Business Model Innovation in the Digital Economy The Two-Sided Telecoms Business Model Martin Geddes, Chief Analyst, STL Partners [email_address] www.telco2.net

Core messages Future growth: Reliant on extending business model New ‘ platform ’ business model grows from existing core consumer business Moves from one-sided to two-sided market model Execution requires partnership and collaboration

Future growth: Reliant on extending business model

New ‘ platform ’ business model grows from existing core consumer business

Moves from one-sided to two-sided market model

Execution requires partnership and collaboration

Many successful two-sided market players

Why you should pay attention $375bn telco opportunity c.15% of global telecoms revenues in 2017 High-margin, high-growth business

$375bn telco opportunity

c.15% of global telecoms revenues in 2017

High-margin, high-growth business

Introducing two-sided markets

Betfair: Beats one-sided rivals Joins two groups who want to interact vs. Bookies Punters Punters

Google: Two-sided master FREE! Need to attract users that upstream party values Advertisers Audience

Chicken and egg problem: need an audience Build audience Introduce revenue model

Mastercard: Balancing two sides Mirror of termination fee debate in telecoms “ Acquiring” (Merchant) Banks “ Issuing” (Customer) Banks

A New Telco Proposition?

New Telco Value Propositions Now: Bundled voice, messaging, video and internet access Supply Chain Platform Personalised Logistics Services for Data Retail Relationship Platform Media & Content Services Provider ECONOMIES OF SCOPE ECONOMIES OF SCALE

1. New Retail Platform

Telco: traditional one-sided retail model INVENTORY RETAILER VALUE PROP “ Connected lifestyle” “ Affordable fashion”

Two-sided retail models Rent shelf space Provide business intelligence & payment services Rent portal space Provide payment and customer care services No inventory risk No inventory risk

Telco media services supply chain platforms What needs to change: Emulation of leading retailers (e.g. Amazon, Tesco) “ Reviews, recommendations & rewards” Investment in analytics, CRM Permission marketing approach “ Trade and persuade” model for customer data and access ODI Innovation World Web21C Litmus Live! + Betavine Content Provider Access

What needs to change:

Emulation of leading retailers (e.g. Amazon, Tesco)

“ Reviews, recommendations & rewards”

Investment in analytics, CRM

Permission marketing approach

“ Trade and persuade” model for customer data and access

2. Supply Chain Platform

Supply Chain Logistics: Physical World Distribution Collection Multi-Modal Transport Delivery 1. Distribution Collection Multi-Modal Transport Delivery B2B VAS Tax & Duty Management Documentation Management Denied Party Screening Scheduling & Supply Chain Management Systems Integration Tracking & Monitoring

Telco 2.0: New Wholesale + VAS Wholesale Distribution Capture/Origination Multi-Modal Transport Display/Termination B2B2C VAS Identity, Authentication, Security Advertising, Marketing Services Ecommerce Order Fulfilment Billing & Payments Customer Services Telco (2.0)

New Wholesale Distribution Platform

Current Approach: One-sided Bulk Wholesale $ Upstream Customers Revenue Side 1 Downstream Customers Revenue Side 2 Customer relationship is with someone else Other Telcos (e.g. MVNO) Consumers Enterprises SMEs Multi-Nationals Your Telco

Future Approach: Fine-grained Wholesale Partners can re-package minutes and messages to achieve higher margins Wholesale Aggregator £15/month £ 20/ month Consumers Your Telco

New Wholesale – Video & Data Connectivity included with the application Tomorrow : Multi-modal delivery Machine-to-machine Wholesale VPN products Packaged apps “comes with data”

New B2B2C Value Added Services Platform

Help customers interact more easily Barriers Identifying Other Party, Authorisation & Security Promoting Offer Conducting transaction Fulfilling Order Billing & Payment Service & Support Customers – Revenue Side 1 Customers – Revenue Side 2 Millions of Customers Thousands of Segments Developers Retailers Government Brand Advertisers Content Owners Telco – Retail

Barriers

Identifying Other Party, Authorisation & Security

Promoting Offer

Conducting transaction

Fulfilling Order

Billing & Payment

Service & Support

Telcos assets well suited Barriers Identifying Other Party, Authorisation & Security Promoting Offer Conducting transaction Fulfilling Order Billing & Payment Service & Support Customers – Revenue Side 1 Customers – Revenue Side 2 Telco Capabilities & Assets       Millions of Customers Thousands of Segments Developers Retailers Government Brand Advertisers Content Owners Telco – Retail

Barriers

Identifying Other Party, Authorisation & Security

Promoting Offer

Conducting transaction

Fulfilling Order

Billing & Payment

Service & Support

Telcos have many valuable but latent data assets MY PERSONAL DATA MY STUFF MY IDENTIFIERS MY INTERACTIONS MY RELATIONSHIPS MY CONTEXT MY DEVICES MY CREDIT Name Address Gender Profile Preferences SIM SoftSIM Serial Number Device details Location Presence On/Off Roaming Pictures Videos Calendar Address Book Bank School Friends Workplace Browsing History .mobi domains QR Codes Bad debt Demographics Average balance Number SIP address IP Address Email

Current Approach: Media & Advertising… $ $ Upstream Customers Revenue Side 1 Downstream Customers Revenue Side 2 Telco Platform Ecosystem Brand Advertisers Consumers Enterprises SMEs Multi-Nationals

Revenue from both sides: advertiser and users Advertising & Marketing Example: Blyk Source: STL Partners’ estimates and calculations; core assumptions not articulated here

Revenue from both sides: advertiser and users

… but market is too small! Revenue, $ Billions 2006 2010 $2,000bn $2,490bn $425bn $533bn $30bn $62bn Fixed and Mobile Telecoms Global advertising On-line and mobile advertising

Upstream customers want more than just ads Authentication is crucial to Betfair’s business Betfair pays around $22 to verify the identity of each new customer Slow and expensive process “ There’s a tendency when building a platform business to do too much yourself - I come back to payments, I come back to authentication. People in this room [at the Telco 2.0 Executive Brainstorm in March] can do this for me. Operators have the skills and the relationships and I am willing to pay them for this service.” Ed Wray, Chairman and Founder, Betfair

Authentication is crucial to Betfair’s business

Betfair pays around $22 to verify the identity of each new customer

Slow and expensive process

“ There’s a tendency when building a platform business to do too much yourself - I come back to payments, I come back to authentication. People in this room [at the Telco 2.0 Executive Brainstorm in March] can do this for me. Operators have the skills and the relationships and I am willing to pay them for this service.”

Ed Wray, Chairman and Founder, Betfair

Open up more markets for telco platform $ Millions of Customers Thousands of Segments $ B2B2C VAS Distribution Upstream Customers Downstream Customers Developers Retailers Government Brand Advertisers Content Owners Telco – Retail Content Owners Telco Platform Ecosystem

Example: Customer Service

Customer Service Example: The Problem User Call centre Se habla español… Your name… Credit card security code… I’m sorry but David is unable to take your call right now… Freephone 1.0 Voicemail 1.0 INBOUND CALLS OUTBOUND CALLS

Customer Service Example: The Solution “ Live voicemail” Form fill Payment services Identity & authentication User Call centre Enter your PIN to release your name and address to Acme Corp, and authorise payment for £188. Your delivery is scheduled for 7 July. To change your order, press one. Freephone 2.0 Voicemail 2.0 INBOUND CALLS OUTBOUND CALLS

Example: Identity

Identity & Authentication Example: Banking Transaction Request Authentication Request Authentication Request Digital Signature Signature Validation Transaction Result Operator

Example: Billing & Payments

Billing and Payments Example: Paypal =  Safe payment solution: customer and merchant data never leaves Paypal Compound Annual Growth Rate: 39% Merchant Consumer $$

Safe payment solution: customer and merchant data never leaves Paypal

Billing and Payments Example: Mobile =  Greedy operators killing the goose? Source: www.gamemobile.co.uk

Greedy operators killing the goose?

Value of the opportunity

$375bn from New Wholesale & VAS Platforms?

B2B VAS revenue c. $125bn* * Total W Europe & US Market, 2017: $125 Billion * See new report, Sizing the two-sided market opportunity for a full analysis. http://www.stlpartners.com/telco2_2-sided-market/index.php Identity, Authen-tication & Security Advertising Marketing Services & Business Intelligence E-Commerce Sales Order Fulfilment - Offline Order Fulfilment – Online (Electronic content) Billing & Payments Customer Support

Opportunity into perspective

Summary

Three different parts to the future Telco Operator $$ Downstream End Users Consumers Retailer SMEs Enterprises Public Sector 1. Developers E-tailers Government Brand Owners Content Owners Telco (Retail) $$ Wholesale Platform Upstream Customers 2. VAS Platform $$ $$ 3.

Next Steps for Operators Now Develop a pilot/proof of concept with a major name upstream customer: Build credibility in marketplace and internally Road test demand for one or more service capabilities Capture platform functional requirements Validate business models and pricing Create basis for volume estimates Next 18 months Develop a ‘joined-up’ strategy and business case for the new wholesale and VAS businesses Engender Board-level support for the 3 businesses and the 2-sided business model Create a separate dedicated organisation for VAS business Develop expertise in two-sided business models and pricing strategies Build downstream capabilities: CRM, data mining & data protection/privacy to support all 3 business models Build upstream capabilities: Aggregation, distribution and integration partners for new wholesale and VAS businesses Establish a process for operator collaboration

Now

Develop a pilot/proof of concept with a major name upstream customer:

Build credibility in marketplace and internally

Road test demand for one or more service capabilities

Capture platform functional requirements

Validate business models and pricing

Create basis for volume estimates

Next 18 months

Develop a ‘joined-up’ strategy and business case for the new wholesale and VAS businesses

Engender Board-level support for the 3 businesses and the 2-sided business model

Create a separate dedicated organisation for VAS business

Develop expertise in two-sided business models and pricing strategies

Build downstream capabilities: CRM, data mining & data protection/privacy to support all 3 business models

Build upstream capabilities: Aggregation, distribution and integration partners for new wholesale and VAS businesses

Establish a process for operator collaboration

THANK YOU More info on this topic at www.telco2.net/blog www.stlpartners.com/telco2_research-analysis.php www.telco2.net/event/ Business Model Innovation in the Digital Economy