Telco 2015 - CSP Newsletter

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The revenue of most communications service providers (CSP) is no longer ... home, digital retail and others provide many
Telco 2015 Re-envision the Future of Mobile Communications

Rob van den Dam

Ekow Nelson

Institute for Business Value IBM Amsterdam, the Netherlands [email protected]

Institute for Business Value IBM London, United Kingdom [email protected]

Abstract— Telco 2015 is IBM’s analysis of four plausible scenarios that might emerge over the next 5 -10 years, based on the trajectory and interplay of two uncertainties: future addressable market growth and industry competition/integration structure. Keywords-component; scenario envisioning; industry outlook; revenue model; mobile broadband; OTT

I.

INTRODUCTION

The communications industry faces real challenges. Wireline revenues continue to decline steadily, while basic mobile services are nearing saturation in many mature markets. The revenue of most communications service providers (CSP) is no longer growing in any significant way even though there is a skyrocketing demand for services and traffic growth is phenomenal. In some advanced countries, overall mobile revenues have even declined for the first time during 20092010 [1]. The industry’s 2% annual growth worldwide is now being sustained almost singlehandedly by emerging economies [2].

capacity, while revenues no longer match the costs (Fig.1). New technologies such as Long-Term Evolution (LTE) will help in bringing network costs down, but rolling out these networks is expensive and the business case is not obvious. In addition, network outsourcing and infrastructure sharing have become mainstream, even among Tier-1 providers, as part of the CSPs’ effort to reduce costs [4]. Most CSPs are also searching for new sources of revenue and new business models. Even if the economic growth returns, there isn’t much room to sustain the current growth model, based on an ever-expanding customer base. Mobile subscriptions already hit the 5 billion mark [5]. That is almost two-third of the world population. Once anyone and everyone who can afford a phone has one, new sources of revenues become more imperative. Many CSPs are searching for opportunities to leverage their assets to bring value to adjacent vertical markets. Services as e-health, mobile payments, smart home, digital retail and others provide many opportunities for CSPs to add value to these industries.

A bright spot is the phenomenal growth of mobile broadband, driven by the rollout of HSPA networks and the increased penetration of smart phones and other mobile Internet devices. World mobile data traffic almost tripled in the past year, and is expected to increase by a factor of 26 by 2015 [3]. The dramatic increase in application stores has reinvigorated the market for mobile applications, supported by aggressive pricing and attractive packages, including “all-youcan-eat” bundles. Yet, when it comes to launching such applications, traditional CSPs face stiff competition from over-the-top (OTT) service providers, including Google, Apple, Facebook, Skype and others. These companies have proven adept at dreaming up compelling new online experiences, and some of them are raking in profits via advertising or e-commerce. CSPs haven’t been as aggressive in launching such services, and often they’re cut out of the profit flow. At the same time, CSPs have to pay for the costs of handling all that additional traffic. There is an increasing pressure on the infrastructure owners for additional network 978-1-4577-0161-0/11/$26.00 ©2011 IEEE

Fig. 1. Revenue and costs are disassociated in a data-dominant world

The disassociation of traffic and revenue is at the heart of the CSP’s revenue model challenge. The “all-you-can-eat” data plans that helped accelerate consumer adoption is unsustainable long-term. A number of CSPs, such as AT&T and O2 UK, already abandoned their unlimited data plans and introduced some form of tiered pricing [6]. For CSPs, the biggest challenge is finding a sustainable strategy to match increasing demand for bandwidth with pressures to generate revenue and cut costs. CSPs are all facing the same questions: How can we manage costs? Where will future growth come from? What future in store for mobile communications? IBM undertook scenario envisioning to assess alternative contrasting futures distinctly different from the present [7]. The findings were built on an extensive fact base, including interviews with 60 senior executives from nearly 40 CSPs, over 7,700 consumers surveyed in 9 countries, and extensive research by the IBM Institute for Business Value (IBV). IBM’s scenario envisioning is based on an analysis of the following:  Forces driving communications over the next 5 – 10 years  Uncertainties – evolving technologies, alternative consumer responses to services/products not yet invented, potential regulatory structure and new competitive initiatives  Major economic, competitive, market and regulatory events that might trigger a particular scenario  Revenue and profitability outlook for each scenario. II.

THE WORLD OF COMMUNICATIONS IN 2015

There are a number of underlying trends in the evolution of the communications industry for which there is a very high degree of certainty and consensus. These provide a common backdrop for the future of communications in 2015. These forces and trends can be grouped into five categories: A. B. C. D. E.

consumers in using OTT communication tools as IM and social networking. Internet data traffic in 2013 is expected to be a factor of five higher as compared to 2008, and 90 percent will be some form of video (TV, VoD, Internet Video and P2P) [9]. However, the largest growth area by far will be mobile broadband, with a forecast CAGR of 130 percent from 2008 to 2013 as the penetration and use of Smartphones, mobile internet devices (MID), Netbooks and tablet devices increase. B. Services – Overall, use of VoIP will increase. Further, the proportion of operator managed mobile VoIP will grow as penetration of mobile VoIP accelerates. A previously skeptical industry is beginning to relax their attitude towards mobile VoIP. Instead of prohibiting use of VoIP they are exploring new revenue models (e.g. by imposing a surcharge or allowing use of VoIP with a data plan) or using VoIP as a means of differentiation by partnering with over-the-top providers like Skype (see Fig 2). Mass migration to mobile VoIP, however, is unlikely until HSPA and LTE networks are deployed more widely to address known limitations around availability, usability, and quality of service. Shared capability services enabling interoperability across fragmented communication tools will become standard through industry initiatives like GSMA’s Rich Communications Suite (RCS) and GoogleVoice, which gives users the possibility to link all their phones together into one central communications network.

Usage – changes in user consumption patterns Services – changes in services and services composition Access – technology evolution in networks and devices Business model – new revenue sources / cost structures Industry structure and regulation – future competition and regulatory framework.

A. Usage – Consumers are reluctant to make radical changes in their use of communication and connectivity services, even in a prolonged economic uncertainty. Mobile devices and broadband access have emerged as critical necessities. Besides their homes, most consumers list mobile and broadband as the next two essentials they are most unlikely to give up, according to IBM’s 2009 global consumer survey [8].

Communications are becoming increasingly fragmented across fixed and mobile voice and text messaging, VoIP, online/mobile email, instant messaging (IM) and social networking. With the younger generation in the front of this development, older consumers have followed the younger

Fig. 2. Attitude of CSPs towards mobile VoIP

C. Access – The number of mobile broadband subscribers reached 500 million in 2010 and it is expected that that number is doubled in 2011 [10]. The race for mobile broadband has been decided in favor of LTE. In December 2009, TeliaSonera launched what it claims the world’s first two commercial LTE networks in Stockholm and Oslo, offering maximum throughput speeds of 20-80 Mbps [11]. Meanwhile a number of major providers, including Verizon, NTT Docomo, AT&T, France Telecom/Orange, China Mobile, Telstra, Vodafone, Telus and SK Telecom, have also deployed LTE or announced plans for commercial deployment. According a study by Idate, there will be nearly 400 million LTE subscribers by 2015 [12]. D. Business model –Voice communication will increasingly be monetized as a feature of broader connectivity packages, rather than a standalone service. CSPs will seek new revenues, amongst others by providing open wholesale interfaces to drive innovation on their networks. As environmental sensitivities progress, CSPs will generate additional revenue by enabling other industries to reduce their environmental impact through new services such as mobile teleconferencing capabilities and machine-to-machine communications. E. Industry structure and regulation – In mature markets, both mobile and fixed termination rates will converge to symmetric low levels. Boundaries defined by access (i.e., fixed, mobile, cable, Internet) will blur as an increasing number of players offer a combination of products. Increasingly, new infrastructure competition will come from government, municipality, cable companies, utility companies and others. There will be new local access competition rules as next generation access (NGA) is deployed but commitment to net neutrality will remain in some form.

III.

CRITICAL (UNCERTAIN) VARIABLES

In addition to the trends outlined above, a number of potentially high-impact variables exist with outcomes that are, as yet, uncertain. From these, there are 13 whose contrasting outcomes signal distinctly different scenarios for the future. These variables have to be seen with the industry trends as the backdrop:

majority of consumers continue to opt for OTT content services? Can CSPs at least secure a share of content revenues by providing premium connectivity to content providers? Siloed versus unified communications: Will consumers continue to communicate with multiple services? Or will the complexity of managing multiple tools and devices lead to demand for basic shared capabilities? Or even stronger, will unified communications finally become a reality? B: Services New verticals: Is there an opportunity for CSPs in adjacent markets such as healthcare and financial services beyond basic connectivity? If so, what form is this likely to take? Delivering packaged end-to-end solutions for selected vertical markets? Or enabling OTT and vertical solution providers to offer their own solutions on top of CSP network capabilities like location and presence? Premium connectivity: Will there be a key market for premium connectivity (such as security, guaranteed low latency, or a more robust content delivery network), e.g. to enable OTT providers to improve their user’s experience? Or will the availability of cheap and unlimited bandwidth limit application providers’ need for premium features from CSPs? C: Access Ultra-fast broadband availability: Taking into account commercial viability and the regulatory environment, will deployment of ultra-fast broadband be limited to densely populated (black) areas, or be extended to less densely populated (gray) areas, or even to the majority of the population? Open versus closed devices: Will CSPs continue to control the latest handsets through subsidies? Will open devices dominate as CSPs retreat from handset subsidies? Or maybe different approaches for low- and high segments? Will the industry continue to support competing device platforms, including Symbian, Google Android, Blackberry OS, Apple, Windows and others (see Fig.3)?

A: Usage The future of voice: Despite drastic price reductions, will demand for voice continue to decline as consumers turn to synchronous/online alternatives such as social networking, IM and VoIP? Or will drastic reduction in prices coupled with new superior convenience from innovations such as H2M (human-to-machine) communications and the ‘spoken web’ lead to a voice ‘rebirth’? Or will voice revenues continue to decline as voice becomes an embedded feature of connectivity packages? OTT versus network-optimized content: How will the battle with over-the-top providers evolve? Can network- optimized content from CSPs coexist with OTT content? Or will the

Fig. 3. Global share smartphone sales of competing device platforms 2010

Fig. 4. The interplay of these critical variables/uncertainties produces four distinct future industry scenarios

D: Business model

Maybe a mix of all? Or just only infrastructure sharing?

User-funded versus third-party funded: Will user-funded retail-driven revenues continue to dominate, or will the twosided business model become a reality with access revenue from users and a share of revenue from application/content providers?

Regulation: Which is the most plausible regulatory outcome/impact? Will Next Generation Access (NGA) investment be stifled by regulatory uncertainty? Will lighttouch regulation on infrastructure encourage infrastructure competition? Will there be a structural separation of access networks and Internet (Internet players and CSPs will compete on a level playing field)? Or will strong net neutrality and strong access obligations on infrastructure stance undermine private investment incentives?

Service pricing models – What will be the likely dominant service pricing structure? Unmetered ample (all-you-can-eat) pricing for voice and connectivity? Tiered broadband based on speed/quality? Monolithic bundles structured for key subscriber segments? Or ‘1 person/1 Plan’ micro segmentation? Will providers be able to generate premium prices for LTE compared to current broadband services? Machine-to-machine (M2M): Will the CSPs’ revenue structure remain largely driven by maintaining high ARPU across a finite number of accesses, or will it be based on low ARPU from an infinite number of connected objects? E: Industry structure and regulation ServCo/NetCo versus vertical integration: Will vertically integrated operators continue to generate superior shareholder value? Or will there be separation of industry into service (ServCo) and network providers (NetCo) to release hidden value, drive innovation and stimulate demand? Network sharing versus outsourcing: Will network outsourcing increase? Will passive infrastructure sharing become the norm? Will CSPs share the active networks too?

IV.

FOUR FUTURE INDUSTRY SCENARIOS

These variables can be grouped into two industry dimensions – addressable market growth and competition/ integration structure – as shown in Fig. 4. Addressable market growth: This embraces all variables related to future sources of revenue growth. Will there be a rebirth of voice resulting in a renewed voice revenue generator, or will the new sources of revenue in particular come from content, broadband connectivity and selected industry verticals? Will increasing communications fragmentation lead to decreasing ARPU, or will it create new opportunities for shared capabilities? Competition/integration structure: This covers uncertainties around the industry structure and open versus closed connectivity models. Will the vertically integrated model survive as CSPs increasingly share infrastructure and outsource significant parts of their business, including networks, to

Fig. 5. Four contrasting future communications industry scenarios

external providers? As regulations change and new technologies lower entry barriers for new players to deliver innovative services, will the service structure be based predominantly on packaged end-to-end offerings or open access platforms with multiple service providers? Will demand for new combination of services stimulate infrastructure providers to open up their networks and enable 3rd party providers to leverage capabilities to deliver new experiences? Is the fragmentation of the industry – with independent national and regional communications providers – sustainable when the main competitive threats are expected to come from global OTT communications providers? What will be the impact of future regulation on industry structure and competition? The interplay between the dimensions of addressable market growth and competition/integration structure result in four equally likely but contrasting future scenarios (see Fig. 5). Each of the four scenarios is triggered by a distinct combination of factors across several dimensions: technological/investment, economic/financial, regulatory/ competition and marketplace/customer-related. Survival Consolidation Survivor Consolidation is likely to be triggered by a prolonged global or local economic downturn that causes consumers to cut back spending, leading to intense price competition. Stagnating penetration and lack of growth/capital investment lead to investor loss of confidence. With constrained access to, and/or increased cost of, capital many

CSPs are likely to reduce Capex. Due to competition, mobile voice and broadband rates continue to decline. Fixed line losses accelerate, mobile slows down and ARPU erosion continues. Revenue growth is almost flat but share of connectivity increases as consumers shift to OTT communications and content alternatives. In the IBM 2009 consumer survey, approximately one-third of consumers – and in Spain and India even more than half indicated they will consider spending cuts on mobile services by up to 20% if current economic difficulties continue. Nearly 40% will defer upgrades to new devices and services or switch to fixed tariff bundles with unlimited calls. If this all happens on a broad scale, it could trigger consolidation and pose problems, particularly for small- and medium-sized operators. In this scenario, consumers will increasingly opt for free over-the-top services, including mobile VoIP. Though mass migration to mobile VoIP is unlikely until HSPA and LTE are deployed more widely, operators can contain further ARPU erosion by integrating mobile VoIP with subscribed services or partnering with OTT providers to enable cross-sell of other CSP capabilities. The UK and Ireland’s 3 mobile operator, and Verizon already offer always on Skype over its 3G network as a selling point [13]. Given the fragility of the economic recovery all around, Survival Consolidation remains a real possibility, in particular in many European countries. Economic pressures and austerity measures might force consumers to cut back on communications spending in the upcoming years (see for Spain

investments. In a stagnant economy, limited investment capabilities for the required data infrastructure may fuel network outsourcing models for many operators. Vodafone in the UK, and France Telecom Orange in the UK and Spain, have outsourced the management of their networks to Ericsson and Nokia Siemens Network, respectively [4]. Also operators as Bharti are outsourcing their networks to equipment suppliers as Ericsson and Nokia [16]. The business of communications is driven by strong retail brands with firstclass sourcing, supply chain and customer management capabilities Clash of Giants Clash of Giants is triggered by the perception of traditional communication providers to take on OTT Internet providers identified by 76 percent of CSP chief executives surveyed as the greatest competitive threat to their business, as illustrated in Fig.7 [17]. These companies have proven adept at dreaming up compelling new online experiences for consumers, and some of them are raking in profits via advertising or e-commerce. Fig. 6. 2011 IBM Telecom Consumer Survey Spain. Question 5: Compared to 2010 and previous years, are you likely to spend less, the same or more on the following products/services in the next 2-3 years?

Fig. 6, from IBM 2011 Consumer survey). In fact, we have witnessed a decline in wireless growth/revenues in a number of countries, with the worst decline in New Zealand, Greece, Czech, Austria and Spain [14]. Market Shakeout Alternatively, a prolonged economic downturn may invoke a different response from CSPs, investors and governments that leads to a different outcome – the Market Shakeout. In this scenario, the industry vertical integration model is disaggregated, either on voluntary basis or forced by investors as separate businesses may attract superior/sustainable returns. While this concept has been in the communications industry for at least a decade, we now see this concept maturing and extending to create a distinction between offering (premium) connectivity services sold to third parties, and serving endcustomers under retail brands.

Traditional communication providers haven’t been as aggressive in launching such services, and often they’re cut out of the profit flow. For example, some of the newest smart phones include capabilities for consumers to bypass their carriers and access the Web via Wi-Fi networks. Moreover, when OTT providers integrate backwards into the network with their own spectrum and infrastructure, this will be an additional trigger for this scenario. In an industry essentially fragmented by geography and national regulations, the ability of traditional CSPs to engage global OTT providers that are relatively unencumbered in their reach will require global alliances, collaboration and standardization of the kind the GSMA is leading for rich

A shakeout may also be triggered by increased fragmentation resulting from greater involvement and investments by parties that are not traditional phone companies, including government, utility companies and cablecos. With respect to mobile broadband, a number of alternative cell phone companies are likely to arise from a sequence of LTE auctions. In the Netherlands, for instance, the cable operators UPC and Ziggo are among the recipients of the licenses for LTE broadband services [15]. Though the industry seems to have decided in favor of LTE for ultra-fast mobile broadband, the majority of operators surveyed indicated that they had major concerns with respect to regulatory uncertainty and the business case for LTE

Fig. 7. IBM Telecom Executives Survey 2009. Question 16: Who do you believe will pose the greatest competitive threat to you over the next 5 years?

communication services (RCS), Voice over LTE (VoLTE) and the OneAPI global applications platform, amongst others [18,19,20]. OneAPI will also feed into the Wholesale Application Community (WAC) initiative, formed in February 2010 by 24 of the world’s largest mobile operators in response to the success of mobile application stores driven by the likes of Apple [20]. CSPs still have a long way to go here. Players as Google have one development team, one Capex, one infrastructure, one set of services deployed almost uniformly everywhere. CSPs have different strategies, services that are not interoperable and multiple Capex budgets and infrastructures. For example, CSPs do not have one response to Google Voice, but multiple, none of which scale. In this scenario, consumers are increasingly prepared to pay for end-to-end packaged services and enhanced rich communication capabilities. Consumers come to accept network-optimized vertical industry applications and digital lifestyle services from CSPs. CSPs in emerging markets are successful in extending communications to the ‘Base of the Pyramid’ as ultra-low-cost handset penetration increases. Generative Bazaar Generative Bazaar occurs when the vertical integration model is broken up, and infrastructure providers integrate horizontally to form a limited number of network cooperatives (Net Co-ops) that provide pervasive, unrestricted and affordable open connectivity to any person, object and device, and a multitude of asset-light service providers. This cooperative will depend on a viable funding model to support open access infrastructure. The Net Co-op may also emerge when national governments fund open access network infrastructures to spur

economic growth. The Australian government, for instance, has decided for a National Broadband Network as a ‘game changer’ for consumers and the competitive landscape. The Generative Bazaar may also result from voluntary cooperation of infrastructure providers such as in the Netherlands. Generative Bazaar depends on widespread deployment of mobile and fixed ultra-fast broadband. Open connectivity access spurs a wave of service innovations supporting the proliferation of Smartphones, MIDs and large volumes of other connected objects and devices. Success in Generative Bazaar rests on existence of a vibrant 3rd party provider community to develop new services and applications to support the increasingly digital economy and personal lifestyles. The emergence of Generative Bazaar is attended by an increased investor confidence in the ability of open connectivity platforms to deliver superior returns in a twosided business model. This scenario reflects a model that is opposite the dominant model of today. Connectivity becomes more prevalent in the mix. Most of the revenue is coming from connectivity. The demand for access grows, fuelled by the proliferation of smart devices, including machine to machine connectivity supporting growth in sensing and automated response capabilities. This will drive mobile connectivity penetration and applications revenues at the expense of pure communications which becomes a feature. The shift to a more connected world means connecting anything and everything – any device, medical to industrial. Vodafone is already headed down this path. Vodafone is working with Xerox to have their SIM card in every printer, copier etc. sold, and with Jaguar to have their SIM card in every car shipped. The shift in the revenue mix, illustrated in Fig. 8, reflects this trend.

Fig. 8. Shift of revenue from communications to connectivity in the four scenarios

In advanced markets mobile ultra-fast broadband is booming as connectivity becomes part of the fabric of Society. Users mix and match communication tools and pay only for communications aggregation and shared capabilities, such as presence, location, contact list, online communication and analytics information. In emerging markets, mobile becomes the de facto internet platform and spurs application and services innovation across all segments. It becomes the users’ portable digital identity. V.

afford to sit passively on the sidelines and wait to see what happens next. REFERENCES [1] [2] [3]

TOWARDS A BRIGHT FUTURE

There is compelling evidence in the industry trends, that the communications industry is facing one of its biggest inflexion points. CSPs will need to watch for the key scenario triggers and to understand the requirements for success in the scenario that eventually transpires. It is important to note that the scenarios are not a set of strategic choices to be made by individual CSPs. They are potential outcomes for markets at national and regional levels triggered by a distinct combination of highly dynamic factors, including government policy, regulation, technology evolution, industry dynamics and the state of the local/global economy.

[4]

The most promising scenario, the Generative Bazaar, will require a fundamental change in the industry structure and result in a shift in revenue mix, with connectivity supplanting communication services as the dominant contributor.

[9]

To return to strong growth, the communications industry need to reinvent itself much as it did with mobile telecommunications in the 1990s. It will have to get smarter. And the first steps of this evolution are now coming into focus. CSPs should: 

Collaborate on establishing global standards and capabilities to facilitate service innovation in competition to global OTT players



Leverage their unique assets to offer value to adjacent industries such as e-health, retail and transportation



Deploy analytics to differentiate the customer experience and improve customer satisfaction



Establish value propositions for third parties, including asset-light service providers, based on a broad range of intelligent connectivity offers

There is clearly a shift to a more connected world. And the value chains of adjacent industries are now more open for the CSPs to capture a greater share of revenue by delivering improved outcomes for those industries. It is now time to act. Nobody, not even the largest global service providers, can

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