taga arthur d little

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Key trends in the telecom industry- need for a change

April 25th 2012Presentation to Telco-Forum/ Moscow

Arthur D. Little AustriaContact Person:

Dr. Karim TagaManaging Partner

2

1 CEO strategies

2 Need for a change

3 Options

Agenda

3

CEO statements converge drastically

Source: Company pages; Arthur D. Little, press research

Selected quotes from European telecommunication player 2012

1 CEO strategies

Télefonica CEO César Alierta:

“Active cooperation among ICT players key to address industry

challenges””Data traffic is booming and new

technological developments will allow this growth.”

"Regulators should allow operators to recover the costs of network

investment.“

Vodafone CEO Vittorio Colao:

“Industry collaboration is needed to create new services and business models”

“Cloud services are steadily gaining importance.”

"We really need to stop this auto-pilot regulation mentality.“

Deutsche Telekom CEO Rène Obermann:

“We see significant growth potential from cloud computing”

“And cloud computing is also one driver of our intelligent network solutions in

the areas of healthcare, mobility, and energy.”

“We require a modern regulatory approach (...) that is not constantly just

cutting prices.”

Orange CEO Stèphane Richard:

“The data demand explosion will continue, it is our task to drive the data

monetization“

“Co-opetition means optimization of asset base with telcos’s, alliances &

partnerships with OTT’s, and strategic partnerships with device manufacturers

and content providers.”

„Now is the time to invest. It is not the time to regulate.“

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Cooperation among ICTplayers

Profitable mobile data growth monetization

Verticals (e.g. eHealth, M2M devices)

Customer engagement

Maximize efficiency

Development of new applications & services

Focus on data security and privacy

Cooperation with partner companies

Growth in mobile internet and consumer services

Growth in verticals

Customer satisfaction

Increase operational efficiency

Growth from dynamic cloud computing & Intelligent network

Services that work reliably and securely

The strategies of European telco‘s show significant similarities in their approaches

Collaboration to create business models/ services

Accelerating mobile data growth opportunity

Verticals (M2M etc.)

Customer experience

Deliver value and efficiency from scale

Expanding growth segments and new service

Ensure data security

All big telco’s show significant similarities in their future strategy approaches, mainly in data monetization, industry co- opetition, verticals, cloud computing and customer experience

Strategy approaches of the big telco’s Co-opetition

(e.g with OTT’s,device manufactures)

Task to drive data monetization

Verticals as new growth areas

Customer concentration

Striving for operational efficiency

New growth segment cloud computing & intelligent networks

Safety, security & privacy in services

Source: Arthur D. Little analysis

1 CEO strategies

5

6 common areas of interest of thelargest telecommunication companies

Data monetization- profitization of rapid

data growth- tiered pricing

schemes

Customer excellence/ experience

New Services- Cloud computing

- Intelligent networks

Verticals- financial services

M2M, eHealth

Collaboration and partnerships

- with OTT‘s, device manufactures and content provider

Source: Arthur D. Little

The strategic direction of the European telecommunication player show significant similarities

Maximizing efficiency

1 CEO strategies

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1 CEO strategies

2 Need for a change

3 Options

Agenda

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Out of the 55 Western European Operators there is an strong indication of decreasing financial trends

Even though EBITDA margins show an increase, there is a significant reduction in service revenues and EBITDA This leads to less cash for investment and therefore impacts CAPEX by a -7.4% decrease between 2007 and 2012

Service Revenue and EBITDA, Western Europe,2007 – 2012 CAPEX, Western Europe, 2007 - 2012

0

50

100

150

50.5

38.2%

2011E2010A

132.3

-8.1%

50.8

38.4%

2012E

131.9

2009A

132.3

50.2

38.1%132.3

38.3%

2008A

140.9

52.3 50.6

2007A

143.5

53.3

37.1% 37.1%

EBITDAService RevenueEBITDA Margin

14,814,713,713,6

15,715,9

0

5

10

15

20

2007A

-7.4%

2012E2011E2010A2009A2008A

CAPEX (EUR bn)

EUR bnEUR bn

Source: Arthur D. Little Analysis, Merrill Lynch Global Wireless Matrix Q2-2011

2 Need for a change

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Operators are caught in a dilemma: They need to invest further into high speed networks to meet exploding data demand, - but they are constraint in their ability to monetize it

End of Profit for Mobile Carriers?

Source: Tellabs 2011

North American Mobile Carriers Western European Mobile Carriers

2 Need for a change

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Operators tend to resort more & more to partners and focus on their core competency, customer management

A more & more permeable value chainAn increasing number of initiatives

1. Outsourcing & sharing of network infrastructures – JV for new build/wholesale models

2. Detachment of network and services – drivers for network based value creation

3. Service Delivery Platforms – stimulating service development & partnership

4. Owning, building and secure the customer relation

5. Development of proactive multi-branding / 3rd

party brand management

Accessvs

Service

FVNOsMVNOs

OTTMedia groups

Networkinfras-

tructure

Network abstrac-

tion

SDP platforms

Customermanage-

ment& billing

Commer-cialization

Tower companies

UtilitiesRegulators

1

2

3

4

1 2 3 5

Service providers

MediaCPE vendors

4

Operators focus ?5

2 Need for a change – Value chain fragmentation

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Telcos have to re-think their position along the value chain and focus more …

Implications

Outsourcing & shared or jointly operated networks

Service Delivery Platforms

Customer relation

Consider network sharing or managed services if under cost pressure and reduce uncertainty from traffic growth (e.g. mob BB) and network complexity

Monitor new opportunities for “joint network” deployment and wholesale offer to reduce capex spending and optimize opex

Move away from silos to reduce costs and accelerate time to market Provide integrated and mashed-up services Anticipate disintermediation from non-Telco competitors Reduce risks of managing services via revenue sharing models with suppliers

Manage content aggregation timely – take advantage of the “cloud” Manage partnership as first mover advantage to differentiation from competition Build customer relations via mashed services (own and 3rd parties)

Source: Arthur D. Little LCC: Low Cost Carrier

3rd party brand management MVNOs/LCC*

Capitalize on your network capacity Acquire “new” channels via commercial partnerships to address untapped

segments – consider the “self liquidated sponsorship” effect Cherry pick and manage price war

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3

4

5

Network abstraction Capitalize on your network assets (presence, location based, traffic mgt. etc.) Participate in the market place by cross selling 3rd party developed applications Differentiate your services per targeted segment and applications e.g. QoS

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2 Need for a change – Implications value chain shift

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… but we have to re-think the value chain framework

The new Telco-media value chain

User

: Point-of-contact

Role Examples

Point of Contact On / off-line advertising

Retail & Services

On / Off-line retail shops Internet Services

Content Player

Music Company TV Program Producing Company

Telecom Player

Telecommunication Company Cable Company

System Player

Device Manufacturing Company S/W Development Company H/W Development Company


2 Need for a change – Rethink the value chain

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Business Portfolio: Value Chain Model

The new Telco-Media Ecosystem is useful for strategic positioning analysis, else Google wouldn’t be understood

Usage and Usefulness of Telco-Media Ecosystem: Google’s Case

Business Portfolio: Media Ecosystem

“Shows that Google has a sound service portfolio with multiple services in Service Integrator area,

where close relationship with user is highly required”

Focusing on Service Integrator area & formulating Ecosystem through partnership with players in other areas

ContentPlayer

SystemPlayer

AccessPlayer

UserPicasa

Portal

Street

Universal Partnership

WarnerPartnership

VodafonePartnership

DELLDevice

Sony BMGPartnership

CBS Partnership

Viacom Partnership

BSkyBPartnership

SF WiFiPartnership

Blog

YouTube

Service Enabler

Map

Earth

Direct Investment

Partnership

Origi-nation

ServiceProvision

Trans-mission

UserContact

YouTube

Aggre-gation

Portal

Blog

Picasa

Map

Earth

Street

“Difficult to say that Google has a sound service portfolio because it has multiple services in aggregation related area,

merely one of four areas.”


2 Need for a change – Case Study

13

1 CEO strategies

2 Need for a change

3 Options

Agenda

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Revenue outlook in the telecom sector(per interviewees) Interview quotes

“Increasingly difficult market situation. Can’t see anything that can turn around the negative trend”

“The future revenue growth will to a large extent depend on how the carriers act going forward.”

“Negative in the short term and stable in the mid term if we are lucky”

“Within Europe, growth is only possible if offering services beyond core telecoms. Without those

services, at best revenues will be flat.”

Source: 2012 Arthur D. Little – Exane report interview notes

According to interviews conducted for the latest ADL-Exane report, Telco executives expect stagnation or decline, and plan their activity accordingly

3 Options

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Do you believe Telecom operators can effectively diversify outside of their core segments?

Different options explored: Online Centric Premium: service and

innovation excellence

One-Stop-Shop: services aggregator

Mastering “Internet of Things”: powering M2Mapplications

Bit-Pipe: economies of scale, wholesale…

Examples in France:

Orange: 1Bn€ savings planned in France in 2015, mainly in network customer care (Chrysalidprogram)

Bouygues Telecom: 300M€ savings planned on external charges (including network), offers (subsidies), and distribution

Examples:

2010: complete merger of Orange UK and T-Mobile (Everything Everywhere)

2011: similar deal between Orange and T-Mobile in Poland

Orange was sold in Switzerland and Austria

Several rumors ongoing…

Diversification Change of the Business Model Cost cutting Consolidation /

mergers

Shareholdersstep-down

network mutualisation is aneffective cost cutting lever

=> no Telco found the solution yet

=> resignation

=> all concrete optionsboil down to cost cutting

1 2 3 4

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To face current difficulties, Operators are exploring 5 options to rethink their business

3 Options

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Top five winner and looser in the online advertising and media industry

The five top 5 winners and looser in the online advertising and media industry

34.2 bn. (+39%) 1.15 bn. (+28%) 33.700 E-Reader Kindle

Growing revenue (+ 43%) Too wide, too many

competitors Chances with hardware

+ media from one hand

0.15 bn. 0.03 bn. 600 Short message service

Twitter Global brand, among

most visited websites Unclear business model

Important communication tool, take-over candidate

Revenue Profit/ loss Employees Most import-

ant product Strengths

Weaknesses

Outlook

1.8 bn. (+257%) 0.5 bn. (+250%) 2.400 Social network

Dominating network,targeted advertising Very depended on online

banner advertising Leading position in

banner advertising

29.32 bn. (+24%) 8.51 bn. (+30%) 24.000 Google search

Dominating search based advertising Dependent on search

based advertising Chances in local search

based advertising

65.2 bn. (+52%) 14 bn. (+70%) 49.400 Iphone and Ipad (in

media sector) Hard- ,+Software+ digital

media from one hand Extreme dependent on

end-user Most popular end-user

devices

2.42 bn. (-26%) - 0.78 bn. 5.860 Email, internet access Global brand, own

media Very dependent on

sales of internet access

Revenue is growing slower than costs of production

0.76. bn. (-7%) - 0.23 bn. 149.000 Games provider Playdom

and PenguinWorld largest media

company, content, brand Deficits in online business Missing digital distribution

channels

2.5 bn. (+4%) - 2.5 bn. 90.000 Search engine Bing,

Hotmail Global brand

Billion deficit in internet business Shareholder force sale

of Bing

1.1 bn. (-36%) - 0.61 bn. 51.000 IGN Entertainment, Wall

Street Journal online Second largest media

company after Disney, Content No social network Missing digital channels

of distribution

6.32 bn. (-2%) 1.23 (+ 105%) 13.600 Email, digital sport-

and finance news Most visited news

portal Very dependent on

banner advertising Is loosing attractivity

Revenue Profit/ loss Employees Most import-

ant product Strengths

Weaknesses

Outlook

3 Options

+

-

Source: Wirtschaftswoche 48, change YoY Sept ‘11

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On the way to 2020, telcos have a need to rethink drastically their business models as business as usual won’t work

Bit-pipe

Service excellence

Comparable business models

American tower GTL Ericsson Alcatel Lucent

Key successfactors

Economies of scale Technology mgnt. Finance/ capital

Partnership Recruitment in

adjacent markets End2End platform

Geek Squad BTGSOBS T-systems

Financials(EBITDA)

20-25 %

5-15 %


Focus

Lean Telco Network mgnt.

B2B B2B2C Vertical enabler Home assistance.

Description

Best practice network operator’s Network developer (network as a

service...)

Google

Apple

Apps/services innovation Partnership Customer Exp.

40-45 % B2C/B2B2C Broad portfolio Customer

interface

Service and content aggregator Customer and service interface

M2M/ Internet of things Vertical champion - the engine and

backbone for other industries

One-stop-shop

Mastering IoT

Utilities Best-buy

Limit complexity Scale single

servicefp

10-20 % “Me too” Cost

effectiveness

Universal service provider- from IT to telecom to energy to entertainment...

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3

4

5

M2M: Machine to Machine OBS: Orange Business Services BTGS: BT Global ServicesIoT: Internet of Things B2C: Business to CustomerIT: Information Technology B2B: Business to Business

3 Options

Telco 2.0 Amazon IT/ cloud technolog.

Online retail

portfolio

Self-service process

35-45 % B2C/B2B2C Platform Portfolio

Service on demand: Cloud/ Web 2.0On-line distribution & customer care

2

18

Smart Home has become a hot topic again and players from various industries are now placing their bets

21 3

46

IT equipment players Service providers

Assistance specialists

Devices / appliances

manufacturers

Over-The-Top

5 Smart Home pure players

Selected examples

Source: ADL

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Verizon and AT&T have recently made significant moves towards Home System Management

Energy management: energy reader, smart appliance

switches and thermostats, Security : smart door and

window locks Video-camera : in-door, out-

door

Anytime/anywhere value proposition

Remote control via: – Smartphone

– PC – FiOS TV product

Launched a pilot to develop a Verizon home systems management solution

(Jan 2011)

Acquisition of Xanboo, home system management solution specialist

(Dec 2010)

+

Security / video

Energy Healthcare

Lighting

In Jan 2010, Verizon Wireless and 4Home* announced partnership to develop Home control applications

Source: Public information, Verizon, AT&T, Arthur D. Little analysis Home Automation specialist

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Example of move around alliance Telefonica alliance “Beywatch”

Telecom operators are also active in the Smart Home field with initiatives around CPE or large alliances, mainly to response to OTT closed and integrated ecosystem

Example of move around CPE Freebox Revolution

NAS storage serverDLNA media server

Gaming

Gyro remote control

Internet on TV

Apps store

Other players involved

Source: ADL

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Multiple Ecosystems will be significantly affected from smart technologies - forming “The Internet of Things”

Internet of thingsEcosystemsMedical & health Moving objects

Building automation

Industrialprocesses

RetailVending Machi-

nes & POS

Energy“Smart Metering & Smart Grid”

Mobiledevices

Source: ADL

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The value chain consists of a wide area of services and eco-system players that need to be aligned in order to establish a sustainable solution

The vertical application value chain

Value highly distributed across the Value Chain – fuelling the need to extend own service offerings towards service enablement & provisioning

The Internet of Things value chain

SIM cards Sensors Actors Aggregators Transponde

r

Vending machines

PNDs Cars Cameras Computer

Uses service

Resells services

Buys service

Uses Service

Network Connectivit

y Availability Quality

Platform Enabling

capabilities (e.g. QoS)

Applications

Interfaces Solution

build-up Hardware Backend

Packaging / Bundling

Service Provisioning

CRM Billing

5 – 10% 15 – 20% 30 – 40% 15– 20% 10– 20%

Average Value Share Distribution

Smart object

Network operator

Service enabler

System integrator

Service provider

Reseller (Bus. cust.)

CustomerModule / modem supply

Source: ADL

23

Interesting future …

…high impact …

high uncertainty

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Although the average price level of mobile voice services is already beneath the lowest in Europe, the year-on-year decline was by far the highest – increasing the price gap to 200%

Monthly mobile service fee (average user)(2009)

Comments

The Austrian mobile telecommunication market is extremely competitive – this leads to one of the lowest price levels in Europe

Nevertheless, prices are still falling very fast – the decline in the average price level was more than two times higher than the average decline

This led to a further increase of the inter-European price gap, that amounted to nearly 200% in 2009

In other words, the average mobile telecommunication customer in Switzerland had to pay three times the amount, that the average Austrian customer had to

Source: Finnish Communications Regulatory Authority (FICORA); Arthur D. Little Analysis

11,513,013,313,515,7

29,331,532,134,636,638,8

22,227,6

-50

-40

-30

-20

-10

0

10

20

30

40

Switz

erla

nd

Fran

ce

Irela

nd

Italy

Bel

gium

Spai

n

Port

ugal

Ger

man

y

Dem

ark

Net

herla

nds

UK

Aus

tria

Swed

en

Price, in €

x 3

YoY 08-09, %-48,1 %

4 Mobile Voice Market

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Comparison of the key data from fixed mobile communications operators shows a relatively stable market

Revenue EBITDA*

Source: Arthur D. Little, Press releases, Company Information, RTR.*) not separately published from 3G for Austria, **) only consolidated account available (fixed+ mobile line)

€

The Austrian telecommunication market

Market Share

1.5741.668

9831.0381.085

548569592

207174196

2008 2009 2010

1.367

585600

283283285

185182187

2008 2009 2010

424342

313032

192020

886

2008 2009 2010

3GOrangeT-MobileA1 Telekom

The market share and EBITDA of the Austrian mobile operators remain stable from 2008-2010; revenue is slightly decreasing

Market share per operator in %

Revenue per operator in mio.

EBITDA per operator in mio.