafone's Asia-Pacific operations. Although Vodafone's footprint in the Indian Ocean and Pacific regions is very diverse (including leapfrog innovator Safaricom in Kenya, cost-focused Hutch-Essar in India, and quasi-European Vodafone-Hutchison in Australia), common themes are identifiable and Vodafone executives are on the record as saying that the entire portfolio is managed in much the same fashion. Essentially, Vodafone APAC embodies the Happy Pipe concept. The key issue is efficient transport and low cost. As a result, consolidation of support services across the region, infrastructure-sharing, and innovative network devices are top priorities. Vodafone-Essar makes use of 100,000 shared towers and is using specialised low-cost base stations extensively. Similarly, it is critical to manage the costs of backhaul and power. The Indian market is very low ARPU, poorer in infrastructure than China, and crowded Vodafone faces two state-owned operators, several regional carriers, as well as divisions of Telenor, SingTel, Etisalat, and Bharti Airtel, bringing the total competitor set to fifteen. Further, the entire industry is under pressure due to overbidding for the recently-auctioned 3G licences. This has two downstream consequences a permanent price war, and intense pressure on costs. In the dense urban centres, meanwhile, the Happy Pipe operators have to contend with rapid smartphone proliferation and growing demand for data. MNOs are therefore keen to offload traffic onto WLAN hotspots in order to keep their basic voice and messaging pricing competitive. An important issue for the ultra-low cost operators is that SIM freedom constrains the degree to which they can segment the market. The problem with a hi-lo strategy with near-EU pricing for iPhone or BlackBerry users and ultra-low cost basic service is leakage if the low price offering is as cheap as it needs to be, its also cheap enough to make it worthwhile for the high-end users to swap a low cost SIM into their smartphone. In this environment, cost control is everything. Effective networks need to optimise everything, especially their backhaul networks, in order to keep the costs down. As well as compressing and optimising traffic, they also need to think carefully about where intelligence lives in the network. Its worth pointing out that the smart network is not necessarily centralised deploying large numbers of lowcost small cells often involves increasing their intelligence, by integrating RNC functionality into the base station and using the emerging Self-Organising Network standards to reduce the management overheads involved. Telco 2.0 strategy Smart strategy Customer segmentation Very limited: Every-day low pricing Voice, Data, or Messaging Majority voice & messaging (data starting to grow) Smart use case
Happy Pipe
Smart network
Data compression and backhaul optimisation
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Figure 11: Vodafone Indias ARPU levels are now below $4/month, illustrating the need for a smart network approach
Vodafone India Monthly ARPU ($)

8.0 7.8 7.8
7.4
6.8 6.6
6.1
5.5
4.9 4.6 4.4 4.2 3.9 3.9 3.8 3.8
Note: constant exchange rates used Source: www.medianama; STL Partners analysis
China Mobile Giant Happy Piper

China Mobile, the world's biggest mobile operator, has a market share in its domestic market of 70% and six hundred million subscribers. These are distributed between the three zones Chinese sociologists tend to divide the country into the coast, the interior, and the West. The coastal zone includes the great cities and the hotspots of export-processing industry, and accounts for most of China's wealth. The interior is poorer but industrialising rapidly. The West is impoverished and remote from the new coastal economy, and acts as a pool of cheap labour for the country as a whole. We might expect China Mobile to follow a Full-service Telco 2.0/smart services strategy like NTT DoCoMo. Such a high market share means that China Mobile benefits from scale economies it can create propositions cost effectively and has the reach to make its enabling services, such as payments, appealing to other service providers seeking to interact with its customer base. The realities of China mean otherwise. China Mobile has a simple marketing plan there are three sub-brands that face the customer. One of these is a post-paid, main-line brand focused on business users (GoTone). Another is a premium-priced, dataheavy, prepaid brand focused on urban youth (M-Zone). A third is a low, low price, voice and messaging centred, prepaid brand focused on the interior and the West (Easyown). China Mobile's technology strategy also fits with the Happy Pipe concept. Since 2004, the company has been building an all-IP backbone network based on cheap Huawei and Cisco Systems routers by 2006, Huawei claimed that over 70% of CM's traffic was carried on an IP bearer, so we expect that the figure is well over 90% by now. Their voice, messaging, and value-added services are provided by carrying encapsulated SS7 over this IP NGN. It is worth noting that they have also been investing heavily in a Huawei-built monitoring and instrumentation framework to support their network KPIs.
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More recently, China Mobile has been aggressively expanding its WLAN assets in order to offload mobile data traffic in the coastal zone. At the 2011 Mobile World Congress, CEO Wang Jianzhou announced a target of deploying an additional 1 million WLANs in three years with 20,000 alone in Beijing, describing the technology as a very important complement to the cellular network. China Mobile recently informed its vendors that WLAN is a non-negotiable requirement in all handsets. China Mobile has also created an alliance with NTT DoCoMo and KT to support roaming between their WLANs. A further development of this strategy would be to create a mobile CDN focused on the most heavily trafficked nodes in the coastal zone, serving both WLAN and 3G traffic. While WLAN offload saves on spectrum and radio CAPEX, content delivery networking saves on backhaul CAPEX and OPEX. Telco 2.0 strategy Smart strategy Customer Segmentation Very limited: Three strategic segments Voice, Data, or Messaging Balance between the three Smart use case
Happy Pipe
Smart network: Low cost
WLAN integration Hetnet
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Figure 12: China Mobiles WLAN strategy for coverage, capacity and cost control
Source: http://www.chinamobileltd.com/images/present/20110316/pp03.html
[We have sought to] expand the coverage of WLAN, simplify the authentication of WLAN access and enhance WLANs effectiveness in diverting data traffic...[we aim to] , prioritize traffic by WLAN, Future LTE, 3G, then 2G for businesses and applications.
China Mobile Annual Report, 2010
Globe Telecom, Philippines Messaging-based Telco 2.0 differentiator

Globe Telecom faces very different challenges to China Mobile. In the Philippines, it has a middle-income market, but it also faces intense price competition and usage unusually dominated by messaging (as opposed to voice or data). Globe and its arch-rival Smart have been highly innovative in bringing text-based services to market. Many of these are two-sided smart services that serve both end users and upstream service providers. GCash, Globes mobile money transfer and payments service is an example. GCash users can transfer money and pay bills without needing a bank account. This can be done from the menu of feature phones or simply by sending a structured text message to a short-code number (see Figure 14,
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below). Importantly, the charges for GCash are lower than other payments and remittance services and, although GCash is integrated with the banking network, users are not required to have a bank account to use the service. Unlike China Mobile, Globe has a much more detailed segmentation strategy we counted as many subbrands for prepaid SMS alone as China Mobile has for the entire company. Globe is significantly more focused on differentiation through its pricing plans and its VAS offerings it's worth noting, though, that these products are communications-focused, rather than content-focused. Bulk video is less of a problem for them than it is for VHA or NTT DoCoMo. On the other hand, managing their diverse customer base and highly detailed segmentation plan is a challenge. For this, Globe could benefit from real-time analytics of their customers behaviour, based on network data, as an input to their marketing and management information systems. Telco 2.0 strategy Smart strategy Customer Segmentation Extreme customisation Voice, Data, or Messaging Messagingdominated Smart use case
Full-Service Telco 2.0
Smart services
GCash
Figure 13: GCash Globes text-based payments service
Source: http://site.globe.com.ph/web/gcash/what-is-gcash-mobile?sid=Tj-3ucuxpRYAAH8LVMkAAAAZe
Telkomsel, Indonesia Telco 2.0 on a shoestring

Telkomsel boasts a user base of over one hundred million, in a country experiencing strong economic growth (so much so it is sometimes bracketed with the BRICs). However, its main challenge is that usage patterns remain unusually voice-centric. As a result, Telkomsel has adopted a combination of Telco 2.0
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options like mobile advertising (it provides a variety of products including money-off surveys and targeted delivery), traditional high-end options (such as pushing the iPhone hard), and cost-centric basic voice, messaging, and connectivity in what retailers term a hi-lo strategy. This implies a need for significant network intelligence both in terms of network cost optimisation Indonesias islands make it a challenging territory in terms of infrastructure and also in terms of providing a richer feature set. A smarter network could help them deliver mobile advertising based on empirical metrics of customer behaviour, for example. In general, this represents a model closer to the differentiation-led, highly segmented Full-service Telco 2.0 option than the Happy Pipe but with elements of both. We anticipate that many operators globally are going to pursue this dual-strand strategy going forward. Telco 2.0 strategy Smart strategy Customer Segmentation Voice, Data, or Messaging Voice-heavy with growing data Smart use case
Telco 2.0 on a budget
Smart services (at low cost)
Hi-Lo split
Dynamically targeted ad delivery
SingTel, Singapore End-user financed Telco 2.0 approach

SingTel's domestic operation, in contrast with its overseas investments (including both a sizable stake in Australian operator Optus and interests in India), is a typical full-service carrier. Currently, the top priority (as with NTT) is the deployment of 4G wireless and FTTH in the fixed sphere. SingTel is cooperating in the Singaporean government's national broadband network project, which aims to provide 1Gbps service and to offer full openness at Layer 2 and also at Layer 0 (i.e. to the ducts). Their product strategy is the most differentiated of the ones we examined. It is notable that they extend into content and TV on the consumer side, and make cloud computing a major priority on the business side. An example of Telco 2.0 implementation in SingTels fixed network is their Bandwidth on Demand product, which allows a customer to instantly provision more Ethernet bandwidth as required. They are also a very significant force in carrier services, wholesale, and IP transit. Telco 2.0 strategy Smart strategy Customer Segmentation Voice, Data, or Messaging Smart use case
Full-service Telco 2.0
Smart services personalised and end-user financed
Granular
Data-dominant
Business Bandwidth on Demand
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Figure 14: PowerOn SingTels on-demand business services
Source: SingTel website
European operators: Focusing on a narrow range of Telco 2.0 smart services as pressure increases to reduce costs
Operator strategies in the markets of Europe and North America are each more homogenous than those in Asia Pacific. In this section, we focus on three operators Telefonica, Vodafone and Yota as representative examples from the region. Most Western European markets have reached or are approaching maturity and Eastern European markets are catching up fast as mobile penetration reaches saturation and ARPU levels flatten in response to slowing GDP growth. The characteristic of a typical mobile operator in Europe are, therefore: Slow growth in user base with strong competition among operators for subscribers. Flattening or, in some markets, contracting voice and messaging revenues in response to existing and new competition. Slowing growth in mobile broadband. Pressure to return cash to shareholders high dividend yields. Management teams that yearn for growth but increasingly recognise that it is difficult to achieve: Making acquisitions of, or taking stakes in, developing market network operators has already happened and there are few attractive opportunities left; Several big opportunities have proved difficult to realise as the internet players have stepped in and captured most of the value. Mobile advertising is a typical example: touted 5-6 years ago as a big
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opportunity, it is now a relatively marginal activity in most European operators. For a host of reasons that are beyond the scope of this report, Google and Apple have been far more successful than operators in realising value. Having said this, it is not yet game over in Europe. The big guns (Vodafone, Orange, T-Mobile, Telefonica and Telecom Italia) still have aspirations to play a bigger role in the digital economy a Full-service Telco 2.0/smart services strategy is still on the agenda. They are, for example, collaborating to build a Near-Field Communications (NFC) payment solutions in which mobile customers can use their devices to pay for physical goods tickets, consumer items etc. It seems that investment in smart services is becoming more focused on a few big bets and the larger operators are willing to work together to increase their chances of success. This is a big change in philosophy. As the GSMA and other bodies have found, historically it has been extremely challenging to get mobile operators to cooperate on anything more than technical projects (partly, it must be acknowledged, owing to strict competition law). This shift suggests that the threat posed by the internet giants is becoming more real in the minds of MNO executives and that the need for new sources of value is becoming increasingly urgent.
Telefonica The full-service Telco 2.0 poster child

STL Partners believes that Telefonica is further ahead than any other European mobile network operator, and probably the most advanced operator globally, in moving from traditional telecoms (Telco 1.0) to a Telco 2.0 smart services strategy. This belief was reinforced by the recent reorganisation of the business in which Matthew Key, the European CEO, was appointed head of a new unit, Telefonica Digital, which has the 3 objective to build the companys presence and value in the digital world. A recent press release summarises the objectives of the division as being: To take full advantage of the opportunities afforded by the digital world with respect to new products, services and value chains, both in markets where the company operates directly and those in which it has industrial alliances or the potential to operate directly in OTT (over the top) businesses. This unit will be responsible for developing and globally exploiting businesses like, among others, video and entertainment, e-advertising, e-health, financial services, cloud and M2M. It will aim its activity both at the corporate and residential segments. To actively help the two major geographic regions, Europe and Latin America, take advantage of their distinguishing traits (relationship with and proximity to more than 300 million customers, capillarity, invoicing and distribution capabilities). To attain this goal, the unit will develop top-flight global competencies in the areas of business intelligence, pricing strategies and management of alliances in the digital environment with respect to both hardware (i.e. devices) and software. Generate new growth opportunities by investing in new digital businesses, while grouping together or reinforcing initiatives such as Amerigo, Wayra and Vc's.
The new division contains many (though not all) of the initiatives and companies that STL Partners considers as clear indicators of Telefonicas Full-Service Telco 2.0 strategy.
http://pressoffice.telefonica.com/documentos/nprensa/Nota_TEF_09052011_en_0.pdf
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South America Media and Content focus

Many of Telefonicas innovation focus in South America has been on building a strong media and content business to provide value in its own right and to provide pull-through for the core mobile (and fixed) broadband business. One example of such a business is: Terra. Acquired by Telefonica in 2005, Terra is a media and content company whose st website is the 31 most visited in the world with 70 million people accessing it each month. The company focuses on delivering premium content to users across all devices and generates income through advertising and paid-for services. It has substantial scale in content services such as 12 million people using Terra TV, a video platform, and 6 million using Sonora, a music platform. These services provide a pull-through for internet (fixed and mobile) and voice and messaging services for example Sonora Prime delivers 7 million pieces of content daily via SMS.
Europe focus on core services and enabler services

In Europe, although Telefonica continues to push into media on the fixed side with IPTV offerings such as Imagenio, its focus in mobile is to build value for its core voice and messaging and connectivity services. Top-Up Surprises, outlined earlier, is one example of this. Others include: BlueVia. Developed by Telefonica R&D, BlueVia is a developer platform which rewards developers with a revenue share for using Telefonicas voice and messaging and carrier payments APIs. BlueVia is an attempt to grow, or at least protect, consumer voice and messaging revenues as they come under attack from internet-based communications by rewarding developers for integrating these services into applications, websites and software. Jajah. Another acquisition, Jajah is communications platform which enables users to initiate calls via the internet and either call other Jajah users for nothing (the Skype model) or connect to the telephony network and make and receive calls at reduced rates. The calls are carried via Telefonicas network and so call quality is maintained but the benefits associated with internet calling (presence, integration of voice with IM and content, embedding of service within other applications such as Twitter and Facebook). The service is small but growing fast from under $1 million in 2006 to a run rate of over $100 million in 2011.
In addition, Telefonica is pushing on with a range of Telco 2.0 smart services projects, including: O2 More and Priority Moments. Two services launched in the UK. O2 More is an opt-in services that has attracted 6 million users in two years which offers personalised marketing based on information given by the user (interests etc.) and observed information about the user (location, device type etc.). Priority Moments, launched in July 2011, gives users discounts based on their location e.g. for coffee when users are near a branded caf. Both services have differentiated O2 in the competitive UK market and Priority Moments, in particular, has gained significant traction in the market in a short space of time. Tuenti. Founded in 2006 and acquired by Telefonica in 2010, Tuenti is the leading social networking site, with around 11 million users, and the most visited website in Spain. It is similar to Facebook, and allows users to interact via IM and posts to walls, to upload photos, videos and playlists and to engage by playing games and buying things using
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virtual currency. It is strong in mobile and focuses on a location-based (relevant) advertising model and minimises intrusive banner advertising. A recent development has been the beta launch of Tu, a MVNO that seeks to leverage the social graph associated with a social network within the personal mobile communications space to enable people to communicate in the most appropriate manner from the mobile.
Figure 15: Telefonicas Full-service Telco 2.0 strategy
Source: http://www.telefonica.com/en/shareholders_investors/jsp/home/home.jsp
Telco 2.0 strategy
Smart strategy
Customer Segmentation Granular big focus on leveraging individual data
Voice, Data, or Messaging
Smart use case
Smart services
Increasing shift to data
Smart voice and messaging BlueVia, Jajah, Tu
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Vodafone promoting efficiency to capital markets but still aspiring to some smart services
Message to investors: trust us, we wont waste your money
Vodafone has focused over the last couple of years on demonstrating to the capital markets that it has matured into an efficient organisation. As growth has slowed in Europe, first Arun Sarin and then Vittorio Colao have sought to demonstrate to investors that the business is trimming away the fat left over from a decade or more of aggressive growth. The emphasis has been on cost reduction and efficiency the mantra of a utility company. Vodafone executives recognise that, first and foremost, the company operates (bit)pipes and the focus on growing mobile data is thus a core part of the strategy. Gone are the days when Vodafone speaks to investors about sexy services. In a recent investor presentation Colao majored on three angles: growing data, protecting the profitable enterprise base (where Vodafone is strong and which is under less pressure than the consumer space), and continuing to grow in markets outside Europe (see Figure 17). Almost no mention has been made, for example, of Vodafone 360 a 0.5 billion investment that attempted to aggregate content and social networks via a Vodafone application on the handset and is now being mothballed.
Figure 16: Vodafone main messages are about being an efficient data pipe
Source: Investor presentation, Bank of America Merrill Lynch TMT Conference June 2011
Smart services (growth) strategy not mothballed

While the Vodafone PR machine has moved away from heralding forthcoming and potential new services (and is also much more shy about touting the company as a major media and content player), executives have not given up on new service revenues to replace the decline being experienced in personal
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communications. A major shift in approach has been that Vodafone appears to be shelving its go-it-alone strategy and is adopting a much more collaborative approach with other operators. In the past, executives appeared to believe that Vodafone had the scale required to bring new services to market on its own. It now appears that Vodafone has returned to the safety of the fold: Collao clearly believes that the combined scale of the industry is likely to increase chances of success in: 1. Enhancing exist voice services through RCS-e. A defensive play to preserve consumer voice in the face of OTT VOIP. 2. Competing with Google, Apple and others in mobile payments as Vodafone and other operators seek to carve out a bigger role in facilitating digital transactions. 3. Developing a single set of standards for the advertising industry and media owners so mobile grows as an ad channel. 4. Supporting the Wholesale Applications Consortium (WAC) in developing standard APIs for telco assets and services, especially carrier payments for in-app purchases.
Figure 17: Collaboration with other operators key to smart services strategy
Source: Vodafone keynote presentation, Mobile World Congress, 2011
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Telco 2.0 strategy
Smart strategy
Customer Segmentation Bias to enterprise customers
Voice, Data, or Messaging
Smart use case
Smart services
Big data push
Collaborative approach to Telco 2.0 projects
Yota, Russia the happy piper

Yota is a pure-play Happy piper. It provides high-bandwidth connectivity to its retail customers (in major Russian cities) who use it to connect their PCs, laptops, tablets and smartphones. Although it provides a range of content services and an application developer community, these are relatively peripheral to the main purpose, similar to the aspirations of Lightsquared in the US, of moving bits and bytes. This it does in massive quantities. The average Yota customer downloads 13 Gigabytes a month and the company is committed to providing unlimited downloads. One customer is alleged to be downloading 3 terabytes a month! The company signed a deal with the four major Russian MNOs Megafon, MTS, Rostelecom and Vimpelcom to build and operate an LTE network for them. It is becoming a major network infrastructure player in Russia but will continue to provide retail services. Network capacity is not an unlimited resource and Yota is clear that it will increasingly need a smart network strategy to be able to deliver the right quality of service to customers. Being able to match network performance to both specific applications and to individual customers will become more important to Yota as its network fills up because it will enable to dynamically change the characteristics of the network and to charge the end user, or the upstream service provider, accordingly. Telco 2.0 strategy Smart strategy Customer Segmentation Voice, Data, or Messaging Smart use case
Happy Pipe
Smart network
Very limited
Data the fat pipe
Dynamic bandwidth allocation
North America: Big players flexing muscles as they enter dawn of new Telco 2.0 era
Most developed mobile markets have three large players that account for over 90% market share. The UK, following the merger of T-Mobile and Orange, was one of the last European markets to reach this point. Why three players? Any more would be sub-scale and an incentive to consolidate; any fewer would be unacceptable from a regulatory point of view. The US has four, as well as some large regional operators, and consolidation has been a regular feature of the market for some time. The market leader, AT&T, has pursued a strategy of consolidate and defend essentially, it has tried to reunite as many of the RBOCs originating in the old AT&T as possible, and then build a defensive barrier around them. Verizon, the other carrier which originates from the RBOCs, moved away from a media-oriented strategy early and instead has pursued something closer to a Full-service Telco 2.0 strategy, while investing
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strategically in fibre-to-the-home and LTE. It is making major strides in developing the M2M market and a set of network APIs. The two smaller mobile players, Sprint and T-Mobile, are pursuing a Happy Pipe approach. Sprint underwent a difficult and complex technology transition, which has limited its ability to innovate in value-added voice and messaging (a former strength). However, it has specialised in wholesale voice and messaging. Finally, T-Mobile USA remains chronically sub-scale, and although it has good customer satisfaction ratings on the basis of a solid HSPA+ network, it is no surprise that Deutsche Telekom management took an offer from AT&T to exit the market.
AT&T: Consolidate to Accumulate

The so-called New AT&T, to distinguish it from either the pre-divestiture monopoly or the company that owned its long lines assets after divestiture, originated through the merger of BellSouth and SBC and the acquisition of AT&T Wireless. Its existence has been characterised by consolidation and M&A activity, and its latest act has been to attempt the acquisition of T-Mobile USA. Generally, AT&Ts strategy is traditional. As the first carrier to distribute the Apple iPhone, it made use of hero devices and sizable sums of handset subsidy. With the end of iPhone exclusivity, it has had to sponsor a broader range of smartphones, but in general it remains true to say that AT&T and Verizon Wireless are engaged in a smartphone subsidy war. It has not been keen to open its services up to developer communities, it has been technically quite conservative, and it remains enthusiastic about on-deck content and media products. AT&T is one of relatively few operators to still consider IMS a strategic technology choice. They have also been early to introduce (or re-introduce) usage caps and volume pricing. Its command-and-control approach to new services suggests more of a Telco 1.5 than Telco 2.0 approach. For example, it supports the deployment of third-party services on its devices but seems to much prefer AT&T own-brand ones. This may, in part, be down to the well-publicised problems it had with unscrupulous third-parties charging customers for free downloads (for which the state of Florida fined the company in 2008). Having said this, AT&T is seeking to play a role in digital transactions through both its participation in ISIS and other projects relating to being a trusted guardian of customers digital identities and data. As part of the partnership with Apple, it has also been quite aggressive about WLAN deployment as a form of traffic offload from its dense urban networks. This has been especially important given the signalling load generated by some of the iPhones. As a fixed operator, AT&T has concentrated on defending its role as incumbent in much of the US, with its NGA strategy being defensive and based on FTTC/VDSL technology. Its critics would say that it is the classic example of an operator that gets more return on its investment in regulatory lawyers and lobbying than anything else. Telco 2.0 strategy Smart strategy Customer Segmentation Usage-based Voice, Data, or Messaging Smartphonedriven data-heavy Smart use case
Telco 1.5 Command-andcontrol
Smart services
Policy control and dynamic charging
Verizon Moving Towards Telco 2.0

The number 2 player, Verizon, is also a product of the old AT&T, but it has adopted a different strategy entirely.
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In the mobile sphere, Verizon Wireless has combined classic tactical moves for example, adopting Android-based high-end smartphones in order to match AT&T during the iPhone exclusivity period with a distinctive effort to open up new business models and new technology options. The company has been much more willing to open up to developers, to move into new markets, and to deal with over-the-top players. For example, Verizon Wireless is making a major effort to develop the M2M market. Its Open Development Initiative (ODI) is intended to make it much easier to homologate new M2M devices for use on its network. They expect total mobile penetration to eventually approach 400%, which implies the extensive use of cellular M2M systems. The M2M focus is probably partly a function of Verizons strength in the corporate market especially with SoHos and SMEs where it recently came out top in JD Power Customer Satisfaction rankings. In the consumer space, Verizon has also adopted a progressive approach to OTT voice and messaging services and was one of the first major carriers globally to strike a deal with Skype, permitting its thin-client version onto their devices. The solution allows unlimited Skype-to-Skype calling from the US to anywhere in the world. Users can easily purchase Skype credit to make international calls to fixed and mobile numbers and Skype calls to US national and local calls are counted against the standard calling plan.
Figure 18: Verizon Wireless and Skype offering
Source: Verizon website
Technically, they were the first operator to deploy LTE and also the first mobile operator with IPv6, which they consider very important as a way of minimising the configuration process for M2M devices. Telco 2.0 strategy Smart strategy Customer Segmentation Increasingly finegrained strong in corporate segment Voice, Data, or Messaging Data-heavy Smart use case
Telco 2.0 Platform
Smart services
CDN; Network API endpoint
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Video: Case study in delivering differentiation and cost leadership

Growing data traffic on mobile networks
As is widely documented, mobile networks are witnessing huge growth in the volumes of 3G/4G data traffic, primarily from laptops, smartphones and tablets. Despite great content diversity, there is still an inexorable rise in the use of mobile devices for big chunks of data, especially the special class of software commonly known as content typically popular/curated standalone video clips or programmes, or streamed music. Images (especially those in web pages) and application files such as software updates fit into a similar group sizeable lumps of data downloaded by many individuals across the operators network. This one-to-many nature of most types of bulk content highlights inefficiencies in the way mobile networks operate. The same data chunks are downloaded time and again by users, typically going all the way from the public Internet, through the operators core network, eventually to the end user. Everyone loses in this scenario: The user has to deal with all the unpredictability and performance compromises involved in accessing the traffic across multiple intervening points and ends up paying extra to support the operators heavier cost base. The content publisher needs huge servers and expensive bandwidth to dish up each download individually. The operator has to deal with transport and backhaul load from repeatedly sending the same content across its network (and IP transit from shipping it in from outside, especially over international links).
Fixed CDNs: improving user experience and cutting costs

In the fixed broadband world, many content companies have availed themselves of a group of specialist intermediaries called CDNs (content delivery networks). These firms ingest large volumes of the most important content served across the Internet, before dropping it locally as near to the end user as possible, served up from cached (pre-saved) copies. Often, the CDN operating companies have struck deals with the end-user facing ISPs, which have often been keen to host their servers in-house, as they have been able to reduce their IP interconnection costs and deliver better user experience to their customers.
Mobile CDNs: similar upside available?

In the mobile industry, the use of CDNs is much less mature. Until relatively recently, the overall volumes of data didnt really move the needle from the point of view of content firms, while operators radio-centric cost bases were also relatively immune from those issues as well. Optimising the middle mile for mobile data transport efficiency seemed far less of a concern than getting networks built out and handsets and apps perfected, or setting up policy and charging systems to parcel up broadband into tiered plans. Arguably, better-flowing data paths and video streams would only load the radio more heavily, just at a time when operators were compressing video to limit congestion. This is now changing significantly. With the rise in smartphone usage and the expectations around tablets Internet-based CDNs are pushing much more heavily to have their servers placed inside mobile networks. Whether operators choose to deploy their own CDN solutions or those of specialist third-parties is beyond
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the scope of this report . Here we focus principally on the potential benefits of a mobile CDN and briefly on some of the issues associated with implementation (of and own or third-party solution). Essentially, a CDN deployment supports both: Smart networks it reduces operating and capital costs for the MNO; and Smart services it offers a superior (differentiated) upstream customer and end user experience, as well as new revenue streams.
Figure 19: Content delivery with and without a CDN
User Experience improvements

The principle benefit to mobile end users of caching content closer to the edge of the network is performance. Users can download content faster. This is particularly important with video services where delays create a poor user experience. However, Joe Lueckenhoff, Senior Vice President of Business Product Management 5 at AT&T, explained in a recent interview speed is critical for many applications:
With the use of AT&T's CDN services, what we were able to do for AccuWeather was [intercept] a set of users so that not all of them would go back to the [central] server. For instance, if you had 50 people all within a specific geography asking for weather [forecasts] ... you'd get one inquiry going back to the server and [the CDN] would answer that question for all 50 people in that location. The benefit from AccuWeather's point of view is the response is much, much quicker. On average, if you use AT&T's CDN services, the response is anywhere from 40% to 60%
4 5
We have covered this topic in a recent Analyst Note: Broadband 2.0: Mobile CDNs and video distribution. http://searchtelecom.techtarget.com/news/2240037768/ATT-sees-opportunity-in-mobility-e-commerce-for-CDN-services
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quicker. And what we've seen is the quicker the response, the more likely the customers are to continue the interaction, which is where AccuWeather makes their money.
There is a benefit here too for the mobile operator with a CDN. If downloading AccuWeather information is better on one network than another, the operator with the advantage is likely to better retain its customers and attract subscribers from competitors. The table in Figure 21, from a white paper by Akamai, demonstrates the value to users of caching content closer to the user. With a CDN, content is held at multiple points in the network, rather than at a single point. This means content is closer to the user and that the latency and packet loss is reduced and higher throughput is achieved.
Figure 20: CDN benefits to consumers are substantial

Distance (Server to user) Local: < 100 miles Regional: 500-1,000 miles Cross-continent: c. 3,000 miles Multi-continent: c. 6,000 miles Network roundtrip time 1.6 milliseconds 16 ms 48 ms 96 ms Typical packet loss 0.6% 0.7% 1.0% 1.4% Throughput 44 Mbps (highquality HDTV) 4 Mbps (basic HDTV) 1 Mbps (SD TV) 0.4 Mbps (poor) 4GB DVD Download time 12 minutes 2.2 hours 8.2 hours 20 hours
Source: The Akamai Network: A Platform for High-Performance Internet Applications, Erik Nygren, Ramesh K Sitarman & Jennifer Sun
Cost savings: lower capex requirements

A CDN solution reduces costs to the content provider, since it requires smaller servers and less bandwidth to serve up the content once to a few thousand CDN servers than to serve it real-time to millions of individual customers. Cost savings also accrue to the mobile operator in the form of lower: 1. Operating costs: 1.1. Transit and peering is reduced because content does not have to be brought from outside on to the network 2. Capital expenditure: 2.1. The operator requires less investment in core and backhaul networks.
Revenue benefits: differentiated services for the content industry

It is important to recognise that the fixed-centric CDN business has increased massively in richness and competition over time. Although some of the players have very clever architectures and IPR in the form of their algorithms and software techniques, the flexibility of modern IP networks has tended to erode some of
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the early advantages and margins. Shipping large volumes of content is now starting to become secondary to the provision of associated value-added functions and capabilities around that data. Additional services that provide upside revenues in fixed and could be made available in mobile include: Analytics and reporting Advert insertion Content ingestion and management Application acceleration Website security management Software delivery Consulting and professional services
Thus, CDN deployments potentially offer new Telco 2.0 revenue streams that could be derived from upstream players. Setting up such a two-sided, content-charging business model that is aligned with rules on Net Neutrality seems feasible there are few complaints about existing CDNs except from ultra-purist Neutralists.
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The benefits of Smart on CROIC

Cash Returns on Invested Capital increasingly important measure of success
Cash Returns On Invested Capital (CROIC) is a good measure of company performance because it demonstrates how much cash investors get back on the money they deploy in a business. It removes measures that can be open to interpretation or manipulation such as earnings, depreciation or amortisation. In simple terms CROIC is calculated as:
While it is simplistic, STL Partners broadly sees the benefits of a smart networks or Happy Pipe strategy accruing to a MNO in the form of higher EBITDA margins (owing to lower costs) and lower capital expenditures. A smart services or Full-service Telco 2.0 strategy will also generate higher sales. It is, therefore, easy to see why many operators are interested in pursuing a Full-service Telco 2.0 strategy: if they can execute successfully then they will receive a double-whammy benefit on CROIC because lower opex and higher sales will result in more free cash flow being generated from lower levels of invested capital. CROIC also demonstrates how the current metrics used by operators particularly EBITDA margins preclude operators from considering different operational and business models which may have lower EBITDA margins but higher overall cash returns on invested capital. Thus, as shown in Figure 22 (showing relative rather than actual financials), MNOs tend to focus on the existing capital-intensive business (which currently generates CROIC of around 6% for most operators) rather than investing in new business model areas which yield higher returns. The new business model areas require relatively low levels of incremental capital investment so, although they generate lower EBITDA margins than existing services, they can generate substantial CROIC margins and can move the needle for operators.
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Figure 21: Cash Returns on Invest Capital of different Telco 2.0 opportunity areas
Source: Operator annual reports for relative levels of capital, sales and EBITDA margins; STL Partners estimates and analysis
The benefits of smart on CROIC

A full business case for smart networks or smart services is beyond the scope of this report. However, we have explored the benefits of both individually and in unison using the table in Figure 22 together with a set of simple assumptions. Essentially, we assume that a typical MNOs current position is not smart and that it provides a mix of Core Services, Vertical ICT and Infrastructure Services as outlined in Figure 22. The combined result of these activities invested capital of 2,000, sales of 1,200, EBITDA of 435 and free cash flow of 116 give a cash return on invested capital of 5.8% (outlined in Figure 22 below). We have then run two scenarios with the following assumptions: 1. Happy Pipe/Smart Network strategy only: 1.1. The MNO suffers a 5% decline in revenue owing to price and share pressure caused by existing competitors and the increasing impact of substitute products from new players; 1.2. Invested capital is reduced by 5% through the deployment of more efficient technologies and processes that enable effective network capacity to be increased (including better network provisioning, traffic shaping, mobile Wi-Fi offload, femto/pico underlay network, network sharing, Multicast and CDN usage, and so forth); 1.3. Operating costs are reduced by 10% through the deployments above;
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1.4. Overall the MNO achieves higher free cash flow (140) on a lower capital base (1900) and CROIC of 7.4% vs. 5.8%. 2. Addition of a Full-service Telco 2.0/Smart services strategy on top of a Happy Pipe/Smart network strategy: 2.1. Invested capital increases in absolute terms over the current position (2,225 vs. 2,000) but is lower relative to sales owing to efficiencies generated by the Happy Pipe strategy (1.36 x annual sales versus 1.67 x annual sales); 2.2. Similarly, operating cost efficiencies from the Happy Pipe mean that although EBITDA margins contract from the current position (36%) with the addition of new Telco 2.0 solutions, they are still attractive (33%); 2.3. This double whammy of attractive margins and lower invested capital means that free cash flow is 2.5 times higher than the current situation at 296 yielding CROIC of 13.3%. These scenarios, summarised in Figure 23, are illustrative and the investment levels and savings are best estimates. However, the analysis does suggest that a Happy Pipe strategy is attractive in its own right and even more so when extended into Full-service Telco 2.0 strategy. If an MNO was to increase CROIC by even half of the suggested amount in scenario 2, the share price would see a major re-rating by the capital markets. As pointed out earlier in the report, we do not think it currently feasible for an operator to build a standalone Full-service Telco 2.0/smart services strategy without having a smart network hence the absence of such a scenario.
Figure 22: The benefits of smart to a MNO are tangible and significant
Focus Strategy Invested capital Sales EBITDA Free Cash Flow CROIC %
As-Is Cost Cost + Revenue
Current position (Base) Smart network (Happy Pipe) Smart network + services (Happy Pipe + Full-service Telco 2.0)
2,000 1,900 2,225
1,200 1,140 1,635
435 452 544
116 140 296
5.8% 7.4% 13.3%
Source: STL Partners estimates and analysis
Smart benefits supported by Telco 2.0 survey

In our recent survey, participants were given three benefit areas and asked to rate the importance of each in driving a smart strategy. The three were: Cost reduction: reducing capex and opex by making the mobile network more efficient in handling the increasing burden placed upon it. Revenue growth: giving operators the technical and commercial ability to provide differentiated personalised own and 3rd-party services to end-users and to dynamically price, bill and take payment
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from both them and upstream service providers. E.g. charging either end users or video retailers for guaranteed QoS for video streaming service. Performance improvement: making the experience for users of the network (both upstream service providers and end users) better.
As Figure 24 shows, participants felt that all three were important drivers of MNO smartness. Revenue growth (smart services) was a clear number one with 68% describing it as Very important key driver. Cost reduction was second with over 50% rating it the key driver and a further 42% Quite important a secondary issue. These results align with our analysis of operator strategies which showed that many operators were pursuing a dual smart network and services approach and seeking to capture both cost and revenue benefits. Many operators are not seeking to reduce costs per se but, instead, are seeking to improve performance for customers at the same level of opex and capex hence the importance of Performance improvement below.
Figure 23: Telco 2.0 Survey benefits of smart to MNOs
How important should the following be in driving operators toward a 'smart' strategy?
100% 75%
50%
Quite important - a secondary issue
Irrelevant - does not influence decision-making regarding smartness Not very important - marginal
25%
Very important - key driver
0%
Revenue growth
Cost reduction
Performance improvement
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Implementing a smart strategy

Introduction
While the theory behind a smart strategy may seem logical and there is clear evidence that many MNOs are seeking to become smarter, the question remains as to whether MNOs can really deliver. Is network intelligence just a pipe dream? Or can at least some MNOs make the change and successfully implement a smart network or smart services strategy?
Some Industry insiders remain sceptical

It is not just the capital markets that seem to give MNOs only a slim chance of delivering smartness. In our recent survey, 28% felt that MNOs will fail at smart services, though only 12% felt the same way about smart networks. The majority of participants felt that only a few Tier 1 operators would succeed with either strategy 52% for smart network and 56% for smart services. Overall, participants were more convinced that a smart network strategy would be successful at most operators (36%) compared with a smart services one (only 16%).
Figure 24: Telco 2.0 survey MNO chances of success with smart strategies
100%
How successful will MNOs be in implementing a smart strategy in next 3 years?

Most operators will not even attmept this and any that do will fail
75% All or nearly all operators will fail with this strategy 50% Most operators will attempt this but only few Tier 1 operators will be successful Most operators will be successful with this strategy 0% Smart Network Smart Services
25%
Many activities important

There is no silver bullet for delivering network or service smartness. Both a Happy Pipe and Full-service Telco 2.0 strategy will require several changes at MNOs. We asked respondents to evaluate how important each of a number of actions were that MNOs could take to deliver smartness. The actions were non-
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exhaustive but covered a broad sphere from physical network sharing right the way to differentiated and personalised service offers: Physical network sharing Enhanced switches (vs. routers) Peering (vs. transit) Femto/Pico underlay Wi-Fi offload Multicast and CDNs Efficient network configuration and provisioning Traffic shaping/management via DPI & policy controls Network protection security procedures for abuse/fraud/spam Device management to ameliorate device impact on network and improve customer experience Personalised and differentiated services via use of customer data content, advertising, etc. Making operator assets available to end users and other service providers location, presence, ID, payments (APIs) Differentiated pricing and charging based on customer segment, service, QoS
The results, summarised in Figure 26, were very interesting: Overall, respondents felt that all of the above were important as part of a smart strategy. In fact, all except two activity areas Femto/pico underlay and Enhanced switches (vs. routers) were rated by more than 50% of respondents as either Quite important or Very important. Activities associated with a Full-service Telco 2.0 strategy were rated as particularly important: Making operator assets available via APIs, Differentiated pricing and charging and Personalised and differentiated services were ranked 1, 2 and 3 out of the thirteen activities.
Few considered that any of the actions were dangerous and could destroy value although Physical network sharing and Traffic shaping/DPI were most often cited here. Even without looking at how difficult each individual area is to implement (which we also explored), the results here alone demonstrate the difficulties faced by operators in prioritising activities. Many complain that MNOs are slow to implement changes. That is in part due to skills, culture, organisation structure, legacy systems and so forth (discussed in the next section) but also simply due to the (real or perceived) volume of things that need to get done.
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Figure 25: Telco 2.0 survey lots of moving parts required for smartness
How important to MNOs are the following forimplementing a smart network or smart services strategy? Very important Least important Enhanced switches (vs routers) Peering (vs transit) Femto/Pico underlay Physical network sharing Multicast and CDNs Wi-fi offload Traffic shaping via DPI & policy controls Device management Network protection
Efficient network configuration and Differentiated pricing & charging
operators must do this to remain relevant and/or to maintain or grow current revenues
Quite important - those operators that can implement this will benefit Not that important - a marginal cost reduction or revenue growth benefit only
Unimportant - this will not move the needle
Network & other APIs Most important Personalised & differentiated services
0% 20% 40% 60% 80% 100%
Dangerous - this is more likely to destroy operator shareholder value than add to it.
Source: STL Partners/Telco 2.0 & Tellabs Smart pipes survey, July 2011, n=107 NOTE: Overall ranking was based on a weighted scoring policy of Very important +4, Quite important +3, Not that important +2, Unimportant +1, Dangerous -4.
Key challenges are organisational and cultural

In an initial round of interviews with senior executives at MNOs we identified a list of eight potential barriers to implementing a smart strategy. We then used the online survey to quantify these. The results largely confirmed our hypothesis that moving up the stack and delivering differentiation via services is challenging and that the principle reasons for this are not regulatory or technical. The results are summarised in Figure 27, below: The demand from upstream and end user customers for smarter networks is clear (although the demand for MNO services is less strong), the technology to deliver smart networks is maturing fast and regulation is not a significant impediment even for smart services. Overall, delivering a smart network requires managers to overcome a number of small-to-moderate barriers (which collectively are quite significant). Executing a smart services strategy is much harder with very significant competition from internet players coupled with major commercial challenges in both developing an ecosystem and in organising
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the MNO correctly. Engendering a culture of change and developing the skills to deliver this are also significant barriers.
Figure 26: Telco 2.0 survey Differentiation via smart services is particularly challenging
What are the barriers to operators successfully implementing a smart strategy?
Smart Network
Smart services
No barrier
Small barrier
Moderate barrier
Big Barrier Technical right solution Demand Regulatory creation - net neutrality getting and other upstream or downstream customers to adopt or use Competitive - Commercial Skills other players developing the operators lack such as ecosystem to of key skills internet deliver a e.g. customer players/device complete data and manufacturers solution privacy doing a better job Cultural operators difficulty in seeing the need Organisation operators difficulty in managing the change
You touch on culture but I think, particularly on the service side the contrast with how someone like Google, Skype, Sky, Financial Times or Apple approaches innovation and a traditional operator, is huge and understated.
Source: Product Marketing Manager, Equipment Provider; STL Partners/Telco 2.0 & Tellabs Smart pipes survey
It comes as no surprise to find that none of the individual components required to become smart were rated overall as particularly easy to implement by our survey participants. Furthermore, while most fell into the manageable category overall, the sheer number of activities makes implementation challenging. It is also notable that the three areas associated with a Full-service Telco 2.0 strategy (smart services) were rated the most difficult to implement supporting the findings on barriers to change above: Personalised and differentiated services via use of customer data content, advertising, etc. Making operator assets available to end users and other service providers location, presence, ID, payments Differentiated pricing and charging based on customer segment, service, QoS
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Figure 27: Telco 2.0 survey Implementing changes is challenging

How challenging is it for operators to implement the changes required to become smart?
Easiest
Efficient network configuration Wi-fi offload Peering (vs transit)

Enhanced switches (vs routers)
Very easy - low capex, no regulatory implications and/or simple technical, commercial & organisational implementation Relatively straightforward
Multicast and CDNs

Device management Manageable
Femto/Pico underlay Network protection Physical network sharing Traffic shaping via DPI & policy controls Network & other APIs Differentiated pricing & charging Hardest Personalised & differentiated services
0% 20% 40% 60% 80% 100%
Quite difficult
Very difficult - high capex and/or signifcant regulatory challenges and/or very challenging technical, commercial or organisational implementation
Source: STL Partners/Telco 2.0 & Tellabs Smart pipes survey, July 2011, n=107 NOTE: Overall ranking was based on a weighted scoring policy of Very easy +5, Relatively straightforward +4, Manageable +3, Quite difficult +2, Very difficult -2.
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Conclusions and recommendations

Prioritising smart-related activities is not easy
Understanding the importance of specific activities, the challenges in their implementation and the barriers to change overall is useful but more granular analysis is needed to prioritise activities. In our interviews we asked executives to identify the MNO priorities. Results of individual interviews were, inevitably, coloured by personal responsibilities and objectives. Senior executives, in particular, felt that pursuing new service and customer opportunities (Smart services/Telco 2.0) was particularly important even, as one interviewee put it, our chances of success are slim but we have to try. The survey was useful to help gauge industry perception of MNO priorities because it enabled us to compare the relative importance of specific activities against how easy they are to implement. We could then classify activities into four categories:
Category
Must get right Strive for new role Housekeeping Forget
Importance for delivering smart strategy

High High Low Low
Relative ease of implementation

Easy Difficult Easy Difficult
Unfortunately, as Figure 24 shows, no activities fall clearly into the Forget categories but there are some clear priorities: A smart services strategy is about striving for a new role in the digital economy and is probably most appropriate for Tier 1 MNOs only since it is going to require substantial scale and investment in new skills such as software and application development and customer data. It will also require the development of new partnerships and ecosystems and complex commercial arrangements with players from other industries (e.g. banking). There is a cluster of smart network activities that are individually relatively straightforward to implement and will yield a big bang for the buck if investments are made the Must get right group: More efficient network configuration and provisioning; Strengthen network security to cope with abuse and fraud; Improve device management (and cooperation with handset manufacturers and content players) to reduce the impact of smartphone burden on the network;
Although deemed more marginal in our survey, we would include as equally important: Traffic shaping and DPI which, in many cases, underpins various smart services opportunities such as differentiated pricing based on QoS and Multicast and CDNs which are proven in the fixed world and likely to be equally beneficial in a video-dominated mobile one.
There is third cluster of smart network activities which appear to be equally easy (or difficult) to implement but are deemed by respondents to be lower value and therefore fall into a lower Housekeeping category:
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Wi-Fi offload we were surprised by this given the emphasis placed on this by NTT Docomo, China Mobile, AT&T, O2 and others; Peering (vs. transit) and Enhanced switches this is surely business-as-usual for all MNOs; Femto/Pico underlay generally felt to be of limited importance although a few respondents cited its importance in pushing network intelligence to the edge which would enable MNOs to more easily deliver differentiated QoS and more innovative retail and wholesale revenue models; Physical network sharing again, a surprising result given the keenness of the capital markets on this strategy. Most respondents felt this was quite difficult to implement.
Figure 28: Telco 2.0 survey Prioritising smart implementation activities

More important for being smart Telco assets via APIs Smart services Telco 2.0 Smart network Happy pipe Differentiated pricing Network security Device management Traffic shaping & DPI Physical network sharing Multicast and CDNs
Strive for new role
Service differentiation
Efficient network configuration
Must get right
Hard to implement
Easy to implement
Forget
Femto/Pico underlay Enhanced switches (vs routers)
Wi-fi offload Peering (vs transit)
Housekeeping
Less important for being smart

Overall, it appears that mobile network operators need to continue to invest resources in developing smart networks but that a clear prioritisation of efforts is needed given the multitude of moving parts required to develop a smart network that will deliver a successful Happy Pipe strategy. A successful Full-Service Telco 2.0 strategy is likely to be extremely profitable for a mobile network operator and would result in a substantial increase in share price. But delivering this remains a major challenge and investors are sceptical. Collaboration, experimentation and investment are important facets of a Telco 2.0 implementation strategy as they drive scale, learning and innovation respectively. Given the demands of investors for dividend yields, investment is only likely to be available if an operator becomes more efficient, so implementing a Happy Pipe strategy which reduces capital and operating costs is critical.
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The Telco 2.0 Initiative

Telco 2.0 is a collection of research, brainstorming and consulting services designed to catalyse change in the Telecoms-Media-Technology sector. Telco 2.0 Research & Analysis Telco 2.0 Executive Brainstorms Telco 2.0 Consulting
The Initiative stimulates new ways of thinking about Business Models, Service Portfolios and Technical Architectures. Created by boutique analyst and consulting company, STL Partners, the Telco 2.0 Initiative was launched in May 2006 and is supported by the GSM Association, among other organisations around the world. Since we launched the concept of the 'Two-Sided Telecoms Business Model', the approach has been finding increasing resonance at senior levels in both mature and fast growth markets.
Why does it exist?

Key challenges for strategists who work in or with the telecoms industry are: Overall Strategy: How is the digital economy evolving, what are the best strategic responses and the most profitable market opportunities? Voice and Messaging: How best to innovate core service offerings to add value and grow revenues? Data and Broadband: How to ensure incentives and rewards are better aligned across the [digital content] value chain? New Communications Services: How can latent telecoms capabilities be better exploited to address new market opportunities?
Conventional Answers are Unsatisfactory

Leading strategists now agree that today's predominant 'one-sided' telecoms business model does not provide sufficient answers to these questions, for telcos or for other players in the digital economy. Something new is needed.
Challenges to the Telecoms Industry

IP has changed the game and many growth markets are maturing rapidly. The lines between industries are blurring and everyone is after the same consumers. This is causing disruption in the telco industry, for operators and their partners. Greater levels of creativity are needed to address the following issues. The vertically integrated Telecoms business model is under attack from all sides: tougher regulation, new technology (most notably VoIP and open spectrum), disintermediatory new entrants, and advancing customer expectations.
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P/E ratios suggest little investor belief in this improving. They have low confidence in 'converged' or triple/quadruple-play bundles providing high returns. Operators are making investment decisions in Network & IT, Products & Services, and Mergers & Acquisitions without a clear view of the future. 92% of respondents to an STL online survey replied that 're-thinking the strategic role of the operator' is a key priority. 85% of senior execs said the current telco business model will no longer deliver sufficient growth. (Telco 2.0 Survey, November 2008) There is an urgent need for all players in the telecoms value chain to review and renew their business models.
The Opportunity
Fortunately telecom's companies possess a whole host of assets that could be exploited much more to support new, sustainable market growth. The key is for telcos to create open platforms that help other service providers (enterprises, SMEs and government) interact with end-users in more efficient ways than they can today.
Telco 2.0 'two-sided' telecoms business model
We call this the 'two-sided' telecoms business model, delivering value to and generating revenue from 3rd party service providers as well as end-users. The 'two-sided' business model has consequences for the design of existing services such as conventional voice, messaging and data/broadband products (e.g. see Voice & Messaging 2.0 "What to learn from - and how to compete with - Internet Communications Services") and also creates opportunities to create new revenues and B2B Platform Services. Our analysis shows that in 10 years time this new business model could deliver up to 30% growth in annual revenues to operators and dramatically enhance the value of the industry to the wider 'digital economy' (Please see: Future Broadband Business Models "Beyond bundling: winning the new $250Bn delivery game" and The 2-Sided Telecoms Market Opportunity "Sizing the new $125Bn platform services opportunity")
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To realise this ambition we need to re-think not only our organisational and technology structures, but also how we collaborate across a wider ecosystem.
How to get involved?

To start to explore the opportunities in more depth see our reports or attend one of our Executive Brainstorm events To access our searchable knowledge base of information, case studies and learning, please see our Executive Briefing Subscription Service here To engage and act with the industry we invite Telcos to join the Telco 2.0 Operators Club and Vendors join the Telco 2.0 Partners Programme (email: contact@telco2.net) To explore the strategies appropriate to your organisation arising from these developments use our consulting services We also use our insights, contacts and experience to help clients evaluate and implement innovative strategies and applications, and to create new business opportunities - email contact@telco2.net To keep up to date with the latest news please see our widely read blog or sign up to our newsletter
For more detail, please see the full Telco 2.0 Manifesto
Who to contact?
Enquiries to: contact@stlpartners.com
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The Value of 'Smart' Pipes To Mobile Network Operators

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Strategy research

The value of 'Smart' Pipes to mobile network operators

The value of 'Smart' Pipes to mobile network operators

The value of 'Smart' Pipes to mobile network operators

About STL Partners

Sponsorship and editorial independence

The value of 'Smart' Pipes to mobile network operators

The value of 'Smart' Pipes to mobile network operators

The value of 'Smart' Pipes to mobile network operators

The value of 'Smart' Pipes to mobile network operators

Two smart pipes strategies available to operators

Smart network strategy good, smart services strategy better

The value of 'Smart' Pipes to mobile network operators

Regional approaches to smartness vary

The value of 'Smart' Pipes to mobile network operators

Implementing a Telco 2.0 strategy is important but challenging

The value of 'Smart' Pipes to mobile network operators

Unimportant - this will not move the needle

The value of 'Smart' Pipes to mobile network operators

Efficient network configuration Wi-fi offload Peering (vs transit)

Multicast and CDNs

Conclusions and recommendations

Importance for delivering smart strategy

Relative ease of implementation

The value of 'Smart' Pipes to mobile network operators

More important for being smart Telco assets via APIs

Smart services Telco 2.0 Smart network Happy pipe

Strive for new role

Efficient network configuration

Must get right

Multicast and CDNs

Physical network sharing

Femto/Pico underlay Enhanced switches (vs routers)

Wi-fi offload Peering (vs transit)

Less important for being smart

The value of 'Smart' Pipes to mobile network operators

The value of 'Smart' Pipes to mobile network operators

Mobile network operator challenges

Figure 1: Pressure from all sides for operators

The value of 'Smart' Pipes to mobile network operators

Source: STL Partners/Telco 2.0

Investors want their money back

Figure 2: Vodafone historical dividend yield from growth to income

Source: London Stock Exchange; Vodafone annual reports

Other MNOs in Europe and the US in the same situation

The value of 'Smart' Pipes to mobile network operators

Figure 3: Unimpressed capital markets and falling employment levels

The value of 'Smart' Pipes to mobile network operators

Source: Relevant stock exchanges (May 2011); US Bureau of Labor Statistics

The value of 'Smart' Pipes to mobile network operators

The future could still be bright

The value of 'Smart' Pipes to mobile network operators

Figure 4: Porter and Telco 2.0 competitive strategies

A Differentiation strategy in Telco: Full-Service Telco 2.0

The value of 'Smart' Pipes to mobile network operators

Figure 5: Defining Differentiation/Telco 2.0

Source: STL Partners/Telco 2.0

Full-Service Telco 2.0 opportunity areas

The value of 'Smart' Pipes to mobile network operators

Examples of innovation in core services include:

The value of 'Smart' Pipes to mobile network operators

The value of 'Smart' Pipes to mobile network operators