ALPHABET’S STRATEGY: IMPLICATIONS FOR TELECOMS … · 2020. 3. 30. · Google’s acquisition of Jibe Mobile in 2015 revived the GSMA’s ailing RCS initiative by leveraging Google’s

Alphabet's strategy: implications for telecoms operators

© Analysys Mason Limited 2018

RESEARCH STRATEGY REPORT

analysysmason.com

ALPHABET’S STRATEGY: IMPLICATIONS FOR TELECOMS

OPERATORS

ENRIQUE VELASCO-CASTILLO



KEY QUESTIONS ANSWERED IN THIS REPORT

WHO SHOULD READ THIS REPORT

2

Alphabet, Google’s parent company, is one of the two most-valuable

companies in the world by market capitalisation and plays a dominant

role in the global digital economy. This report examines the factors

that operators must consider to strengthen their own services in

light of Alphabet’s market position and future developments.

In particular, this report:

▪ analyses which of Alphabet’s activities have the potential to impact

telecoms operators most, both now and in the medium term

▪ examines potential areas of collaboration — and competition —

between Alphabet and telecoms operators

▪ explores the lessons that operators can learn from Alphabet’s

activities and strategies

▪ discusses the challenges that Alphabet potentially faces, including:

― changes in the digital advertising market due to variations in

user behaviour, regulation and competition

― challenges to Alphabet’s connectivity for smart cities, a

segment which requires high levels of investment and

collaboration with local stakeholders.

The report also provides recommendations for operators that want

to implement digital services in segments where Alphabet is already

a player, or for operators that want to articulate their responses to

Alphabet’s activity in the markets in which they operate.

About this report

▪ What are the key areas of collaboration and competition between

Alphabet and telecoms operators?

▪ What are the challenges that Alphabet and Google are likely to face over

the coming years?

▪ How do areas/industry verticals such as connectivity, artificial

intelligence (AI), enterprise, automotive, or smart homes and cities shape

Alphabet’s strategy?

▪ What should operators do to make the most of their networks and assets

in light of Alphabet’s activities and market position?

▪ Strategy executives, directors and managers within mobile operators

who are implementing digital service initiatives – or designing a response

to Alphabet’s activities.

▪ Vendors and software developers involved in the development and

integration of digital service platforms for telecoms operators, and that

need to anticipate new opportunities and commercial prospects for

operators worldwide.

▪ Industry experts and observers who wish to better understand Alphabet’s

strategies, and the related trends, challenges and opportunities that its

plans are likely to have on telecoms operators worldwide.



Figure 1: Potential responses by operators to Alphabet’s activities discussed in this report

4

Some of Alphabet’s activities — including connectivity initiatives

such as Google Fiber and Project Fi — bring it into direct

competition with operators. Many of the operators’ key interests

are shared by Alphabet, namely to connect the underserved and to

bring Rich Communications Services (RCS) to fruition. However, as

Alphabet expands into new areas, operators must decide whether

to compete against Alphabet, collaborate or remain neutral.

Operators must consider the following key factors when

formulating their strategic approach to Alphabet.

▪ Alphabet relies on Google for 99% of its revenue, 87% of which

comes from digital advertising. Alphabet is involved in activities

in other segments (in part to reduce its dependence on

advertising), some of which impact operators’ businesses.

▪ Depending on their footprint and appetite for risk, operators

can choose to compete, resist or collaborate with Alphabet.

This report recommends that:

▪ those operators that want to be active in digital advertising

should consider acquisition strategies similar to those of US

operators

▪ operators explore filling Alphabet’s gaps in support for smart

homes and cities, either as partners or competitors to Alphabet

▪ operators collaborate with Alphabet to define the standards for

next-generation messaging and RCS.

Executive summary

Source: Analysys Mason

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Advertising (rest of world)


© Analysys Mason Limited 2018 6

1 See the appendix for a list of some of the most-important Alphabet companies and activities.

2 For more detail, see Alphabet’s Form 10-K filing for the year ending 31 December 2017, available

at https://abc.xyz/investor/pdf/20171231_alphabet_10K.pdf.

Alphabet has become involved in many different activities to

diversify its revenue.1 Some of these (such as Google Fiber or

Project Fi) directly impact telecoms operators’ businesses, while

others (such as RCS) represent opportunities for collaboration.

Alphabet, Google’s parent company, is one the largest technology

companies in the world in terms of market capitalisation, reach

and R&D spend. Google’s core products (Google Android, Chrome,

Gmail, Google Maps, Google Play, Search, and YouTube) each have

over 1 billion monthly active users (MAUs).

These large audiences, and the vertical integration between

Google’s devices, software, content and services, helps Google to

monetise its large user base. However, it also means that Alphabet

is reliant on Google for 99% of its revenue, 87% of which comes

from digital advertising.1

As a disruptor, Alphabet is aware that its dependence on advertising

puts it at risk from changing consumer behaviour, increasing

regulation and new competitors. When Google reorganised as

Alphabet in 2015, its core activities (advertising, cloud, YouTube and

hardware) were isolated from its ‘Other Bets’ (other segments such

as connectivity and smart homes).2 Although these areas are growing

rapidly, they accounted for only 1% of Alphabet's revenue in 2017.

Alphabet’s revenue is also concentrated in the USA (47% in FY2017)

and Europe, the Middle East and Africa (33%).

Figure 2: Alphabet’s main business segments and revenue, FY20171

Alphabet’s activities can be categorised into three types:

▪ activities that directly impact operators’ core communications

businesses. These include connectivity projects such as Google

Fiber or the Project Fi MVNO in the USA, and Project Loon in

emerging markets; handsets (Nexus and Pixel); and RCS.

▪ activities that impact operators’ new revenue streams, such as

digital advertising in the USA, or segments such as smart homes.

▪ activities with a medium to low impact on operators’ businesses,

and where Alphabet may become a partner, a customer or even

a vendor to operators (for example, AI or smart cities).

Challenge: operators need to decide how to respond to

Alphabet’s continued expansion into new segments

Business

segment

2017 revenue

ActivitiesUSD

billion%

Google 110.9 98.9%

Ads, Android, Chrome,

Commerce, Google Cloud,

Google Maps, Google Play,

Hardware, Search, and YouTube.

Other Bets 1.2 1.1%Access, Calico, CapitalG, GV,

Nest, Verily, Waymo, Google X.

?

https://abc.xyz/investor/pdf/20171231_alphabet_10K.pdf



1 In 2011, a group of European operators that included France Telecom, Telefónica and Vodafone,

lobbied the European Commission to change traffic peering agreements so that high-traffic

sources such as YouTube would have to pay for increased capacity. This challenge was

unsuccessful on the grounds of net neutrality.

7

Operators’ interests tend to align with Alphabet’s in connecting

underserved markets and bringing RCS to fruition, and in these

areas operators are more likely to collaborate with Alphabet.

However, in other, more-nascent areas, operators are likely to

remain neutral to Alphabet.

Operators are responding to competitive pressures from Alphabet

in different ways.

▪ Compete. In the USA, Verizon has invested over USD9.2 billion

in acquiring digital content and advertising assets (including

AOL and Yahoo!) to capture a larger share of digital advertising

revenue through its Oath business unit. These efforts have

started to bear fruit: Oath represented 8% of Verizon’s service

revenue in 4Q 2017.

▪ Resist. Operators have opposed Alphabet through technology

(for instance, traffic shaping and VoIP-blocking) or through legal

channels (including lawsuits and lobbying).1

▪ Collaborate. Alphabet’s Project Loon deployed emergency LTE

connectivity from high-altitude balloons after natural disasters

in Peru (in partnership with Telefónica) and Puerto Rico (with

T-Mobile). RCS also provides an opportunity for operators to

collaborate with Google to define standards for next-generation

messaging services.

Each section in this report examines a separate Alphabet

activity that impacts operators’ businesses, followed by a

discussion of the implications for operators.

▪ Digital advertising. This section focuses on Google’s core

advertising activities, and discusses emerging challenges to

Google’s digital advertising leadership.

▪ Devices and software. We discuss Android and Google’s

consumer devices such as Pixel handsets, as well as Google

Home. We also discuss Google’s streaming video (YouTube),

and messaging services. Finally, RCS is discussed in detail.

▪ Connectivity. In this section, we analyse the challenges faced

by Alphabet’s connectivity efforts in the USA (Google Fiber and

Project Fi) and discuss how Project Loon may help operators in

emerging markets to connect underserved areas.

▪ Artificial intelligence (AI). This section focuses on Alphabet’s AI

activities and the impact that they may have on operators’ own

deployment of AI-enabled products.

▪ Enterprise. We discuss Alphabet’s cloud and cybersecurity

offerings, and how operators active in these areas may have to

choose to either compete or partner with Alphabet.

▪ Smart homes and cities. We analyse Alphabet’s smart homes

(Google Home and Nest) and cities activities (Sidewalk Labs),

highlighting the advantages that operators have in these areas.

Solution: beyond connectivity for the underserved and RCS,

operators are likely to compete with Alphabet or remain neutral



Recommendations

1If operators in any region want to compete against Google in digital advertising, they should consider

following strategies similar to those adopted by US operators.

AT&T and Verizon are investing heavily to acquire assets to compete against Facebook and Google. Operators in

other regions have been more cautious, but they still have many of the capabilities needed to become more active in

the digital advertising value chain. Operators that enter this value chain need a similar strategy of simultaneously

investing in adtech capabilities to show better, more-relevant ads, and the content properties to display them.

2Alphabet may not have the appetite to support smart cities — and possibly some smart home activities — outside

of North America. Operators should explore filling in these gaps, either as partners or competitors to Alphabet.

Alphabet hopes to be a leader in the smart homes and cities segments, but it lacks the capabilities (such as well-

staffed customer support) or appetite (for example, to deal with local authorities and planning processes) to

provide ‘on the ground’ support for smart-city and some-smart home services outside of the USA. Operators are

familiar with these activities and should consider partnering with Alphabet – or competing against it, if necessary.

3Operators will need to offer a stronger collective vision if they are to shape the future of RCS; Google is

currently setting the agenda.

Google’s acquisition of Jibe Mobile in 2015 revived the GSMA’s ailing RCS initiative by leveraging Google’s market

power to assert the need for a universal profile and work with OEMs to implement its capabilities in devices. The

interests of Google and the mobile operators are largely aligned now, but this may not be the case in the future. If

operators wish to shape the agenda, they must offer a stronger collective vision for the future of RCS.



CONTENTSCONTENTS

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EXECUTIVE SUMMARY

REPORT OVERVIEW

DIGITAL ADVERTISING

DEVICES AND SOFTWARE

CONNECTIVITY

ARTIFICIAL INTELLIGENCE

ENTERPRISE

SMART HOMES AND CITIES

APPENDIX

ABOUT THE AUTHORS AND ANALYSYS MASON



About the author

Enrique Velasco-Castillo (Senior Analyst) is a lead analyst for Analysys Mason's Digital Economy Strategies research programme, focusing on

the opportunities for communications service providers and vendors in emerging verticals such as payments, ecommerce and advertising.

Previously, Enrique covered mobile financial services and M&A and funding activity for more than 2 years at research firm IHS, where he wrote

several reports on the opportunities for mobile operators in mobile payments and venture capital investments in mobile. Enrique also has

research experience in 'cleantech' and healthcare from other previous roles.



Analysys Mason’s consulting services and research portfolio

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challenges facing clients, in addition to the wider effects

of global forces.

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RESEARCH

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Analysys Mason’s consulting and research are uniquely positioned



Research from Analysys Mason

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Consulting from Analysys Mason



PUBLISHED BY ANALYSYS MASON LIMITED IN APRIL 2018

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Documents

ALPHABET’S STRATEGY: IMPLICATIONS FOR TELECOMS … · 2020. 3. 30. · Google’s acquisition of Jibe Mobile in 2015 revived the GSMA’s ailing RCS initiative by leveraging Google’s