Total comms spend & wallet share and implications for operators ss 04 oct 2014

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Published on October 4, 2014

Author: saravanans80



limited case study based draft note on trends in total comms spend and share of wallet and its implications for operators in the future.

Trends in Global Telecom spends / share of wallet by revenue drivers and implications for Operators Draft Note for discussion based on limited case studies Saravanan S Freelance Consultant – Telecom Strategy & Change 4 Oct 2014 1

Summary  It has been difficult getting hard data on Devices and OTT revenues and creating a holistic total communication spend for many markets. I have therefore done my best to gather and analyse what data I could collect on 3 markets :  US market – total wireline + wireless + Devices + OTT and Digital economy revenues  China market – Mobile + Devices + OTT & Digital economy revenues  India market – Mobile + Devices + OTT & Digital economy revenues.  The one clear message from the analysis : Devices and OTT revenues are growing in terms of total Industry wide revenues on all things related to / driven by Comms biz. While the level of maturity and rate of change from Connectivity related to Experience and Device related elements varies across markets, the trends are clear and lead to so e unequivocal projections of the future. • Device business in the Smart Phone world is already close to 20% of the total. If we assumed growth in wearables, smart fashion and IoT (M2M), we are potentially looking at an even greater share for Devices within the total industry. Operators are increasingly losing their share of the Devices business in OECD and GMU players have in most cases got out of the Device business since the 1990’s and the Latam / Asean financial crisis. • Operator forays into OTT play either on their own / partnering with select solution providers OR building a Venture-Mentor program have all failed to produce any results. The fault lies primarily in the inability of the monolithic operators to adapt from an Asset and Long gestation / Long Life Rental Low Risk / Limited scope business model to a Rapid Innovation - Global scale - High Risk business model • I believe that Operators need to undertake what I call a “Metamorphosis” transformation – restructuring their existing business into the 3 part R-N-A model of the business if they wish to leverage the Devices + OTT growth. 2

US – Total Telecom Spend – Connectivity + Device + OTT / Digital Economy Revenues Trends 2010 to 1H 2014 and projections to 2020 3 View slide

US – Total Telecom Spend – Share of Wallet by Revenue Stream. Device + OTT / digital revenues as share of total telecom spend is already 50% by 2014 and will cross 60% by 2020. 4 View slide

China – Total Mobile Spend – Connectivity + Device + OTT in RMB Billions… Trends 2008 to 2012 and projections to 2017 5

China – Total Mobile Spend – Connectivity + Device + OTT in RMB Billions… Chinese Devices + OTT market expected to cross 40% of wallet share by 2017 / 45 - 50% by 2020. 6

Indian Mobile Industry – Total annual Spend on Connectivity + Devices + OTT Trends 2010 to 2013 and projections to 2020… 7

Indian Comms Industry – Share of Wallet by Revenue Driver Device + OTT will cross 30% by 2016 and 35% by 2020. 8

Mass Retailers / Online / OEM Stores are gaining retail share of Smart phone sales compared to Operators. Operators have lower share of non-phone Smart Device sales – eg. Tabs / Pads; wearables; IoT devices – in car / @ home / etc… 2Q 2012 2Q 2012 9

With increasing shift to “fashion” / “built-in-device” / “wearables”; etc… Operators markets stand to lose a large chunk of the total Device growth opportunity. Mass Merchant Retailers – Best Buy, Costco, Walmart, etc.. Together contributed less than 15% of total Retail Smartphone sales in 2012. Source : All Things D Oct 2012. On the Pads / Tabs side, Carriers have always been minor players (relatively) compared to OEM Retail / Mass market Retailers.. By 2013, the same Mass Merchant Retailers were doing more than 25% of total Smartphone sales – Source : All Things D Nov 2013. (No new data on pads / tabs) Online Retailers like Amazon / e-Bay though still small are growing rapidly – (from <4% in 2012 to ~ 9% in 2013) for smart phones. As Devices change from Phones / Tabs to Wearables, @homes, in-car, security, health monitors, etc… in the future… and the sales outlets for them will shift to Fashion / Clothing / Accessories outlets; Home Depot / Staples; Pharmacies and a variety of 3rd parties including Auto companies, Security service providers, etc… On current trends, Carriers will potentially end up losing a good chunk of the 15-20% of current revenues which is based on device sales and financing. 10

Successful OTT players outscore even the largest Operators in Scale of user base and Penetration growth rates. Monetisation and retention does not seem to be an issue for players like Amazon, iStore, eBay, Google, FB, Alibaba, Tencent, DeNA, Sina Weibo, etc… 11

The OTT business model – is inherently incompatible with traditional Operator n.g. (navel gazing) mind-set / multi-layer governance / investment and operations philosophy .. 12 Inherent Incompatibility 1. Investment philosophy For every new OTT player / product, there are hundreds / perhaps thousands of failures. Even NPD by successful OTT players has a fairly high failure rate. OTT strategies rely on scale of new ideas, bootstrap investment philosophy, early market testing and rapid culling to arrive at the few successful products / services. Operators still believe in spending 6 months with 2-5 managers to develop 5 year / 10 year business case documentation before investing a single penny in the product / service. Few Big relatively Risk free investment is the core of Telecom Operator investment philosophy. That is why they are so successful in rolling out nation-wide networks for $X billions but fail miserably in product / service innovation 2. Mind-set – Scale / Self-center / Monetisation vs. Aggregation Operators focus on customer revenuisation – and they therefore position every idea in context of their subscriber base. But even the biggest Comms Operator has no more than few tens of millions of subs. OTT players on the other hand plan on global scales - 8 billion population / 7 billion SIMs / 6 billion Active Subs / 2.5 billion homes and close to 1 bill odd SMBs. Operators start with their own brand and customer base. Thus they can not even cobble together a national platform of services with competitors even when they comfortably share network infrastructures. OTT players constantly compete and co-operate with their worst rivals – whether it is Google-Apple OR Amazon-Google, etc… While OTT players too are interested in revenuisation, that is not their first concern. Creation an aggregated pool of committed and regular users is the primary concern of OTT players. Operators on the other hand, could not conceive of an investment, which is not monetisable from day 1 – and preferably promising a 60% Revenue to GFA commitment 3. Governance and Management Operators with their multi-layer management and governance organisations / long drawn decision making processes are simply not geared for running or even partnering with OTT businesses which churn out 1000 Apps a day, new product / categories every month / quarter; new OS versions every quarter / half year and change revenue and business models every 2-3 years.,

Monolithic end to end Own and Rent out “access & usage” business models of today’s leading operators need to be completely rethought and restructured to leverage the Device and OTT opportunity. I have been working on a white paper on Metamorphosis – a transformation of the monolithic telecom business to create what I call the R-N-A model – which calls for splitting the Business into 3 separate and distinct businesses with own strategies / relationships / role in value chain and governance / management structures : 1. R - Retail and Customer management business Focusing on Territory Share of Wallet and Customer Value management (Retailer model) 13 2. N – Network and Infra business Focusing on Asset Utilisation / Revenuisation – (Asset Rental model) 3. A – Applications and Service Platform business Focusing on building a Multi-way Industry Value Platform of competitor and OTT partners. The RNA splitting of the business in my view will finally enable Operators to take independent strategic actions in each of the 3 layers – without regard to potential contradictions which today plague any decision making by Operators, which is the primary cause for failure in their OTT ventures of various forms and shapes in the last decade. It will also open up the whole of the Device and Retail play and Full scope of services portfolio management for Customer Value Maximisation at the Front end Retail business, which is today held hostage to the Capex decisions on the Network side OR the partnership deficits on the Platform side of the business As Operators get to grips with the scale of the business opportunity that they are potentially losing out on the Devices and OTT side of the value chain, hopefully, they will be more open to true business restructuring transformation options than they are today…

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