Business of Value Added Services in New Mobile Era: From Strategy and Business Models to Services Development for Telecoms Operators

Business of Value Added Services in New Mobile Era
From Strategy and Business Models to
Services Development for Telecoms Operators
By ALI Saghaeian
Chief Analyst & Consultant
Telecoms, IT, and Media
Saghaeian [at] gmail.com

About Me
Ali Saghaeian
Telecommunications, IT, and Media
Emerging Markets & Developed Countries
Email: saghaeian @ gmail.com
Based in Sydney – New South Wales, Australia
Professional Experiences
• Founder and Chairman at Kiana Intelligent Communications
• Shadow Marketing Director at the Largest Telecoms Operator in the Middle East
• Principal Consultant ‐ Strategy & Business at Information Technology Development Center
• Head of Value Added Services at Miniatel Communications Development
• Chief Analyst & Consultant at Teyf Research & Consulting Group
• Chairman and Keynote Speaker in various World Telecoms Events
• Project Manager and Consultant to several national VAS Projects

• The mobile 3.0 – The trends for Multimedia Services and Value Added
Services
• The 4th revenue curve of mobile communication – The business of Value
Added Services.
• Differences in doing business with Multimedia and Value Added Services
than voice, messaging and access (data) services.
• Mobile Operator Strategy and implications for the ecosystem
• The Impact of 4th curve on mobile operator’s financials
• Investing in the 4th Curve
• How can Operators become Digital Lifestyle Solution Providers (DLSP)?
Presentation Agenda

Consumer Demand
 Fast broadband networks, well-designed mobile computing devices, and the
increasing supply of content, applications, and services have unleashed the
consumer demand for more like never before.
 The changing face of the industry also impacted the business models, the
revenue streams, and the value chain power structure.
 The operators rush to meet the growing data demand that is doubling every
year in most major markets.
We segmented the operator revenues by voice, messaging,
and access and correlated them with subscription growth.

Monthly Internet Traffic Forecast: 2015 - 2019

Families of Use Cases:
Matching the Customers’ Demands
Examples to represent variety & variability

Revenue Growth Curve in Mobile
The sigmoid or the S-curve growth: This model can be used to
explain the growth of individual products, companies, markets, and
global industries.

 In a majority of the cases, the rise is slow when the subscriber
penetration is below 25% and as the subscriber penetration approaches
70-90% band in a given segment, the Net-Revenue starts to hit its peak,
stagnates for a bit and declines.
 The amount of time the revenue curve stays in the stagnation phase
depends on the market competitive dynamics and usage profile of the
subscribers in a given country.
 These are generally dependent on the maturity of the market, the
economic and political conditions of the market, the regulatory regimes,
the competitive forces that are at play in the market, and the availability
of substitute solutions.
Analysis of the Growth Curves in Mobile

Mobile Voice Revenue Growth Curves
The first cellular market started in Japan in 1979

Mobile Voice Revenue Growth Curves for some countries

Telco Voice Standards : What is our Roadmap?
VoWiFi
> Significant % of customers have poor in-building coverage in
homes, transports…
> VoWiFi can be proactively communicated to customers, e.g. T-
Mobile US & EE
> Initial launch can be without handover to mobile coverage
VoLTE
> Clear customer benefits (HD-Voice, faster call set-up,
simultaneous voice and data services at 4G speeds) that build on
existing base of HD-Voice customers
> The experience can not be inferior to that today, e.g. handover
required for launch. Therefore, no commercial launch until all major
problems have been resolved
RCS &
Enriched
Calling
> RCS & Enriched Calling, when combined with VoLTE, will ensure
that customers gets the most out of simultaneous voice, messaging
and data services; major European operators (Orange, Voda, DT &
TEF), see this as the vision for “future of comms”
> However, benefits will only be relevant to customers when there is
a significant base of enabled devices

VoLTE: Very Early Days
• 25 operators have
launched
commercially in
some capacity
across 16
countries
• VoLTE by itself is
purely a
technology
migration
• 200+ VoLTE
capable devices
announced
VoLTE is less than 2% of subscribers

VoLTE Forecast 2015 - 2020
VoLTE Subscriptions (Mio) Revenue ($ Bn)
In 2020:
• VoLTE subscription more than 1.4 Bn
• VoLTE revenue going beyond $260 Bn

VoWi-Fi Market Scenario and Forecast
VoWi-Fi is going to surpass VoLTE by 2018 in terms of minutes of use
VoWi-Fi extends the
coverage of MNOs
offering an cost-
effective, scalable, high-
quality approach
whereas cellular
coverage might be
sketchy
But VoWiFi also can help
to win the battle against
the erosion of revenue
from over-the-top
providers’ (OTTPs’) VoIP
offersSaghaeian [at] gmail.com

OTT VoIP is cannibalizing Traditional Voice Revenues

Mobile Messaging Revenue Growth Curves
The first SMS was sent in 1991 in Europe

Messaging Trends and Outlook
 In some of the emerging markets, messaging is still the second biggest
revenue generation category after voice.
 Messaging continues to be a big revenue generator but its share of the overall
data revenues is gradually declining.
 For the first time, in 2011, KPN the biggest Dutch operator started to
publicly make noise about the impact of players like Whatsapp on their
messaging revenue.
 Now, over 90% of such subscribers preferred IP messaging. Hence, they
were looking for a cheaper alternative to operator messaging.

Messaging in Turkey – Declining Trend

Mobile Messaging Usage Growth Curves in Spain

Mobile Messaging Revenue curve in Taiwan

SMS traffic growth slowing, MMS more volatile
• Global SMS traffic appears to have peaked at just under 8 trillion messages,
with flat growth in 2013.
• MMS traffic still appears to be somewhat volatile, peaking at 371.3 billion
messages in 2011 before falling substantially in 2012 and then recovering
somewhat in 2013. We expect that in those markets where messaging apps are
being used to send pictures, the use of MMS will continue to decline.

Variable growth in messaging traffic in top 5 markets
• China and the US are largest markets for SMS and MMS.
• But while SMS seems to be holding steady, and MMS traffic is still growing for
Chinese operators, the US operators are seeing a marked decline in both SMS
and MMS traffic.

China Mobile: steady decline in messaging revenues
• China Mobile has seen its messaging revenues steadily decline in recent years.
• Tencent‟s WeChat/Weixin incredibly popular – 396 million monthly active users ,
14/05/14

Vodafone Group: messaging traffic down
• Vodafone Group messaging traffic declined 6.6% in FY2014 to 332.6 billion
messages (356 billion in FY13)
• By country, Netherlands, Germany, Italy, Spain and Europe saw steepest
declines: >25%
• Turkey, Romania, South Africa only opcos to see increases in messaging traffic.

OTT Messaging Traffic Worldwide

Messaging will be the most popular application /
platform in Emerging Markets for 2014-2017

Mobile Messaging Revolution

• Operators in developed markets reporting significant declines in
messaging traffic, revenues. . . . . . OTT apps increasingly favored by
subscribers, contributing to cannibalization.
• Clear segmentation is emerging among messaging apps . . . Some, like
WhatsApp, will continue to focus on communications, others (Line,
WeChat, Kakao) have already become potent content and commerce
platforms, generating good revenues
• Internet companies acquiring, investing or merging with messaging app
providers . . . Will Internet companies become the new telcos?
• Mobile operators developing multiple responses, depending on
technology and local market conditions . . . Partnership becoming very
common, especially in emerging markets; emulation has little success so
far.
• SMS becomes one of a number of communications services mobile
subscribers will use
• . . . Mobile operators have an opportunity to protect the legacy SMS
base i.e. those users who are slow/reluctant to move to IM apps.
Conclusions on Messaging

Mobile Access Revenue Growth Curves
With each cycle, the length of the curve shrinks, so the access
revenue curve will peak earlier than the previous two curves

Data access is compensating for the decline in voice

communications is core business…
being challenged by digital communication
 Communication is (will be) feature of
any web-based service and web-
connected “thing”.
 Operators’ existing communication
services have failed to address costumers’
digital communication needs and will be
increasingly challenged new technologies
& new players.

 Mobile operators must look at ways to move beyond just providing access
services and position themselves from being service providers to becoming
service innovators.
Mobile Access
 In addition, the migrations from 2G to 3G to 4G have been step functions to
deliver more capacity at a lower cost/bit.
 For the access curve, where most operators are still going to be riding the growth
for the next several years, strategies will be driven by technologies and business
models that help manage the cost per bit to enhance the margins per bit.
 The growth of the access curve helped compensate for the declines in voice and
messaging revenues. For example, in the US, the voice revenues declined $12B
from 2007 to 2011. During the same time, the data revenues increased by
$41B, easily compensating for the decline. In Japan, the voice revenues
declined by $3B but the data revenues increased by $25B from 2007 to 2011.

Mobile Services Revenue Growth has been Declining

As We Grow from 2G to 3G to 4G and to 5G

4G-LTE Global Service Status

LTE users – what’s important?
New opportunities, new challenges

Will LTE users pay more for quality?

How can 4G Grow the Revenues

Mobile Data
 WE are living in a data-driven mobile era.
 Many operators started from unlimited to boost demand but soon realized
the folly of their judgment and moved back to the metering model. While
unlimited voice and messaging can be sustained, unlimited data cannot
 Smartphone penetration is a proxy for high-data usage. The advent of the
iPhone coincided with and to some extent accelerated the deployment of
the fast 3G networks. Android started to show the same data consumption
characteristics as the iPhone by 2010.
 AT&T’s data revenue grew from $689M in 2004 to $22,000M in 2011, a
30x increase. Other operators have seen similar hockey stick curves.
 AT&T gave up on the unlimited plans 3 years after the launch. During this
time period, the operator sustained the most incredible wave of data
growth witnessed in human history. From 1 PB/month traffic in 2007, the
data traffic grew 25000% to 35 PB/month by Q1 2012.

US Mobile Operators Revenue Microtrends

US Mobile Revenue Growth 1995-2011

Growth in Data revenues in India
• Data revenues were insignificant pre 2010. During 2010-11 there was some traction.
• In 2012 it increased by 50%. In 2013 it doubled form 2012 levels and became
significant contributor to non voice revenues
• Airtel’s mobile Internet revenues grew around 90 per cent year-on-year
• Idea Cellular that reported 92.2 per cent mobile data traffic volume growth.
• The company’s average 3G data revenue per user has also increased by Rs 20 in
the last one year to Rs 109.

China Mobile – Mobile data segment trends

Core Revenue Trends – Mobile Data
Telco revenue decline is expected to slow a little going forwards, also due to
increasing data revenues from higher penetration and traffic from smartphones &
connected devices

Industry Growth Drivers 2014 - Mobile Data and OTTs
Also industry executives are highlighting mobile data monetization and
OTTs/content services as key industry growth drivers

Mobile in the Past
Evolution of Global Market Drivers

Mobile in the Past
Global Trends Overview

Evolution of Communication Services

 The Mobile Internet 3.0 is defined by the cloud-enabled, software
driven, IP-centric, high-speed 4G+ networks; consumers using
multiple connected devices; flattened value chains; and operators
relying on mobile data services for majority of their revenues.
Mobile Internet 3.0
 In fact, mobile apps and VAS commanded the highest share in 2011
from the mobile data revenues.
 Additionally, the VASrevenue is also lost as this revenue moves to the
over-the-top (OTT) application providers such as Google, Facebook
and others.
 For China Mobile, Mobile VAS revenue is now greater than both
messaging and access revenues.

The Game is Changing …

Mobile Internet 3.0 – Leading global mobile operators

Challenges for MNOs: Porter’s Forces
Mobile communication services have been heavily impacted by smartphones
and all IP networks
A good product roadmap needs to take into account these 4 challenges.

Operators need to focus on Data and VAS
Data (Mobile Broadband)
Voice & Messaging
Current Status
(ARPU)

Why VAS is Important
In mobile telecommunication industry, VAS is defined as services that are:
1. Not part of the basic voice offer.
2. Allow the mobile operators to develop another stream of revenue.
VAS Category
Category Characteristic Example
Entertainment designed for mass appeal Games, Caller Ring Back Tone
(CRBT), music download.
Info characterized by the
useful information
SMS ,Stock Update, Location
Based Service (LBS).
M-Commerce services involving
monetary transaction
using the mobile phone
M-banking and m-payment

Reasons for Increasing Importance of VAS
• Decrease in ARPU despite increase in MOU:
– With declining ARPU, the challenge is to develop alternative revenue
streams and retain customers by creating a basis for differentiation.
• Greater need for differentiation among the service
providers
–Greater competition
–Saturation in Metros and Urban cities
–Number Portability expected to come
• 3G/4G VAS:
– With added utility to mobile phone through 3G/4G, both subscriber
base and ARPU are expected to observe phenomenal increase in the
coming years

Key Challenges for Service Providers
Complexity of choosing VAS mix
Ability to maximize revenue from major investments
• Balance the Portfolio with High price point vs. low cost services
• Promotion to Maximize Penetration and Adoption Rates
• Time of day promotion
Ecosystem complexity
• Content: Content Providers, Aggregators, Distributors
• Applications: Financial Institutions, Retailers, Government
• Foster business models to enable service providers, verticals and VAS
• vendors to drive adoption to manage a Win-Win business Model
Conflicting goals
• Robust internal architecture vs. low CapEx
• New 3G/4G investments vs. profitable applications on current 2G networks
• Internal transformation (siloed to distributed) vs. time-to-market

What is an OTT communications service

The OTT communications services market – segmentation

Threats from OTT Communication Apps
 OTT communication apps are here to stay > Evolves & improves
permanently generating enormous user satisfaction (90%+) > Generates
enormous usage (WhatsApp has more messages alone than all GSM
operators combined)
 Communication suites are a threat to telcos > They capture value
outside of the traditional communication model > They cause irreparable
collateral damage (revenue, margin, image) > Churn is facilitated through
cloud-based context
 The “App” Model has advantages over native > Available on any
smartphone and secondary devices (tablets, PCs, TVs, Watches…) >
Evolves and updates more frequently than native or standard-based services
> Allows an autonomous strategy : no lengthy and difficult agreements with
other players (web, telcos, OEMs, OSes…) > Favors virality via Address
Book and usage of the Phone number

OTT set to corner Revenues of the Future
All Revenue Streams (Messaging in MENA-India & Gaming in Far-East)
are moving towards Internet Giants and away from Telcos…

Who are the OTT Users

OTT video revenue will exceed physical by 2018
Global video revenue, OTT vs physical (US$bn), 2013-2018
Source: Ovum, PwC

Growth of online video through 2017 in SE Asia

OTT Is Taking Up
› Inline with other markets
around the world, OTT
revenues in China and Korea
are mainly advertisement
driven
› Japan, however, continues
to rely more on subscription
revenue.

OTT Video Market Share
Direct revenues’ share of video will increase and provide monetization opportunities

OTT Business and Monetization Models
1. Free
• Build subscriber base/market reach
• Then sell content/services/advertising
• Creates data traffic/revenue for mobile operators
2. Subscription
• Small monthly fee
• Include in mobile operator monthly price plans
• Eg BBM, WhatsApp, operators‟ services
3. Advertising and sponsorship
• Based on building subscriber base/market reach
• Eg Nimbuzz, Fring, OoVoo, TextPlus
4. Virtual content and apps
• Stickers, avatars, games
• Eg Line, KakaoTalk, Tango
5. Call-out/message-out
• Skype, Nimbuzz, Rebtel, T-Mobile Bobsled, Fring
6. Partnerships
• Mobile operators – revenue share, market reach
• Handset manufacturers – market reach

The 6 Cs are the key market drivers
Commoditization, content, convenience, collaboration, consumers and
consolidation are all shaping the future landscape for OTT services
 Commoditization of traditional revenue streams (e.g. voice) means
operators must create new profit centers.
 Content remains key to the take up of access and demand is almost
inexhaustible, but premium content remains a scarce resource.
 Convenience is what consumers value in content services – they want it
to be readily accessible across multiple devices, easy to pay for and easy to
find.
 Collaboration is key to the future of operators’ digital strategies. Very few
have the skills and resources to compete with best of breed services.
 Consolidation is starting to reshape the landscape as operators move up
and across the content value chain, and grow scale, though M & A activity.
 Consumers are happier to spend on access models than single
transactions, and Internet access is taking wallet share from pure content
spend.

OTT content is key to revenue growth
Operators should partner to find attractive content bundles for consumers
 Commoditization: As core services become commoditized, service
providers will need to offer content bundles to attract and retain
consumers.
 Content is not just a retention tool; there are significant revenue
opportunities as content providers and aggregators explore new ways to
package and sell content.
 Convenience: Operators can play to their strengths – an active base
of paying users, a robust billing and CRM platform, and marketing clout.
 Collaboration is not easy, but is the best way to respond to evolving
consumer demand, and unlocking multi-billion dollar revenues.
 Consolidation: We expect to see larger entities competition for
rights and a shift of power within the value chain.
 Consumers are demanding more content, on more devices - OTT
video services, digital music, video games, and e-books.

Consumer Cloud services
Telecom operators seen as a vertical by IT – will they sell consumer-cloud?
 Consumer cloud & security services are still underpenetrated for most
segments of the customer base.
 No single brand has managed to become top-of mind / leader in consumer
cloud services - while telecom operators feel they have a role to play.

Enterprise Messaging: From VAS to M-Commerce
Mobile is the key media & the strategic channel
7.1B mobile connections WW with a population of 7.1B people alive*
91% of users have their mobile phone within arm’s reach 24/7**
98% of mobile messages received are read compared to 22% of emails***

The 4th Curve
 The 4th curve is not a single entity or a functional block like voice,
messaging or access but is made up dozens of new application areas.
 The 4th curve has different characteristics than the previous three:
o It is not one single curve but a combination of dozens of smaller
curves.
o The barriers of entry are low on the fourth curve.
o The Competitive landscape of each of these curves is different
requiring a more agile organization.
o Competition from new entrants starts very early.
o Business models that extend beyond metering are required.
 The previous three curves were quite distinct in their offerings. The
investment required, the type of people that needed to get hired, the
product roadmap, the vendors, and the value chains etc. were well defined
over the course of time. The purpose, the functionality, and expected
returns were well understood.

Telecom sector revenue trends
Revenue decline can slow down if especially mobile operators implement the
right strategies

 Who will capture the profits
 The Need for New operating models
 Implications on the Ecosystem
 Competition and Operator Consolidation
 New Revenue Models
 New Joint Venture Models
 New Business Models
 Regulatory Rethink
Implications of the 4th wave

Opportunities in the 4th Curve
 AT&T and Telefonica Digital are focused on opportunities beyond
communications into M2M, Advertising, Financial Services, Cloud, Security,
mHealth, and Distribution. With the scale of multi hundred million
subscriber base, each can make an impact with solutions and services they
introduce into the market.
 In many of the markets like advertising and security services, the operator
will be a new entrant. But, the operator is also in a unique position where
they can provide an end-to-end solution to the customers where they already
have a billing and service relationship.
 Operators will have to segment the cost of doing business and the revenue
streams and optimize for higher margins.

Opportunities beyond Voice and Data

Globally identification of new revenue opportunities is a key
requirement for Telco players facing slow down
• Further development of customer base
expansion through segmentation
• Locking of customers to retain the revenues
• Focus on high-end customers
• Push on (interactive) VAS to increase revenue
and margin
• Re-assessment of cost base and organisation
models to address increasing margin pressure
• Identification of new revenue opportunities
in adjacent sectors
• Direct competition between fixed and
mobile players in voice market
• Customer base and consumption still on
the rise, but tariff pressure and regulatory
changes leading to ARPU decrease
• Markets increasingly competitive and
segmented
• Increase in acquisition and retention costs
• Technologies enabling media players to
compete in the Telco market and Telco
players in the media market (OTT)
Global trends in the Telco industry Potential actions from Telco’s

NTT DoCoMo Revenues from new businesses

Telefonica Digital Revenue Targets

Contextual Communications means New Revenue

AT&T earns new revenue with connected car

China Telecom earns new wholesale revenue with
virtual numbers

Innovation and Collaboration in the 4th Curve
 The opening up of the network for innovation necessitates re-architecting
the network elements that can scale with demand and meet the specific
requirements of the vertical and the application.
 In certain areas, like mobile advertising, financial services, identity
management, they should collaborate with their fellow operators to provide
a better front-end to the customer and the vertical industry.
 For segments that are commoditized and provide no inherent competitive
advantage, it is in the interest of operators to collaborate rather than
compete so network sharing becomes a much more practical strategy for
preserving cash flows.
 Operators need to become “service providers” again rather than just the
“network operators.” By providing end-to-end solutions they can capture
better value from the ecosystem.

Operators have a number of different commercial and
technical capabilities to offer their partners

Business Segments – The Ecosystem

What is Happening …

Digital convergence is driving overlaps between previously distinct
industries creating a complex new sector, addressable by Telcos
•Non-Telco players are
entering the Telco
space challenging
traditional business
models
•New addressable
markets being created
due to overlap created
by digital convergence
Telecommunications
ICT Consumer Electronics
Media

Partnerships can benefit operators and handset
manufacturers, as well as OTTs

OTTs to Complement Telcos

Examples of existing CSP-OTT partnerships

Partnering / Bundling approaches to add Value beyond
Connectivity

Mobile Operator and Device OEM partnerships

Partnerships – E-Plus Germany teams with WhatsApp for
branded SIM

Partnerships - Telefonica teams with Line for Firefox OS

An example: OTT partnerships
Zero rating OTT video messaging
● VoLTE subscriber opts into
1-day free trial of OTT video
messaging with HD quality
● Data usage is zero-rated for 24
hours, followed by add-on offer
Monetization models
● “Try and buy” offers –
upgrades or add-ons
● Sponsored data/revenue
share Saghaeian [at] gmail.com

Case Study of Zatto and Orange
Zatto, Orange CH’s OTT TV,
bundled with mobile voice &
data plans and focused on
generation Y & Z, aims to
boost uptake of mobile data
plans
3 play:
OTT TV + mobile voice + mobile data

Partnership Opportunities - Digital Advertising
OTTs & Telecom operators : best possible partnership for targeting user
segments – wealth of data at both ends
This partnership can double the efficacy of targeted campaigns &
hence brand advertisement revenue opportunities

The 4th curve opportunities

4th Curve Application Areas
Application Areas Competitors
Identity, Risk Management Facebook, Google, Twitter, Microsoft, Banks
Commerce Amazon, Ebay, Google, Groupon
Payments Paypal, Startups, Google, Facebook, Visa
User Profile Google, Microsoft, Apple, Twitter, Facebook
Advertising Google, Facebook, Startups, Apple
Cloud Services Amazon, Cisco, Apple, Microsoft, Salesforce
Enterprise SIs, Vertical players
Connected Home Cable Companies, HP, Microsoft, Sony, Apple, ADT
Health Microsoft, Health Care providers
Analytics Google, Microsoft, Facebook, Amazon

The four revenue growth curves
Operators who are investing heavily in the 4th curve have a good shot at
seeing the end of the decade

 The 4th wave analyzes the four mobile revenue curves in detail and
discusses the strategies needed to increase the net revenue and the
investment areas that can lead to new revenue and healthier margins for
operators around the world.
 It is inevitable that the 4th growth curve for the wireless industry is going to
bring in disruption in the industry structure, technologies used, revenue
models, and at some point the regulatory framework itself.
 Any given operator could play a different role on the various mini-curves
that make up the 4th curve. The net performance of any given operator will
be measured by how they perform in aggregate on the 4th curve.
 Alone, any given mini-curve might not represent as big of an opportunity as
the previous three curves individually, however, collectively; the 4th curve
has the potential of surpassing the previous ones.
Analysis of the 4th Growth Curve

The rise and fall of the 4th Revenue Curves

o Delay the decline
This can be achieved by a number of key initiatives that involve a mix of business
models, consumer loyalty, integration of new technologies to reduce churn, and
embracing OTT/VAS services.
o Extend the peak
The reason Sprint is still able to offer unlimited data on iPhone and Android devices
is because their margins/bit are better than their competitors.
A number of operators like Rogers, Vodafone and Verizon have launched data share
plans that allow consumers to bundle multiple device per plan. This will encourage
users to become data users across multiple devices. This form of data pricing and
bundling will help extend the access curve peak in all markets.
o Invest in the 4th curve
Given that the 4th curve is not a singular curve but a combination of several mini-
curves that have their own profile, growth characteristics, competitive dynamics, and
opportunity landscape, operators will have to manage the 4th curve like an
investment professional would manage an investment portfolio or fund – diversify to
reduce risk and extend growth.
Mobile Operator Strategy in the 4th Curve

The Impact of 4th Curve on Operator Financials
 The growth in revenue has been fueled by the investments that operators
have to make to keep up with the network demand. As such, many have had
to raise significant amounts of debt.
 If the EBITDA for the company doesn’t grow in proportion to the rising debt,
the company comes under scrutiny and financial pressure. Typically, the
average Debt/EBITDA ratio for global operators stays around 1.4 with Asian
operators
 Over the past few years, weak economic conditions in various geographies
and pressures on the first three curves have increased the Debt to EBITDA
ratios for some of the operators. For Deutsche Telekom, the ratio has risen
by 22%, for France Telecom 23%, for Sprint 24%, and for Telefonica 50%
 Operators’ ability to raise debt and invest in new ideas and growth curves
rests on the both the will to invest as well as their current financial condition.
When the revenues stop growing but the debt demands stay high, the ratios
start to climb, putting significant stress on the financial health of the
operator.

ICT and Digital Media Revenue Map

ICT and Digital Media Industry - Revenue
 ICT and digital media industry has
grown by 5.6% since 2007, reaching $3.7tn
in 2013.
 It remains a services-based industry
however the proportion of services
decreased by 5.1% since 2007 in favor of
hardware.
 The role of advertising gains on
importance.

Business Segments - Revenue, 2007 vs. 2013
 Communications was the worst performer whilst broadband connectivity gained
in importance as service providers tackle competition with multi-play offerings
 The role of devices increased as more gadgets were connected
 Content was flat as companies look for effective monetization strategies

Shift in value, 2007 vs. 2013

Revenue Growth Barometer

ICT and Digital Media Industry - Profitability
 ICT and digital media industry EBITDA
has grown by 5.1% since 2007, reaching
$962bn in 2013.
 EBITDA margin saw moderate decline
from 26.4% to 25.7%, with software being
the main culprit.
 The biggest improvement in EBITDA
margin was achieved by advertising.

Profitability of business segments, 2007 vs. 2013

EBITDA Margin Barometer

Perceived value, 2007 vs. 2013
 Connectivity & communications remains the worst performing segment, with
a knock-on effect on network vendors
 Investors see potential in content, followed by internet platforms and IT
 Device, OS & components seems overpriced

Global Mobile Industry Profit Share

Mobile Operator profit growth in some regions

Safaricom Mobile Data Revenue Segmentation

Based on the strategy and performance of a given operator on the 4th curve, operators
worldwide will typically fall into three major categories:
o Utility players (access only)
 Typically the tier 2/3 operators whose revenue profile will very much resemble that of utility
players who generate billions of dollars in revenue but their margins are in the range of 8-
12%.
 US Electric Utilities revenues have almost tripled over the last 30 years but margins have
been cut in half. We can expect similar trends for the utility mobile operators or utility
mobile businesses.
o Enablers
 The next category of operators will invest in technologies that help them become effective
enablers of the larger ecosystem.
 They provide a robust network, an extensive set of APIs, and the consumer/network data
that powers the most popular consumer applications and services.
o Digital Lifestyle Solution Providers or Enabler+
 Mobile operators who go beyond just providing access and devices to their customers to
empower consumers and enterprises with solutions and greater benefits from the 4th curve.
 Such operators go beyond just being an enabler of the ecosystem; they actually launch
complete end-to-end solutions in given verticals like AT&T’s digital life in home
automation.
Investing in the 4th Curve

The Telco Challenge: Data Pipe or Smart Pipe

STRATEGY #1: Connectivity Provider
Using core competences to offer
smart connectivity
•Low competitive advantage
•Low level of intimacy with
customer
•Potentially less profitable
•But the “safest” strategy, less
risky
•No complex IT services needed
Negative connotation is not
completely justified
It may be a good choice for some
CSPs, especially the smaller ones
Providing advanced
connectivity offerings for
different types of digital
services e.g.
Rich media
IP communication
Cloud
M2M (QoS monitoring for
different verticals)
E-health (SLA, QoS)

Key digital services in both Fixed and Mobile world
Large number of digital services segments offers significant revenue potential
for both fixed and mobile service providers
* Priority of services based on a discussion with 20 leading Service Providers in APAC Saghaeian [at] gmail.com

(Telco) connectivity will only be a small part of the total
IoT market

STRATEGY #2: Digital Service Provider
Offering digital services directly to customers
•New generation IT services needed
•High risk involved
•Direct competition with OTTs
•Experience in customer engagement is needed
•Needs acquisitions on retail market
AT&T to acquire Direct TV, Orange acquired Daily Motion, and many others
•Potentially high competitive advantage
•Very strong intimacy with customer
•High profit potential
•Can be considered for enterprise customers
Product customization, managed services, SLAs, Closer relationship
with customer, consultative selling, MCC

Telco Digital Services Opportunities

How to Build a Successful Digital Services Business

Service Providers Transition

Digital Revenue as a percentage of Total Revenue
Many telcos have set up new divisions to capture opportunities in adjacent
markets…with mixed success

European telcos are generating 3-4% of total revenues
from “digital” businesses

STRATEGY #3: Digital Service Enabler
Cooperate with OTTs, offer existing capabilities “as a service“
• The experiences from
M2M and Cloud areas
show that in lean CSP
organizations it is
possible to profit from
value-added services
provided on top of
connectivity, in
cooperation with various
partners
• Needs separation of
access and services layer

Cooperation in the Ecosystem

The New Digital World represents both Opportunities &
Challenges for the Service Provider

Simplify
supplier
relationships
Cut
operational
costs
Increased
need for
quality and
reliability
The demand side appetite for end-to-end ICT service
provision is driven by four main factors
• Companies are demanding end-to-end managed ICT services
as converged technologies are increasing the complexity of
supplier relationships
• 47% of European companies cited as key driver in
purchasing decision
• Increasing demand for BPO in attempts to cut cost for
- designing, installing and maintaining corporate networks
- non core processes (e.g. billing, administration, HR, …)
• 51% of Euro. Enterprises cited cost cutting as a key driver
• Increasingly recognised that managed services providers
have more experience than in house teams providing
improved quality and reliability
Note:
Source:
Survey results cited based on Forrester interviews with 1003 technology managers in North American and European enterprises
Forrester ‘The State of Enterprise Managed Telecom Services adoption’ Oct 07, Yankee, EITO
Increased ICT
complexity
• Challenges associated with integrating and managing
increasing number of business communication technologies
are prompting organisations to outsource ICT management
One stop solution
for end to end ICT
service

Convergence between the IT and Telco sectors and end-to-end ICT
service is breaking down the divide of the traditional value chain
Voice and data Connectivity
Network
services
Infrastructure
services
Application
services
Traditional
communication services
and internet access
• Definition and
implementation of
data transport
solutions
- Traditional
- Innovative (e.g.
Virtual Private
Network)
• Analysis, configuration,
monitoring and
management of the
customers network
infrastructure
(LAN,WAN)
• services: capacity on
proprietary servers
(hosting) or data centre
space for the clients
servers (housing)
• HW and OS
management (traditional
and Web based)
• IT infrastructure
management
- Security
- Disaster recovery and
business continuity
- Storage and back up
- Desktop Mgmt
• Remote management
of standard
applications
• Application
maintenance
• Software as a Service
(SaaS)
• System Integration
• Consulting
Business
Process
Outsourcing
(BPO)
• Externalized
management of
company processes
(e.g. Billing,
Administration. HR,…)
ICT value chain
Infrastructure based Services People based Services
Telco operators IT operators
ICT ServicesCommunication Services
Current market pressures

Telco
operator
IT provider
Traditional
ICT services
market
Infrastructure
services
Application
services
Voice
and data
Connectivity
Network
services
Business
Process
Outsourcing
(BPO)
•IT providers acting as the main contractor
-Partner with telco operators (as sub-contractors)
to guarantee infrastructure based services
(connectivity, network platforms, data centres, …)
Evolved ICT
services
market
•Integrated IT and telco offering
-Provides the client with end-to-end ICT solutions
-Strong focus on converged network offerings e.g.
IP telephony, managed networks, mobile
connectivity
-Primarily achieved through JV or acquisition (e.g.
FT acquired Equant rebranded OBS)
Telco
operator
IT provider
1 2 3 4
In this new environment Telco operators are developing end-
to-end ICT offering

Opportunity Nature of Service Business
Model
Synergies with existing
capabilities and
products
Key Challenges
Network Services • Analysis, configuration, monitoring and
management of the customers network
infrastructure (e.g. LAN,WAN)
• Pay per service
• Pay per use
• Synergy with current core
offering:
- Communication services
and internet access
- Data transport solutions
(e.g. content delivery
network solutions, ...)
• Construct a clear and standardized
offering for each segment
Infastructure
Services
• Data Centre services: offer capacity on
proprietary servers (hosting) or data centre
space for the clients servers (housing)
• HW and OS management: maintenance
service (traditional and/or web based)
• IT infrastructure management:
- Security
- Disaster recovery and business continuity
- Storage and back up
- Desktop Mgmt
• Pay per service
• Pay per use
• Leverage infrastructure
management competencies
present in a Telco
• Exploit existing infrastructure
in terms of Data Centres,
Storage capabilities, …
• Construct a clear and standardized
offering for the each segment
• Further develop IT competencies
Application
Services
• Remote management of standard
applications (e.g. mail, antivirus, …)
• Application maintenance
• Software as a service solutions (e.g.
accounting, CRM, …)
• Pay per service
• Pay per use
• Develop IT competencies
• Partner with IT solution providers
• Build an offering of standard or semi
custom SaaS solutions for segment
Business Process
outsourcing
• Externalised management of company
processes (e.g. billing, administration,
payroll, …)
• Unified communication offerings
• Pay per service • Develop competencies
• Develop a standardized or semi
custom offering for the SME market
• Design custom offerings for large
enterprises
1
2
3
4
Each new opportunity for Telco has specific proposition,
business model and related challenges

Digital Service Model (1/4)

4-Phase Evolution to Digital Lifestyle Services

Operators have to move up the value chain

 For some of the services, the operator might just focus on enabling the
ecosystem while for others they might actively participate in bringing the
service to the market.
 For example, AT&T is deeply entrenched in the Health space with several
key initiatives in mHealth, TeleHealth, Cloud-based Healthcare, etc. while
some of its European counterparts are more focused on enablement of the
health ecosystem.
 Deutsche Telekom works closely with BMW for auto services while its US
counterpart is less involved with companies directly but is more focused on
getting the developer ecosystem to take advantage of its network platform.
 Operators like Verizon are spending billions of dollars on acquisitions and
on beefing up their offerings on the 4th curve.
Operators’ Investment in the 4th Curve

Future Telecoms Service Business Models
3 types of Revenue Categories in Communications

EXAMPLES OF LEVERAGING A COMMUNICATION PLATFORM FOR EARNING
INDIRECT REVENUE
Examples for Business Models

How can Operators become Digital Lifestyle Solution
Providers (DLSP)?
• Customer vs. User
• Save the customer relationship
• Use privacy/security as competitive advantage
• Separate the 4th curve organization from the mothership
• Change the DNA
• Portfolio management – fail often and cheap. Embrace Beta launch
• Collaboration
• Standards vs. Proprietary
• Build Advocates
To be an effective and a long-term competitor on the 4th curve, operators have
to become the OTT players themselves or have close collaboration with them.
This requires innovation, financial muscles, and a ruthless mindset to capture
its share from the value chain.

Customer vs. User
 The first step is appreciating that consumers of the 4th curve are not only going to be
the operator’s customers today but also users across all operators and in all countries.
 Instead of offering a messaging service to an enterprise customer, the operator can
offer a cross-carrier service and compete at the OTT scale.
Save the customer relationship
 It is important for the operator to preserve their customer relationship through VAS
and OTT services.
 If they can’t or don’t want to develop their OTT solutions, they should partner with
the players to offer branded solutions or have joint offerings that makes the customer
develop and maintain brand loyalty with the operator.
Use privacy/security as competitive advantage
 If the mobile industry isn’t proactive in addressing consumer privacy head-on from a
technical, business, education and compliance perspective, they will lose great
opportunities.
 Mobile operators are placed very well in the ecosystem to broker privacy and security
between the user and the app ecosystem as a distinct competitive advantage.
Steps to becoming a Digital Lifestyle Solution Provider (1/4)

Separate the 4th curve organization from the mothership
 Smart organizations separate 4th curve organization from the mothership and
hire as many Internet employees as possible – the ones that will go work for
Google or Facebook.
 The group should be held accountable to results perhaps to even a higher
standard and providing business metrics focused on service innovation, new
customer acquisition and growth.
Change the DNA
 Some like Telefonica, Deutsche Telekom, Orange, and AT&T are creating new
divisions and groups to address the OTT threat and opportunity. But there is
significant resistance from the legacy organizations.
 They should work with the OEMs to implement and execute on the strategy.
Apple with iMessage is already doing it without the user even realizing it

Portfolio management – fail often and cheap. Embrace Beta launch
 The 4th curve business model doesn’t require everything to be perfected at
launch but rather its functionality and roadmap iterated based on user
feedback.
 Location, search, consumer cloud services, advertising, and others are classic
examples where operators had the expertise and the technology much before
the Internet players came to the scene, yet, never paid much attention.
 Operators must act like an experienced portfolio manager who can weigh the
risks and have the perseverance to see the vision through fruition.
Collaboration
 There are some good case studies in Portugal where operators are
collaborating on an advertising platform or in Czech Republic where operators
are working towards a common payments platform; however, operators have
largely competed with each other.
 Success on the 4th curve requires much tighter collaboration between them
than ever before. The reason is simple - scale.
 For many of the verticals on the 4th curve, the only way operators can make a
meaningful dent would be to go past their legacy competitive concerns.

Standards vs. Proprietary
 Standards have served our industry well. However, in the apps world,
standards can slow you down. Software solutions by nature are proprietary.
There is a reason Skype doesn’t interoperate with Facetime and Google
Search and Bing don’t talk to each other.
 Bigger operators have the scale to launch proprietary solutions while smaller
ones rely on standardized approaches for their customers to benefit from the
same advances.
Build Advocates
 Advocacy drives output that is measured in sales. Advocacy helps decrease
acquisition cost and increases life time value of the customer.
 Building loyalty is critical to the overall health of future revenues. Operators
should understand advocacy dynamics and launch new programs that instill
brand loyalty.

Essentials of Being a Digital Lifestyle Player
Become a Digital Lifestyle Player!

Thanks for your kind attention 
By ALI Saghaeian
Telecoms, IT, and Media
Business of Value Added Services in New Mobile Era
From Strategy and Business Models to
Services Development for Telecoms Operators

Business of Value Added Services in New Mobile Era: From Strategy and Business Models to Services Development for Telecoms Operators

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