Protecting data revenues


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Telecom revenues are declining.

Till now, Data revenues have been critical for Telcos which have successfully followed a “walled garden” approach. But the "walled gardens" are fast eroding under threat from integrated players like Google and Apple, and the telco revenues are fast declining.

This presentation presents strategies a Telco to counter this emerging threat from different types of online players and increase or at least retain a share of data revenues.

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  • 3 December 2011

    APAC Telcos feel the bite as Operating Cost and Foreign Exchange results in the decrease of Profit by 25% to 37%
    [Prepared by Ajar Arranges and Stephen D Brown]

    Critical facts that has culminated in generating 25% to 37% loss in profit for APAC Tier-One Telcos:
    1. Telcos data traffic increase does not translate to synchronized revenue but has translated reduced ARPU (As in case of Indonesian Telecommunications, 350% increase in data traffic during 2010 compared to 2008)
    2. Telcos offering non-tiered packages for high-speed broadband for wired and mobile users.
    3. Penetration of Smart phones moves past 53% while users increase communications using social media, text, video, VoIP and email on their mobile phones
    4. Telcos offering Cable TV along with VoIP phones for wired users in a non-tiered, flat-rate packages
    5. Telcos maintaining circuit-switched infrastructure at core and aggregation network instead of converting aggressively to an Optical Packet Transport network.
    6. Telcos that provide backhaul has started carrying LTE traffic for Tier-2 Telcos where traffic generated ranges from 120Mb-300Mb per-user, per-tower and per-carrier.
    7. Telcos direction to utilize packet-based infrastructure has been a hybrid carrying packet-based traffic on E1s and limited to SDH granularity, instead of eliminating E1s and allowing for tuning geographical bandwidth requirements by any granularity of 1Mb using Connection Oriented Ethernet.
    8. Projected event where packet-traffic (both voice and data) supersedes voice-traffic on circuit-switched networks is ahead of schedule by 4 years and will be reached by 2013
    9. Telcos have focused in increasing profit by cutting CAPEX by purchasing equipment tied to financing packages offered by vendors with low-cost equipment but with higher operating costs.
    10. Telcos internal culture will resist the merger of the traditionally divided disparate departments of Data and Voice. When the base technology that transports both voice and data traffic becomes Connection Oriented Ethernet, the disparate departments of Data and Voice will be merged. This would mean that technical expertise for Access, Aggregation and Core becomes Ethernet. This will definitely allow for management of higher traffic volume with less man hours, reduced training cost, and transportable expertise across access, aggregation and core parts of the network.
    11. Knowledge of Packet based Optical Transport among senior decision makers within telcos is zero to bare minimum in APAC (survey in Singapore, Malaysia, Indonesia).
    12. Majority of the telcos Senior Execs see Packet based Optical Transport as a technical issue, not realizing the devastating impact on profitability in allowing the infrastructure to remain circuit switched. Without the mandate and leadership of Senior Exec of the Telcos, technical middle management will be slow to recommend to senior decision makers to move to Connection Oriented Ethernet. Technical engineers will be slow to recommend moving to Connection Oriented Ethernet, as this would provide a path to the merger of both the Data and Voice divisions within traditional Tier-1 telcos.

    This provides excellent opportunity for short-selling telcos shares', specifically, Tier-1 telcos that have offered non-tiered data packages. Profits for backhaul providers and long haul providers would increase dramatically as data traffic surges ahead. (This may vary as some providers may have negotiated non-conducive contracts)

    This also provides excellent opportunity targeting senior executives of telcos by headhunters. As profit decreases, senior exec of telcos may choose to transfer out. Depending on the terms of contract, execs may require moving, to maintain a positive personal track record.

    As profit of Tier-1 telcos drop, telcos may apportion part of infrastructure or business divisions to be sold to maintain appearance of profitability. This provides excellent opportunity in asset acquisition of specific telcos infrastructure. This process will become more apparent in the first quarter of 2012

    APAC regional Tier-1 telcos will face increase in revenue's ranging from 3% to 9% along with rapid increase in data traffic. Unfortunately, due to operational cost, the profit will decrease from 25% to 35%. Since APAC telcos do not manufacture their own equipment, relative to the wording of the Telco-vendor supply contract currency clause, a portion of the decrease in profit will be compounded due to currency exchange and further aggravated due to conditions within bridge financing provided by vendors to certain telcos. Nevertheless, majority of the loss of profit will be due to increase in operational cost.

    The rapid increase of operational cost is directly related to the increase in the volume of packet-based data traffic in comparison to Circuit-Switched voice traffic. (4:1). Parameters used were totaled on the basis of equivalent kilobits of transmitted voice along with higher burst increases in the frequency of establishment of circuits within the circuit switched infrastructure that the packet based traffic flows through.

    The limited granularity of Circuit-Based transport network, with restricted grooming hierarchy, forces under utilization of overall bandwidth. The attempt by telcos by increasing the volume of fiber is likened to increasing number of lanes to cater for multiple trains - unfortunately, the trains are only once cabin long and the number of trains increased to 600% of norm. This results in severe under utilization of bandwidth within paths and over utilization, by 200%, of available paths in the existing path-termination plan.

    The solution is for telcos to move to a, purely, packet-based transport network using the technology of Connection Oriented Ethernet. Telcos that invest in packet based backhaul networks with Connection Oriented Ethernet in major metropolitan area will be able to reduce operating costs within 4 months of deployment. Telcos' that implement COE over MPLS-TP will have a further advantage of reducing operational cost by 32% over 5 years as done by Verizon in the United States.

    Based on discrete interviews conducted, it is noted that majority of the senior decision makers within telcos in APAC's ability to asses impact of this drastic change is technically limited.

    Therefore, the opportunities outlined still hold true. Telcos in Singapore may not be severely impacted by local activities, but foreign activities by Telco based in Singapore will result in negative consequences on profitability.

    Prepared by Ajar Arranges and Stephen D Brown
    Randall & Deloitte Consultancy

    The occurrences of events that reflect the above analysis have started as predicted. The following are the news extracts.

    Malaysia: Telekom Malaysia records revenue of MYR 2.30bn
    Business Times Malaysia, 25 Nov 2011, p.B4:-
    Telecommunications firm Telekom Malaysia (TM) has posted revenue of MYR 2.30bn (EUR 541.76mn USD 722.06mn) in third quarter of 2011, rising by 5.8% from same quarter of 2010. Its net profit declined by 31% to MYR 302mn because of unrealised foreign exchange loss on borrowings. The firm's earnings before interest, tax, depreciation and amortisation (Ebitda) grew by 7% from MYR 759.50mn to MYR 812mn.

    Malaysia: Telekom Malaysia posts revenue of MYR 2.10bn
    The Sun (Malaysia), 26 May 2011, p.15:-
    In Malaysia, telecommunication firm Telekom Malaysia (TM) has posted revenue worth MYR 2.10bn (EUR 487.04mn USD 685.38mn) in first quarter ended 31 March 2011. Its net profit declined by 32.8% from MYR 242.90mn a year before to MYR 163.30mn in the first quarter of 011. Also, normalised net profit jumped by 40.3% from MYR 87.20mn to MYR 122.30mn.

    Malaysia: Axiata's third quarter revenue up 4%
    Business Times Malaysia, 01 Dec 2011, p.BT2:-
    Malaysia-based telecommunications firm Axiata Group's (Axiata) revenue rose 4% from MYR 3.94bn (EUR 920.78mn USD 1.24bn) a year ago to MYR 4.19bn in the third quarter of 2011. The growth was attributed to its key operating firms' operational improvements. However, its pre-tax profit decreased from MYR 1.04bn to MYR 9.63mn.

    Malaysia: Maxis posts lower pre-tax profit of MYR 746mn in third quarter
    Business Times Malaysia, 01 Dec 2011, p.BT2:-
    In the third quarter of 2011, Malaysia-based telecommunications firm Maxis recorded a decline in group-level profit before tax from MYR 815mn (EUR 190.47mn USD 256.03mn) a year earlier to MYR 746mn. The decrease is due to investment the firm made on its coverage and network. Meanwhile, its revenue increased to MYR 2.24bn, up 4% from MYR 2.21bn. The firm posted lower pre-tax profit from MYR 2.3bn a year earlier to MYR 2.24bn in the first nine months of 2011. Similarly, its revenue declined from MYR 6.55bn to MYR 6.53bn.

    Indonesia: Telekomunikasi Indonesia posts revenue of IDR 34.46tn
    Jakarta Post, 30 Jul 2011, online:-
    State-run telecommunication firm Telekomunikasi Indonesia (Telkom) has posted revenue of IDR 34.46tn (EUR 2.83bn USD 4.06bn) in first half of 2011, rising by 2.2% from IDR 33.71tn in first half of 2010. Its net profit decreased by 1.5% from IDR 6.03tn to IDR 5.94tn due to operational expenditure that increased to IDR 23.53tn.

    Singapore:SingTel's Second-Quarter Profit Falls as Currency Trims Regional Earnings
    Bloomberg, 10 November 2011;by Robert Fenner
    Singapore Telecommunications Ltd. (ST), Southeast Asia's biggest phone company, reported a drop in second-quarter profit as a stronger currency added to lower contribution from regional units such as Bharti Airtel Ltd. (BHARTI) Net income declined 1.2 percent from a year earlier to S$881.5 million ($683 million), or 5.5 Singapore cents a share, SingTel, as the Singapore-based company is known, said in a statement today. Profit was expected to be S$876 million, according to the median estimate of five analysts surveyed by Bloomberg News. Bharti Airtel's pre-tax profit amounted to SGD 131mn, translating to a drop of 37%.

    Indonesia: XL Axiata looks for potential buyer of 7,000 BTS
    Antara, 24 Nov 2011, online:-
    Indonesian mobile phone operator XL Axiata is seeking potential investors to buy its 7,000 base transceiver stations (BTS) at the price between IDR 14tn (EUR 1.16bn USD 1.55bn) and IDR 15tn. The move came as the company intends to concentrate on its core business, according to President Director Hasnul Suhaimi. However, XL Axiata has not fixed a due date for the buying process. The company has 9,000 to 10,000 BTS across the country so far. Goldman Sachs had been named as the arranger for the sale of the BTS. In 2009, the company has once failed to sell its 7,000 BTS.

    Indonesia: 2010 sees a 350% hike in data traffic
    Kompas, 14 Apr 2011, online:-
    According to Nanot Harsono, a member of the Indonesian Telecommunications Regulatory Body, data traffic in Indonesia increased by 350% during 2010 compared to 2008. On the other hand, the country saw no increase in voice traffic as it remains stagnant because the people felt sufficient using Facebook, BlackBerry Messenger or Yahoo Messenger and they have little time to use voice service for communication

    Asia Pacific: Ovum unveils prediction on data, voice, mobile revenues
    The Nation, 29 Sep 2010, online:-
    Data firm Ovum has predicted that mobile revenues in Asia Pacific region will hike to USD 310bn (EUR 228.38bn) in 2015 from USD 267bn in 2010. Overall connections are predicted to jump to 3.8bn from 2.6bn. Mobile voice revenues in the region are estimated to decrease to USD 176bn in 2015 from USD 182bn in 2010 due to declining average revenue per user
    (ARPU) in competitive markets. Revenues in saturated markets like Hong Kong, South Korea,
    Japan and Australia are predicted to decline. However, the revenues in growing markets like
    China, Indonesia and India will grow although ARPU is decreasing. On the other hand, revenues from mobile data services in the region are expected to expand to
    USD 133bn in 2015 from USD 84bn in 2010 because more users will use social media, text, video and email on their mobile phones.
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Protecting data revenues

  1. 1. Protecting Data Revenues: Positioning Telcos for growth<br />Telecom revenues are declining. Data revenues have been critical for Telcos which have successfully followed a “walled garden” approach. But with Google and Apple, their revenues are fast declining. How should Telcos counter this threat from online players and retain a share of data revenues. <br />Prepared By <br />Charan Puneet Singh<br />
  2. 2. Executive Summary<br />Telecom companies in mature markets are increasingly under pressure, to protect data revenues given the competition from different players in market, the transformation under way in the industry and increased capital and operational spends. <br />In its current avatar, the scope for today’s Telcos in the emerging telemedia value chain is limited to that of a “dumb pipe” , pushing content to the consumer. In order to stay relevant in the market, the telecoms today have four imperatives:<br />1. Defend and grow telecom’s share of the broadband market through network improvements and high-value integrated and interactive multimedia services.<br />2. Focus on enabling the 4A vision (content accessible by anyone at anytime through any device) and empowering users, be they individuals, communities or companies.<br />3. Exploit the advertising potential of the subscriber base - especially mobile.<br />4. Adopt innovative content development and delivery models, and focus on the consumer experience.<br />Also, Telecoms today will have to transform themselves in terms of cost structure, organizational structure and business processes to allow them to take on the emerging competition in the form of internet and media companies. <br />
  3. 3. ROADMAP FOR PRESENTATION<br />Understanding the factors at play<br />Key Recommendations<br />
  4. 4. Challenging times for Telcos Globally<br />Telcos must prepare to face potential threats from within & outside the industry. <br />Declining Tariffs<br />Disruptive Innovations <br />Declining Revenues<br />High Customer Churn<br />Evolving Customer Needs <br />Evolving Technology Trends <br />Breakdown of “Walled Gardens”<br />Declining Profits<br />Macro economic Challenges<br />Investments in Capex <br />Investments in Opex<br />Increased Costs<br />Regulatory Costs /Fees<br />Interconnect Costs<br />Investments in Next Generation Technology <br />*Limited scope of root cause<br />
  5. 5. What is keeping Telco CEOs awake?<br />Data revenues now constitute 50% of revenues for some leading Telcos; implying how leading Telcos are adapting to changing market trends. <br />1<br />Global data traffic now exceeds global voice traffic; implying an underlying change in the way customers use telecom services.<br />2<br />Disruptive innovations in Consumer Electronic Devices (Netbooks/ Iphones/Ipads /IPTV / Satellite Navigation) are affecting a transformation of the telecom industry.<br />3<br />Global Mobile revenue growth has stabilized, with ARPUs declining and subscriber penetration reaching saturation in most industrialized markets. <br />4<br />KPIs like ARPU are becoming redundant; the focus now is on margin (AMPU)<br />5<br />The pricing models are being adapted for a multi-platform & metered consumption <br />6<br />Telcos are losing relevance with consumers, replaced with next-gen. internet brands.<br />7<br />Globally, the telecom industry is set for M&A; only the big and bold will survive.<br />8<br />
  6. 6. The Emerging Telecom Ecosystem<br />The emerging telemedia value chain spawns new business models, undercutting the dominance of telecom service providers who are being forced to innovate to avoid being labeled a “dumb pipe” <br />Sales /Advertising<br />Content Packages / Services<br />License Rights<br />Search /Advertising<br />Content Production<br />Aggregation and Packaging<br />Distribution<br />Portals and Search<br />Transport and Delivery<br />Customer Device Management<br />Advertising Campaign<br />Online Traffic<br />Broadband Subscriptions<br />Traffic Acquisition<br />Advertising Aggregator<br />Customer Data <br />Targeted Deals<br />Content Distribution<br />Customer Devices Sales<br />Customer Content Management<br />POTENTIAL REVENUE OPPORTUNITY FOR TELCOS<br />
  7. 7. Factors Affecting Growth in Data <br />Factors behind a global rise in data revenues:<br /><ul><li> Development of VAS Eco-system: Telecom Operators have developed an eco-system for consumption of Value-Added Services like Video-On-Demand etc.
  8. 8. Growth of Local Content and Search Companies: In most of APAC, VAS demand is dominated by local internet companies and content providers.
  9. 9. Growth of Smart Phones: Smartphone prices have crashed and intense competition between major players has resulted in the best deals for consumers.
  10. 10. Growth of Netbooks: Demand for mobility and proliferation of cheap computing power has pushed data consumption
  11. 11. Growth in mobile-based applications: I-phone segment represents the most profitable of this lot, but analogies can be found globally.
  12. 12. Growth in Mobile-based transactions: Specially in economies where banking network is undeveloped or is sparse or inaccessible for other reasons.
  13. 13. Products offering Convergence / Triple Play: Operators have products selling packaged Broadband, Voice and IPTV services in the UK market.
  14. 14. Innovations in Pricing: Developments in Billing Systems has allowed telecoms to charge consumers on a more granular level to ensure retention.
  15. 15. Innovative Business Models: Data based services like TiVo, Netflix and new devices like iTouch, Ipad , Kindle and Dash have pushed data consumption.</li></ul>VAS <br /> Eco- Systems<br />New Devices<br />Mobile Applications<br />Innovation / Convergence<br />
  16. 16. The Demand for Data: Bursting Pipes<br />The size of data opportunity is huge, will be led by proliferation of smart phones and data cards but will require heavy capital investments in 4G by Telcos.<br /><ul><li>Smart phones have increased data consumption by manifolds: Average data usage went up by 50-100 times with devices like Apple Iphones / Android G1.
  17. 17. It is Data Cards, USB Dongles and Data Cards that make up the bulk of Data consumption today.
  18. 18. Mobile data ttraffic growth will be lead by smart phones and flat price data plans by Telcos and data card traffic.
  19. 19. Investments in 4G technologies like LTE / Wimax will influence success.</li></ul>Source Chetan Sharma Consulting<br />
  20. 20. ROADMAP FOR PRESENTATION<br />Key Recommendations<br />Understanding the factors at play<br />
  21. 21. The Emerging Opportunity For Change<br />To avoid becoming a “dumb pipe”, the emerging telemedia value chain also opens up a lot of opportunities for Telecoms. <br />The opportunities for telecom operators thus translate into four broad imperatives:<br />Defend and grow telecom’s share of the broadband market through network improvements and high-value integrated and interactive multimedia services.<br />Focus on enabling the 4A vision and empowering users, be they individuals, communities or companies.<br />Exploit the advertising potential of the subscriber base - especially mobile.<br />Adopt innovative content development and delivery models, and focus on the consumer experience.<br />
  22. 22. Walled Gardens Cant Alone Save The Telcos <br />The complexities of ever evolving online consumer and technological trends, together with constraints on capital investment make “Walled Garden” a doubtful choice.<br />Where and Why it worked<br />Where and Why it failed<br />The Mighty Fall of American Online: AOL refused to understand that consumers want to exercise choice and not be tied down. <br />Failure of Microsoft’s MSN Strategy: MS could not see evolving trends: Desktop was the final destination, till Google changed the game.<br /> Success of YouTube: Google's’ free content sharing site succeeded despite Viacom’s attempt to protect its content.<br />Closure of Yahoo’s Search Business: Yahoo could not afford continued investment, given Google’s complete dominance of the search business.<br />Failure of Netflix- Streaming: The product was positioned to control TV viewing experience.<br /><ul><li>Success of I-phone: Apple created a new platform to push data based services, (via numerousapplications sold on iTunes) helping Telcos generate profits . However, Apple allows content developers to build and sell applications for Iphones and thus it is a modified “Walled Garden” strategy.
  23. 23. Success of Facebook: Facebook has rich security features, a platform for application developers to generate content. With the new ”like” feature, where users can share content from external sites on Facebook, it has extended the virtual walls to new boundaries. </li></li></ul><li>Don’t run with the Mob <br />While some Telecom s throw money on replicating competitors and building new “walled gardens”, few leading companies are creating their own paths to success based on understanding of customer needs . <br />Note: <br /><ul><li> As per a Gartner Study in 2009, 9 out of 10 corporate social media initiatives have failed.
  24. 24. Though Iphones is a success for AT&T in the US market, it could not stop the market-leader, Verizon from adding more customers and increasing its ARPU, including data revenues by focusing on business design. When Verizon launches I-phone in 2010, AT&T will have a lot to watch out for. </li></ul>Source Oliver Wyman Consulting<br />
  25. 25. Meet Evolving Customer Data Needs<br />Go back to basics to identify what customers really want, customize service plans and product offerings, rather than force fitting solutions to product offerings.<br />Identify data needs of different customer sets; there is no magic bullet for all.<br />Use customer data to identify customer niches and serve them with right handset capabilities, services and price plans.<br />Identify priority segments and focus to serve them better.<br />Offer customizable data plans to users and ensure long term retention. <br />Ensure that business priority is communicated in outbound communication clearly.<br />
  26. 26. Customer is the King<br />Stay relevant to your core audience and invest in brand building the way FMCG and Lifestyle companies have done.<br />Stay On Top Of Consumer Trends<br />Keep track of evolving consumer trends like Web2.0 in local and international markets. It may not be economical to serve a niche, but it is when trends go mass.<br />Focus Customer Communication On Core Values Of Your Brand<br />If there is no perceivable difference in network quality, the communication should focus on softer aspects of the Brand and its core values to drive customer loyalty. <br />Focus on Customer Services <br />Use customer services to make an impact on consumers; achieve higher cross-sells and ensuring satisfaction. No use investing in new technology if the existing are dissatisfied with existing service.<br />Innovate Customer Price Plans <br />Make price plans more transparent and granular to allow a metered access to services. Use the Subway-model to offer consumers freedom to pick and chose components of their service plans at standard prices. <br />
  27. 27. Collaborate, Combine and Compete<br />.<br />Find partners and collaborators because it will be difficult for any telecom operator to invest everywhere by itself when the margins are falling.<br />Open Your Walled Gardens <br />Open up your networks to external application providers to enable the development of new services that incorporate telecom capabilities, such as location tracking, voice mail access, contacts management and presence. <br />Collaborate Across the Chain<br />Expand presence across the emerging telemedia value chain with exclusive tie -ups with production houses, internet companies, technology start ups. <br />Merge or Acquire<br />With margins decreasing and the pressure to transform business, smaller companies will find it difficult to survive alone. <br />Build The Right Skills<br />Build the right skills in your organization to transform it to the next generation telecom. This will enable it to take on competition from different quarters . <br />
  28. 28. Change Management is the Key<br />The new Telco will be very different from the one we know today and managing this change will be critical to its future.<br />Reduce Opex <br />Reduce sales, general and operating expenses by right sizing the organization. Centralize non-essential functions and outsource network specific functions like network maintenance to specialists like Ericsson / IBM. <br />Invest In R&D <br />The telecom sector is way behind internet companies in terms of investments in R&D as a percentage of sales. It is imperative that telecom companies be on the leading edge of technological evolution to stay competitive in future.<br />Reorganize To Focus On Innovation<br />Most Telcos today are descendants of erstwhile P&T departments, with bureaucratic org structures that complicate decision making. Telcos need to move to a new organizational design to be competitive against internet/media companies.<br />Reduce Time to Market<br />Optimize business processes to enable the business managers at the Telco to launch new products and service plans rapidly, without having to go through a technology cycle.<br />
  29. 29. Appendix<br />
  30. 30. Global ARPU Trends<br />Source Chetan Sharma Consulting<br />
  31. 31. Comparing Mobile To Wire line Growth<br />Source Chetan Sharma Consulting<br />
  32. 32. Global Wireless Data ARPU Trends<br />Source Chetan Sharma Consulting<br />
  33. 33. Skills Required For Telco 2.0<br />
  34. 34. Global Leaders in Data Revenues<br />Source Chetan Sharma Consulting<br />
  35. 35. Don’t Follow the herd<br />Delegates at a recent telecom industry meet were divided about the success of online application stores which the telecom operators are opening in a frenzy.<br /><br />
  36. 36. References:<br />“THE ENTERPRISE OF THE FUTURE – TELECOM INDUSTRY EDITION” <br />IBM GLOBAL CEO Study <br />“ Managing Growth and Profits in Yettobyte Era” <br />Chetan Sharma Consultants<br />“A Future In Content(ion): Can Telecom Providers Win A Share Of The Digital Content Market? “<br />IBM Global Business Services <br />“The Upside for Telecom Operators: Turning strategic threats into growth opportunities”<br />Oliver Wyman<br />
  37. 37. Contact<br />Charan Puneet Singh
Account Manager - APAC Region
ThoughtWorksStudios<br />Connect on Linkedin<br />
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