Digitalization in Telecommunications Industry: Disruption ... · Digitalization in Telecommunications Industry: Disruption Opens New Horizons. 2 ... change in its market environment

RESEARCH &KNOWLEDGE MANAGEMENT

SEPTEMBER 2017

Digitalization in Telecommunications Industry:Disruption Opens New Horizons

2

Kazakhstan’s Telecommunications industry

Table of contents

1. Key highlights 3

2. Introduction 4

3. Megatrends in digitalization of the telecom industry 7

3.1 Internet of things 9

3.2 Data cloud services 11

3.3 Higher speeds and lower latency 11

3.4 Artificial intelligence (AI) 13

4. Key challenges for digitalization 14

4.1 Saturation of markets and declining average revenue per user (ARPU) 15

4.2 Operators encumbered by existing legacy assets 16

4.3 Cybersecurity 17

5. Kazakhstan’s telecom industry 18

5.1 International rankings and infrastructure 21

6. Conclusion 23

3


1. Key highlights

Over the last decade, telecommunications industry and related services have shown impressive

growth worldwide, becoming one of the key sectors of developed economies and playing an

increasingly important role in the life of the society. The telecom sector continues to be at the

epicenter for growth and innovation for any industry.

Global mobile and digital ecosystem value forecast and distribution, USD bln (2015-2025)

Source: Informa, Ovum, GSMA, EY

Digital transformation has become a key driver of the modern economy and the telecom

industry is at the forefront of this transformation, both as an industry witnessing large-scale

change in its market environment and as a key driver of worldwide digitization. A large share of

potential value from digitalization across global industries over the next decade is dependent

on the telecom industry delivering essential infrastructure, applications and productivity

improvements in many areas.

Megatrends with most significant impact on businesses in 2017

Source: 2017 BDO Technology Outlook Survey, Samruk-Kazyna

Telecom operators will need to be well-prepared to take advantage of the digitalization. The

industry faces a rapidly changing landscape driven by economic and technological shifts, which

can potentially transform the entire market. Operators’ share of the industry profit pool has

declined from 58% in 2010 to 47% in 2015, and is forecasted to ease further to 45% in 2018.

Consequently, it is increasingly important for operators to explore new digital business models

to protect and expand their share of the market.

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IoT and M2M Advertising Enterprise and cloud

Cloud , 74%

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AI, 16%

3D printing, 14%

Virtual reality, 14%

Blockchain, 8%

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2. Introduction

Over the last decade, telecommunications industry and related services have shown impressive growth

worldwide, becoming one of the key sectors of developed economies and playing an increasingly

important role in the life of the society. The telecom sector continues to be at the epicenter for growth

and innovation for any industry.

Global telecommunications services market value, EUR bln (2012-2016*)

Source: Insight Research, Samruk-Kazyna

The global revenue from telecom services is expected to reach over EUR1.2trln in 2018 from

EUR1.1trln in 2016. With an estimated value of EUR373bln in 2016, the fastest-growing

telecommunications services market is the Asia-Pacific region, followed by North America and Europe.

The telecommunications market size has increased in the past two decades, due to cheaper and

innovative technologies. The market has also benefited from increasingly skilled personnel and

extensive investment in development of new technologies and digitalization.

Global mobile and digital ecosystem value forecast and distribution, USD bln (2015-2025)

Source: Informa, Ovum, GSMA, EY

Both traditional and new segments of the telecom sector will experience significant changes in the

coming years and new operating models will be developed due to digitalization. Amidst growing

pricing pressure, cost containment, and rising competition within the telecom industry, companies are

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Voice/SMS Data Content and video

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planning to increase their focus on business expansion in existing market, new product development,

and improving operational efficiency.

Digital transformation is becoming a key driver of the modern economy and the telecom industry is at

the forefront of this transformation, both as an industry witnessing large-scale change in its market

environment and as a key driver of worldwide digitization. Investment by the telecommunications

industry in technology and interoperability has underpinned an immense shift in information and capital

flows through the global economy, while providing the building blocks for the emergence of entirely new

business models across industries. A large share of potential value from digitalization across global

industries over the next decade is dependent on the telecom industry delivering essential infrastructure,

applications and productivity improvements in many areas.

At the same time, the growing consumer base requires more capital investments into infrastructure and

innovations such as mobile money transfer, video and entertainment and the Internet of Things (IoT). It

is clear, that over the next decade the telecommunications industry will be defined by increasing

demand for data transfer. The mobile subscription growth rates keep slowing down. Consequently, as

the mobile voice market approaches the point of saturation, competition intensifies and profit margins

narrow. In order to maintain growth, operators will need to accelerate the expansion of data services.

Potential value for industry and consumers, USD bln (2016-2025)

Source: World Economic Forum, Accenture, Samruk-Kazyna

According to the World Economic Forum, the digital transformation in telecom represents a USD2tln

opportunity for the industry and society, sourcing from 4 digital themes:

Networks of the Future - Virtualization and an abstraction of the physical hardware layer

promise to fundamentally change the basis of future technological differentiation by creating

networks that will be self-aware, self-optimizing, self-healing and self-secure.

Beyond the Pipe - The increased digitization of consumers and businesses presents the

telecom industry with important opportunities to extend revenue streams beyond just

connectivity – through IoT, digital services and entirely new models of digital communication.

Redefining Customer Engagement - To win the race for customer loyalty and mindshare, the

telecom industry will need to increasingly deploy features and tools that deliver delightful digital

experiences. This is especially important as customers now expect the high-quality service they

receive in one industry to be matched by companies in other sectors

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Beyond the Pipe Redefining CustomerEngagement

Bridging the Gap onInnovation

Value to Industry Value to Society

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Bridging the Gap on Innovation - The need for rapid innovation, greater convergence and

new services means that telecoms must fill key capability gaps using new innovation models

and revamped talent strategies for a digital workforce.

Moreover, WEF estimates show that more than USD10tln of value from digitalization in five key global

industries over the next decade are directly dependent on essential infrastructure, applications and

productivity improvements delivered by the telecom industry.

Potential value for industry and consumers across industries, USD tln (2016-2025)


While the telecom industry is projected to become more consolidated with emerging markets offering

prominent growth opportunities, especially in the data transfer subsector, this will require a much more

segmented and targeted approach as data transfer requires large capital expenditures, while revenues

will be smaller due to increased competition. Consequently, the key challenge would be to manage

exponential growth of data volumes, while keeping network costs as low as possible. The value to the

telecom industry could exceed USD1.2tln in cumulative operating profit between 2016 and 2025,

depending on the ability to connect the billions of people still unconnected to the internet.

Telecom operators will need to be well-prepared to take advantage of the digitalization. The industry

faces a rapidly changing landscape driven by economic and technological shifts, which can potentially

transform the entire market. Operators’ share of the industry profit pool has declined from 58% in 2010

to 47% in 2015, and is forecasted to ease further to 45% in 2018. Consequently, it is increasingly

important for operators to explore new digital business models to protect and expand their share of the

market.

Over the last several years, operators have not been able to protect traditional voice and messaging

revenue streams, which have been disrupted by the digitalization. Estimates have shown that over-the-

top (OTT) applications generate 50% to 90% less revenue for CSPs. While the exponential rise in data

traffic has provided some benefits, it has not been enough to overcome the consistent decline in mobile

voice average revenue per user (ARPU) and has put additional stress on the infrastructure. Meanwhile,

competition in the market, increasing demands for reliability and speed continue to increase.

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Value to Industry Value to Society

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Telecom operators account for a shrinking of the telecom profit pool, USD bln (2010-2018)


3. Megatrends in digitalization of the telecom industry

Establishment of the new global digital ecosystem is based on the exponential growth of smart devices,

high bandwidth connectivity, data analytics, and cloud computing. This ecosystem is maturing fast and

allowing organizations to benefit from many disruptive technology waves, such as 3D-printing,

augmented reality (AR), and virtual reality (VR). Although these trends have not yet figured prominently

in past value creation strategies, they are all active targets of venture funding and will undoubtedly

shape future performance.

Number of startups by technology, 2015

Source: Quid, S&P Capital, IQ, BCG, Samruk-Kazyna

Digital services open new revenue streams for the telecom industry, including video and entertainment,

virtual care and mobile financial services. These services could generate up to USD142bln in additional

operating profit for operators over the next decade, accounting for up to 15% of total consumer telecom

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services revenue by 2025. The largest opportunities in enterprise digital services will likely be in

information security, enterprise mobility management, unified communications, cloud services and

analytics. Together, these could add a further USD48bln in operating profit across network operators

and equipment providers.

Combining technologies such as cloud, mobile, social, data analytics and artificial intelligence has the

potential to exponentially increase the market share and profitability in the telecom industry.

Consequently, the key challenge for an operator is to deploy these technologies simultaneously and

provide the necessary infrastructure for their functioning.

Development of this infrastructure will depend not only on communications service providers, or CSPs

(fixed line and wireless telecommunications companies, cable companies, and bandwidth providers),

digital service and content providers (content, media and IT service companies), and hardware and

software manufacturers (infrastructure equipment, device, software and component manufacturers).

Telecommunications industry ecosystem


Although the landscape of the industry may change very rapidly in the coming years, several key

features can be identified already:

Data storage shifts to centralized databases, usage of cloud services rises, which in turn puts

pressure on classical services, while creating new challenges and requiring new IT skills in the

area of data security and privacy.

Traditional operators continue to take a smaller share of overall revenues, putting further

pressure on free cash flow and investment.

Two areas with the strongest growth are the Internet of Things (IoT), along with content and

video. The IoT market will see significant growth to reach USD700bln by 2025. The content and

video space will see faster overall growth (25% CAGR).

New regulation (e.g. in the areas of Industry 4.0, M2M, Big Data, Intelligent Networks) emerge

and will increase the benefit for consumers.

There is massive price pressure and competition in the market for classical information and

communication technology – but mega trends generate new possibilities for growth.

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Megatrends that will have the most significant impact on businesses in 2017

Source: 2017 BDO Technology Outlook Survey, Samruk-Kazyna

3.1 Internet of things

The number of connected devices is increasing rapidly. In 2012 there were 1.6 connected devices per

person worldwide and in 2017 there will already be 2.5 devices per person. The IoT will cause more

and more objects to generate, collect, share and use their data. The communication between machines

(M2M, Machine-to-Machine) have already increased their share of the total IP traffic in 2017 tenfold

compared to 2012.

Looking forward, the number of connected devices, which will drive demand for data and drive business

models in the IoT, could reach 30 billion. Technological breakthroughs such as drones and artificial

intelligence will rely on secure and rapid connectivity. Consequently, integrated IP networks will be the

basis for new business models.

Besides the aforementioned effects on the telecom industry, IoT is expected to transform several other

industries. Adoption of IoT in industrial production is forecasted to add USD14tln of economic value to

the global economy by 2030. Increased usage of sensors, devices and data centers is the largest driving

force of digitalization, which will provide an enormous opportunity for telecom operators. The largest

players in the market are already investing in platforms, applications, integration and analytics

capabilities that unleash the real power of IoT.

With market revenues projected to exceed USD300bln by 2020, technology companies will have

opportunities to create applications and platforms for specific industry uses. Manufacturing,

transportation and logistics, and utilities are expected to be the largest customers for IoT products and

services, accounting for a combined value of USD135bln by 2020. Services, apps, and analytics at the

top of the IoT stack are expected to grow by 40% annually, faster than sensors and hardware at the

bottom, reaching roughly USD150bln by 2020. In addition, the growth of block chain technologies is

being propelled in part by the opportunity to become the ledger for IoT transactions. At the same time,

IoT has the potential to widen media companies’ content distribution so that many more devices and

surfaces can display digital content.

Cloud , 74%

IoT, 58%

AI, 16%

3D printing, 14%

Virtual reality, 14%

Blockchain, 8%

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Key clusters for IoT startups, 2015

Source: Quid, S&P Capital, IQ, BCG, Samruk-Kazyna

The biggest markets for consumer IoT services and products are health and fitness, home security,

automotive, information and entertainment, and home automation and energy management. Business

services around IoT are broadly concentrated in connectivity, consulting, implementation and

operations services. However, achieving success in these new markets and services will require

telecom operators and ecosystem players to develop and introduce new products and services.

Top-three barriers for IoT deployment, % of respondents

Source: Ovum, Samruk-Kazyna

Rising demand for portable IoT devices, sensors and chipsets will be a major driving force for the

industry. Operators and network equipment providers will play a key role in providing the infrastructure

that supplies connectivity between billions of cloud applications and devices. Consequently, increasing

bandwidth and data usage could generate an additional USD65bln in operating profits for operators.

3.2 Data cloud services

Cloud computing and data analytics are viewed as the foundation of the new digital ecosystem, since

approximately 40% of all data is expected to be stored or processed using cloud services by 2020.. For

Advertising, 9%

Security, 2%

Enterprise IT, 7%

Supply chain, 3%

Communications, 4%

Components, 5%

Energy and environment, 9%

Medical, 15%Wellness, 2%

Healthcare, 5%

HR, 5%

E-commerce, 14%

Finance, 9%

Entertainment, 14%

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the digital economy, the cloud is the next generation of infrastructure. Meanwhile, data analytics

provides the fuel for digital applications and services, helping them perform better and in new ways.

Together, the cloud and data analytics are enabling digital innovation in all sectors, including industries

as diverse as automotive, industrial goods, and financial services.

Worldwide public cloud services forecasts, USD mln (2016-2020)

Source: Gartner, Samruk-Kazyna

The worldwide public cloud services market is projected to grow 18% in 2017 to total USD246.8bln, up

from USD209.2bln in 2016. The highest growth will come from cloud system infrastructure as a service

(IaaS), which is projected to grow 36.8% in 2017 to reach USD34.6bln. Software as a service segment

(SaaS) expected to grow 20.1% to reach USD46.3bln.

Total spending on IT infrastructure products (server, enterprise storage, and Ethernet switches) for

deployment in cloud environments is expected to increase 15.3% YoY in 2017 to USD41.7bln. Public

cloud datacenters will account for the majority of this spending, 60.5%, while off-premises private cloud

environments will represent 14.9% of spending. On-premises private clouds will account for 62.3% of

spending on private cloud IT infrastructure and will grow 13.1% YoY in 2017.

Investments in cloud IT infrastructure will increase across all regions while the majority of regions expect

to see a reduction in spending on non-cloud deployments. Overall, worldwide spending on traditional,

non-cloud, IT infrastructure will decline 5.3% in 2017. However, it will still account for the largest share,

at 57.9% of end user spending.

3.3 Higher speeds and lower latency

Total mobile data traffic has grown 400 million times in the past 15 years and global Internet traffic is

expected to grow by a CAGR of 30% in the coming years. Annual data flows in 2020 are expected to

reach 44 zettabytes. The extension of the available bandwidth allows a sharp increase in mobile data

traffic, which is also supported by the increasing digitalization of various business models.

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System Infrastructure Services (IaaS) Advertising

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Number of subscriptions by speed, mln (2014-2021f)

Source: GSMA, Samruk-Kazyna

The race for 5G is on and will continue in 2017. With many telecom operators globally having already

developed 5G architecture and initiating their field tests this year, 2017 will potentially see the very first

wave of commercial offerings being launched amongst widespread trials of the technology.

There will also be increased interest in 5G research and development emerging from other industries

outside the traditional telco market, including in energy, agribusiness and transportation, who all see

the vast potential 5G technology presents to revolutionize the way they can deliver their goods and

services.

Fueled by consumer and business demand, carriers and governments alike are pushing the deployment

forward with the ambitious goal of rolling out 5G networks more widely by 2020. Service providers will

continue to realign and consolidate their offerings to maximize revenue and ensure their networks are

ready to accommodate future technological advancements.

The rollout of 5G infrastructure in the next five or so years offers telecommunications operators the

chance to embed their networks with more intelligence and help facilitate the development of services

built around new industries

Subscriptions growth across connections in first five years by technology, mln

Source: GSMA, Samruk-Kazyna

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3.4 Artificial intelligence (AI)

Increasing capabilities and computing power of machine-learning technologies present a great

opportunity but are also disruptive for the telecom industry. Networks that can operate autonomously,

while automatically provisioning bandwidth to where it is needed most, are likely to become essential

for any operator, as the complexity and scale of these systems increases. Automation through

increased usage of AI has been a key part of IP and Ethernet network technologies, and the importance

of self-organizing networks (SON) was identified as critical to an optimal end-user experience.

However, there are several obstacles. Lack of interoperability in proprietary back-end network

technologies, disjointed IT systems and lack of compelling end-to-end solutions mean that global

adoption is likely to reach only about 25% by 2025, mainly characterized by small-scale adoption across

segmented parts of large national networks. These challenges will likely result in wider collaboration

between network operators and equipment providers, as demonstrated by such companies as Cisco,

Huawei, Ericsson and Nokia.

While, autonomous networks could provide cumulative cost savings of USD27bln for the telecom

industry over the coming decade, assuming a fall in mobile network infrastructure spending by 30%,

these benefits will be enhanced by greater network reliability and customer satisfaction. Improved

network quality could add an additional USD9bln in operating profit from reduced frequency and

duration of network failures.

AI will be instrumental in the next wave of technology disruption in business. AI applications under

development will offer tremendous advantages in customer engagement. AI technologies can derive

low-value answers through basic image and voice recognition or high-value answers by reading and

analyzing complex data. Telecom companies have an opportunity both to use AI to reimagine their

business models by automating customer support or gaining customer insight and to sell AI solutions

to other companies.

Globally, the native digital assistant installed base is set exceed 7.5 bln active devices by 2021, which

is more than the world population. Although most of the AI capabilities will reside on the network rather

than in the device, native vendor-led implementations will be critical to gather the contextual and

personal data that will feed the AI engines.

Estimated size of selected global vertical growth markets in 2020, USD bln

Source: IDC, Ovum, Technavio, MarketsandMarkets, GSMA, Grand View Research, Navigant Research, Mind

Commerce, Strategy&,, Samruk-Kazyna

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4. Key challenges for digitalization

It is clear that digitalization will be a source of transformational change, but there are a number of

challenges, such as infrastructure development, data privacy and security, that need to be overcome in

the coming years. In addition, businesses in the TMT industry would have to resolve issues related to

changing customer expectations, cultural transformation, outdated regulation and skill shortages,

among others.

Without adapting to the digitalization, telecom operators face a threat of becoming a provider of

infrastructure like utility companies. Consequently, a key challenge for any player in the telecom market

is creating and capturing value through vertical and horizontal expansion.

Looking forward, networks are likely to evolve in two directions: advances in digital and cloud

capabilities will transform operators’ costs, moving away from expensive hardware to generic equipment

that allows a greater share of resources to be invested in increasing reliability and flexibility through

software. At the same time, increasing diversity of data flows in different industries will require greater

flexibility, reliability and security.

Average annual total shareholder return, % (2011-2015)

Source: S&P Capital IQ, BCG

As digital disruptors and over-the-top (OTT) providers attack traditional communication revenues,

telecom operators worldwide are pursuing opportunities to move up the vertical chain to the services

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layer. With a large customer base, ownership of key infrastructure and strong technology capabilities,

telecom operators have the opportunity to become digital services providers. Nevertheless, most

companies have yet to overcome key challenges to compete effectively against internet companies that

are faster to penetrate new markets with new products.

These headwinds might be stronger than those faced by operators in mature markets when growth

slowed. Network upgrades, which are necessary in order to meet rising demand, are costly. There is

limited available spectrum to purchase, and operators in emerging markets—where the penetration of

fixed lines and cable is much lower—generally do not have the same opportunity to build profitable

fixed-mobile bundles.

Their performance may have differed over the past five years, but the challenges facing cable and

telecommunications operators are similar. In order to strengthen their existing businesses, operators

should digitize their value chains end to end. They need to reinvigorate their B2B businesses, which

are especially vulnerable to digital attackers. To spur new growth, they should drive disruptive digital

innovation in adjacent areas if they can exploit sources of competitive advantage.

4.1 Saturation of markets and declining average revenue per user (ARPU)

Traditional, fixed-line and cable companies have benefited from the rapid growth in traffic, especially

with the large increase in demand for fiber connections, but may lose their share of the entire TMT

market due to digitalization. Average revenues per user have declined 13%-36% in all regions globally

since 2012. In addition, growth in data traffic and the surge in the number of connected devices are

likely to put additional pressure on infrastructure. At the same time, a growing number of real-time

technologies will demand faster speeds to enable a seamless and lag-free experience for consumers.

In order to satisfy the bandwidth demand, mobile networks will transform into a massively dense

heterogeneous and flexible network with technologies such as software-defined networking (SDN),

network function virtualization (NFV) and Cloud RAN. This will require a transition to the next-generation

(5G) network, but the rapid increase in demand is likely to drive much faster development and adoption

of these technologies on legacy networks.

While operators have different visions on the future of the industry, most view SDN and NFV as central

to their plans. These technologies offer several important benefits: SDN separates the control and data

layers, while NFV replaces complex network functions with easy-to-manipulate virtualized software.

There is no doubt that these technologies will become widespread driven by network cost reduction.

Estimates show that SDN and NFV could generate savings of 25% to 75% of overall operator operating

expenditures through reduced provisioning, monitoring and hardware costs. These technologies also

promise to create value for customers through improved user experiences.

Deployment of SDN and NFV may be as disrupting for the industry, as the adoption of IP-based

networks, which enabled the global internet. While current adoption levels are quite modest, SDN and

NFV are forecasted to be a fundamental part of telecom networks globally by 2025, with significant

potential benefits for both the industry and its customers. In the nearest future, world’s largest network

carriers: AT&T, Deutsche Telekom, NTT, Telefónica and Verizon among others are likely to lead the

efforts to develop and standardize SDN and NFV technologies.

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The aforementioned technologies could allow operators to capture USD220bln in market value over the

next decade, mostly due to a decrease in network and operational technology spending, as well as

energy cost reductions of up to 50% by 2025. In turn, lower network spending by operators is likely to

shift USD8bln of existing profits away from network equipment vendors and towards operators.

While the world is going mobile, mobile-only operators are struggling to create value. For example, in

the five-year period from 2007 through 2011, the top three value creators in the industry were mobile.

However, between 2011 and 2015, only one mobile-only operator broke into the top ten. The mobile

upgrade costs of integrated operators are substantially lower than those of mobile-only operators,

which, in many cases, must lay new backhaul fiber to accommodate the higher bandwidth.

4.2 Operators encumbered by existing legacy assets

ICT infrastructure will become the defining factor of economic competitiveness. Drawing on the

transport analogy, a low-latency network will be an imperative in the network of the future, estimates

show that over USD2tln of network investments will be needed to satisfy the demand over the next

decade. While, operators have made large strides in the technology, standards and interoperability

underlying wireless and wireline connectivity, they have been unable to capture value in new

technologies and markets that are aggressively crowding out traditional sources of revenue.

Enabling new business models in areas such as IoT will require more flexible and agile networks which

in turn will require significant investments into infrastructure, as well as analytics, personal data

protection and cyber-resilience, ultra-reliable low-latency communication, and enhanced mobile

broadband. In addition, operators’ competitiveness will depend on the capability to collect and analyze

large pools of data, while providing customized services and products.

Global internet penetration stood at 45% in 2016, meaning that the majority of the population,

predominantly in developing markets, is not connected to the digital economy. The number of

connections is expected to rise rapidly, however, there are several significant challenges. Most of the

untapped markets exist in small clusters in remote regions, hence, extending network access is not

profitable for network operators, given high costs and limited potential. There are several new

technologies that offer operators and equipment providers the opportunity to overcome some of these

financial and infrastructure challenges.

As developed markets reach saturation, operators are keen to expand their scope to untapped markets.

For telecom operators, new technologies have the potential to overcome significant cost barriers in

reaching remote regions across developed and developing markets. An increase in the subscriber base

will add value for telecom operators, but will put additional pressure on the infrastructure. Therefore,

major plyers will become more involved in developing and implementing alternative network

technologies, which could raise global mobile broadband penetration by approximately 6% by 2025.

Due to higher operating margins per user (provided by lower network costs), overall increase in

cumulative operating profits for operators is forecasted at USD8bln. Nevertheless, operators’ profits will

be relatively small, since the majority of new subscribers are likely to be in low ARPU regions (USD3 to

USD4) with limited adoption of value-added services, attributable to lower purchasing power.

Operators must radically lower their network costs by improving the efficiency of their networks, and

their cost per megabyte of traffic, through investments in more cost-effective technologies such as

software-defined and virtual networks and cloud-based technologies. At the same time, they must

17


optimize their current revenue streams through new pricing and commercial models and develop new

ones through innovation and by moving into adjacent markets. The internet has redefined the

economies of scale from a customer base, and operators will need to seek a larger scale either through

consolidation or by delivering directly to customers the way OTT operators do.

A number of operators have begun making moves in this direction, changing both their commercial

models and how they interact with customers, while digitalizing their internal operating model to become

leaner and more agile. Achieving true digital maturity, however, will require more efforts. Every telecom

company must move quickly to reduce its costs and to simplify its operations and product and services

portfolios.

One of the most effective ways for telecommunications operators to start an end-to-end digital

transformation is to modernize how information is transmitted over networks and how networks operate.

Together, SDN and NFV are fundamentally changing network operations. SVN can not only reduce

networks’ capital and operating costs but also improve their flexibility and scalability. Its open-source

architecture also fosters greater agility and innovation.

4.3 Cybersecurity

As networks become increasingly software-defined their infrastructure is more vulnerable to attacks.

For this reason, the second half of 2016 saw more and more network operators and telecoms role out

business-wide encryption. In 2017, holistic network security will become more important than ever and

expect to see encryption transition from a niche play to a more pervasive technology.

Security breaches damage credibility, brand, and trust. More than 4.8 billion records have been lost or

stolen since 2013, so security breaches represent an existential threat to all companies. Given the reach

of the new digital ecosystem, cybersecurity is growing ever more critical, and companies from many

industries are rushing to enter the field. With their global reach and vast stores of customer data, TMT

companies are especially vulnerable to such breaches, but they can also help provide the solutions that

will fortify their networks, protect their customers, and generate value and competitive advantage.

Average scope of DDoS attacks, gigabytes (2013-2016)

Source: Deloitte Global, Samruk-Kazyna

Recently, the scale of cyberattacks has been increasing globally at an alarming rate. There were more

than 1 bln records of personal information stolen in 2014, while the average total cost of a data breach

increased by 23% to USD3.8mln between 2013 and 2015. The costs could potentially rise in the future

0

200

400

600

800

1,000

1,200

2013 2014 2015 2016

18


with the increase of the number of subscribers and data flows. More frequent cyberattacks could

potentially undermine the digitalization pace. New regulations to protect the users will in turn slow

innovation, which could result in a negative economic impact of about USD3tln by 2020, according to

WEF. Indeed, cyber-security is the greatest challenge for most telecom operators, some of which

register more than a million hacker attacks in a day.

Cyber-attacks pose a significant threat, but cybersecurity also presents an important opportunity for the

industry. Mitigating security risks will require significant spending from operators and users, spending

on global information security is likely to exceed USD100bln by 2019, creating an opportunity for

individual operators and vendors. At a wider industry level, collaboration between operators can lead

to greater resilience and new business opportunities.

Estimates show that efforts to reduce the direct and indirect costs associated with data breaches could

lead to direct cost savings of almost USD80bln. At the same time, efforts to increase cyber-resilience

and establish greater trust with consumers in data security is likely to drive market-share shifts worth

USD70bln within the industry. Nevertheless, increased information security costs could equate to more

than 2% of revenue by 2025, offsetting some of these cost savings.

To avoid known vulnerabilities, security tools should be easier to use and update, including critical

security patches. To prevent social engineering attacks, organizations should apply trusted tools and

best practices to block phishing emails and embedded malware, and also train employees to help avoid

these attacks.

Organizations should gather the minimal data needed to provide the desired services while preserving

the rights and expectations of individuals. Organizations should also apply encryption for gathered and

stored data that are in transit and at rest. Encryption must be made easy to use, and ideally implemented

as a default, particularly for individuals.

5. Kazakhstan’s telecom industry

Telecommunications industry in Kazakhstan is one of the most important sectors of the economy. The

Kazakh telecommunications market has experienced significant growth since its modernization in 1995

due to several competitive advantages compared with other countries in the region. Kazakhstan’s

relatively higher income per capita and young demographics make it an attractive marketplace,

particularly for telecommunications. The structure of telecommunications services revenues in

Kazakhstan has undergone significant changes mirroring global trends, revenue grew mainly in the

mobile telephony and Internet segments.

Volume of telecommunication services reached more than KZT720bln, 28% of which came from

Internet access services. Provision of internet services has been the main driver of the industry.

Between 2011 and 2016, the share of revenues from this subsector increased from 17% to 28%, while

the share of revenues from mobile voice services, on the contrary, decreased from 51% in 2011 to 34%

in 2016.

The country’s mobile market has been booming since 2000 (no doubt boosted to some extent by the

long delays in obtaining fixed-line services). The number of mobile services had exceeded fixed-lines

by 2004 and has increased to surprisingly high levels of penetration. Kazakhstan’s mobile market has

experienced particularly strong growth over the last decade or so. Revenues from mobile services grew

19


rapidly, on average by 17% annually until 2011. Penetration of mobile services reached 170% by 2015,

partly due to the delay in advancing fixed-line services.

Volume of telecommunication services, KZT mln (2011-2016)

Source: Kazakhstan Statistics Committee, Samruk-Kazyna

In 2015-2016, the telecommunications industry in Kazakhstan started to experience challenging times

for the first time since the 2000s. Most of the companies in the industry experienced lower sales,

declining operating profits and EBITDA, as companies started to cut tariffs due to increased competition.

The subscriber growth rate in 2015 and 2016 was 3% vs. 13% average between 2010 and 2015 as the

market reached over 26 million subscribers in 2016. The mobile market is now highly mature and

saturated. Mobile operators begin to lose revenue from its core competency - voice calls.

Capital Expenditures in telecommunications, KZT mln (2004-2016)

Source: Kazakhstan Statistics Committee, Samruk-Kazyna

The largest players are optimizing their expenditures, reducing capital expenditures and other

investments. Reduced CAPEX can limit future growth and effectiveness of operations. Since

telecommunications industry is one of the most innovative, its development will largely depend on

investments into new technologies and equipment. CAPEX decreased from their all-time peak of

KZT137bln in 2011 to just KZT105bln in 2015.

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

2011 2012 2013 2014 2015 2016

Fixed subscription Data transfer Cable and satellite TV

Internet Mobile subscriptions Other services

0

50

100

150

200

250

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

CAPEX % change YoY

20


In the end of 2016, the government lifted a monopoly on the provision of fourth-generation (4G) services

in the telecommunications sector. The government has lifted the monopoly under which previously only

the Altel company—a subsidiary of the state-owned telecoms provider, Kazakhtelecom—had the right

to provide 4G services. The government will henceforth grant licenses on existing and new frequencies

for 4G services to all of Kazakhstan's three mobile telephone providers.

The move to de-monopolize 4G services comes after Kazakhstan formally joined the World Trade

Organization (WTO) in December last year. The government had previously stated that it would not de-

monopolize 4G services until 2018. Under its commitments to the WTO, the government has also

undertaken to abolish a restriction of 49% on foreign equity in the telecoms sector by mid-2018, with

the exception of the main state-owned operator, Kazakhtelecom.

The move is intended to increase competition in the telecoms sector, leading to an improvement in

technical capacities and quality of services, and allowing larger numbers of subscribers to benefit from

4G services. The government has set the objective of rolling out 4G services to all villages with a

population of at least 500.

Increased competition and active development of 3G and 4G technologies poses a threat for

Kazakhstan operators, since there is a huge difference between the rate of growth in network traffic

volume and income. In 2015, Kcell recorded traffic growth of 101.6% compared to 2014, Tele2 and

Beeline reported similar dynamics. At the same time, the income of operators of mobile internet services

rose on average by one third compared with the previous year. Profitability of data services will

deteriorate further, as the amount of traffic is expected to grow substantially, requiring operators to

invest in telecom infrastructure.

The total number of mobile broadband subscribers is expected to increase by 3% in 2016. By the end

of 2020, the number of subscribers is expected to reach around 18.8 mln subscribers, given the

introduction of MNP and non-restricted access to 3G and 4G licenses. This would be equivalent

to 67.5 % of the total mobile market.

Actual and forecasted number of cellular and 3G subscribers (2013-2020f)

Source: BMI, Samruk-Kazyna

Data transmission, mobile Internet, according to some experts, can amount to more than 80% of all

mobile services in the next five years. On the other hand, there is a significant decline in revenues from

voice and SMS. About 30-50% of consumers use smartphones, and this number is expected to reach

0

5,000

10,000

15,000

20,000

25,000

30,000

2013 2014 2015e 2016f 2017f 2018f 2019f 2020f

Cellular mobile 3G

21


as much as 90% within the next couple of years. All of Kazakhstan’s cellular operators are expected to

have 4G LTE networks live in all regional capitals by the third quarter of 2016, and to have expanded

services to most cities by the end of 2016.

5.1 International rankings and infrastructure

According to the World Economic Forum’s Global Technology Report, Kazakhstan holds 39th place in

the world by Networked Readiness Index (NRI), which measures the propensity of the economy to

employ ICT. WEF notes high affordability and government usage of digital technologies in Kazakhstan.

While quantitative indicators of development of the ICT industry, such as number of telephone lines or

mobile users, reached average or above-average global levels, the quality of products and services in

Kazakhstan has to be improved in order to achieve this transformation. Namely, Kazakhstan holds only

90th place in the world by firm-level absorption of technology and 73rd place by impact of ICT on new

services and products. Still, Kazakhstan has one of the most affordable entry-level fixed-broadband

(1.1% of GNI per capita) and prepaid handset-based mobile-broadband (1% of GNI per capita) in the

CIS region. Telecoms infrastructure in the country has improved rapidly over the last few years with the

deployment of fiber optic cables, microwave links and satellite services.

Kazakhstan’s rating in the Network Readiness Index (2016)

Source: UN E-Gov survey 2016

Kazakhstan’s ICT infrastructure ratings

Country Percentage

of

Individuals

using the

Internet

Fixed

telephone

subscriptions

per 100

inhabitants

Mobile

cellular

subscriptions

per 100

inhabitants

Fixed (wired)-

broadband

subscriptions

per 100

inhabitants

Wireless

broadband

subscriptions

per 100

inhabitants

Kazakhstan 54.89 26.12 172.2 12.93 59.4

Source: UN E-Gov survey 2016

22


However, existing infrastructure still limits access to Internet in rural areas and does not meet the needs

of rural residents in terms of range, quality and speed. According to official statistics, the share of

internet users varies between 62.4% in Akmola region and 93.9% in West Kazakhstan region. In order

to reduce disparities between urban and rural regions, it is necessary to provide broadband Internet

access in rural areas.

To resolve this issue, the government together with JSC Kazakhtelecom is implementing the project to

cover all rural villages with population of over 250 people with the fiber-optic communication lines. To

increase the share of local content and availability of Kazakh internet resources, JSC Kazakhtelecom

provides free traffic with speeds up to 100 Mb/s, as well as free hosting for 1 month.

In spite of the current difficulties in the industry, development of the telecommunications sector is a

priority for the government within the framework of diversified economic development. The Government

plans to adopt a program "Digital Kazakhstan 2020", developed in accordance with the World Bank's

methodology, to increase the growth of the share of ICT sector in GDP from 4% in 2015 to 5% in 2020.

The program will be approved before the end of this year and implemented starting from 2017. The

amount of funding for the Program from the republican budget is KZT228.5bln. Its purpose is to improve

the competitiveness of the economy and quality of life through the introduction of digital technology.

Key indicators of the program are:

increase the share of the ICT sector in the country's GDP to 5%,

create 150 thousand additional jobs in the IT sector,

increase labor productivity in IT sector by up to 37%,

increase the digital literacy of the population to 85%,

increase the share of internet users to 75%,

improve "E-Gov" index (according to the UN methodology) to be in top 25 countries,

improve e-participation index (according to the UN methodology) to be in top 20 countries.

In addition, national holding Zerde in partnership with SAP plans to adapt best practices of the SAP

Institute for Digital Government, which accumulates the best practices of digital governments of

developed countries, in particular Australia, Singapore and Denmark. SAP (one of the leaders in the

corporate applications market) already has experience of cooperation with Kazakhstani state agencies.

For example, last year SAP signed a strategic cooperation agreement with JSC Samruk-Kazyna. The

agreement aims to increase the degree of process automatization of Samruk-Kazyna group from 30%

to 70%. The economic effect of cooperation according to the Fund estimates will be about KZT200bln

by 2020.

Technology advances have brought traditional business processes to a new level with a huge impact

on the economic growth. Intelligent, interconnected systems, cyber-physical systems and cloud

computing now enhance activities along the entire value chain. It means reduced costs and improved

efficiencies, greater speed and scale, smarter products and services. Capitalizing on the potential of

ICT is a key success factor for any economy in the coming years. Kazakhstan has started to implement

new technologies in government and business processes with modest results, but there still is a lot of

work to be done. This will require better cooperation between government agencies, businesses and

consumers.

23


6. Conclusion

The importance of telecommunications industry to the economy cannot be understated, as it is an

essential input for virtually all businesses and is a key driver of all modern economies. Kazakhstan has

made many positive improvements to its telecoms sector in the recent past, however many challenges

remain to ensure active development of the sector in accordance with the best international experience.

The telecommunications industry is expected to grow slower than the general economy in the short-

term, due to declining revenues on fixed and mobile voice services. Weaker macroeconomic

environment will contribute to the industry slowdown. Mobile operators' total revenues will grow slower,

as services rates decrease on data and voice call segments. Penetration rates are likely to go down,

thus, further development of the sector would not be in quantitative saturation but in improving the

quality of communication and data transmission.

At the same time, data segment will gradually assume a larger share in total revenues. As competition

is getting more data-centric, operators with the highest smartphone penetration among subscribers will

benefit the most. Consequently, the key challenge would be to manage exponential growth of data

volumes, while keeping network costs as low as possible.

At the moment, mobile sub-sector is affected by worsening of the macroeconomic environment, overall

decline in disposable income and increased fixed costs. In the medium-term operators will seek to

maximize the coverage of the market, especially mobile broadband (3G and 4G), and attracting

customers from some segments, which were previously considered unprofitable. Operators have

already started to cooperate more closely, in order to optimize their expenditures. In the nearest future,

we see further development of such partnership strategies. Joint construction and use of the

infrastructure can provide a significant reduction in capital expenditures. Creating a single developed

network with non-discriminatory access instead of multiple overlapping networks for each operator will

provide enormous savings in capex.

The telecommunications industry is undergoing transformation. Data transmission, mobile Internet,

according to some experts, can amount to more than 80% of all mobile services in the next five years.

TMT companies must simultaneously manage the low-growth cash flows of their legacy businesses

and build businesses with explosive growth in new, unfamiliar areas. The best way for a company to do

this is to engage in an end-to-end digital transformation of its value chain while creating new and

disruptive digital businesses.

24


Disclaimer & Disclosures

The Research and Knowledge Management Department Strategy and Portfolio Investment Block of

JSC “Samruk-Kazyna” (hereinafter referred to as “the Research Team”) is responsible for the analysis

of this report. The Research Team certifies that all views expressed in this Research report (hereinafter

referred to as “Report”) reflect the Research Team’s personal views.

The Report is based on the information taken from the sources which the Research Team considers

reliable and takes every care and precaution to ensure that information related to the Report published

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Research Team nor JSC “Samruk-Kazyna” make no guarantee, warranty of any kind, express or

implied, or make no representation as to the accuracy or completeness of the information contained in

the Report or otherwise, and it should not be relied on as such. The Research Team may change the

information contained in this Research at any time without notice.

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for any losses or damage that may result from use of the information contained in the Report as a

consequence of any inaccuracies in, errors or omissions, if any, from the information which the Report

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