Grabovsky a.t.kearney telco-form_08.06.11

Dr. Sören Grabowski

Moscow, June 8th, 2011

Future transformation and integration of Telecom and Media

A.T. Kearney 05.20110 2

Evolution of the consumption patterns and Internet value chain

Selected trends 2020: Net Neutrality, Social Communications and Media

Redistribution of the revenue streams and new partnership models

Russian realities and a word of caution

Agenda

A.T. Kearney 05.20110 3

Industry trends and uncertainties point towards three likely scenarios of how the communication industry could evolve

Global communications

industry scenarios

Full service world: Pipe Dream

All cloud: Commodity pipe

Mobile Play: Status quo

Major industry uncertainties

Regulatory role

Delivery service paradigm

Customer preferred

relationship

Share and role of user generated

content

Major industry trends

Stagnant core

Size matters

Data explosion

Integration finally happens

Device and service

integration

LTE

New neighbors, new threats

New business models

Industry Scenario Approach

Source: A.T. Kearney analysis

A.T. Kearney 05.20110 4

Industry scenarios range from a high value-added role for MNOs to a fully commoditized, web-payer-dominated world

Industry scenarios

Global communications market scenarios

Full service world: Pipe Dream

All cloud: Commodity pipe

Mobile play: Status quo

• Mobile industry evolves along same path as fixed – operators provide access with no value add – dumb pipe

• Operator split between wholesales and fixed

• OTT players capture service revenues

• Handsets commoditize like PCs (OEMs that transform into all-out web-players win, e.g., Apple)

• Operators integrate the value chain, driving convergence across content, delivery and device

• Acquire online players and media firms

• Disintermeditate OEMs by going direct to ODMs – use subsidies to control device

• Mobility as all encompassing service

• Industry definitions stay stable

• Limited additional convergence; evolution is incremental

• Each player leverages its assets for revenue sharing


A.T. Kearney 05.20110 5

Each scenario results in a different value chain configuration with a specific set of winners and losers

End state value chain configuration by scenario

Device Service Distribution

OEM Applications & online services

Network operator

Service provider (MVNOs)

Platform software

All cloud

Mobile play

Full service world

All cloud • Software and online services players

succeed in the online services battle thus capturing major part of profit pools

• OEMs and operators driven out of new income sources

Mobile play • No major changes in value chain • More activity for media players starting to

provide online services • OEMs still have a significant role, specially

integrated OEMs like Apple

Full service world • Operators consolidate and converge. They

control distribution and contact points along the value chain

• Operators provide online services and become a dominant players

Online services

Online services

Devices

Devices

Fixed operator

Mobile operator

Mobile operator

Fixed operator

Mobile operator

Devices

Online services

Online services

Online services

Fixed operator

Mobile operator

Mobile operator

Media

Fixed operator


A.T. Kearney 05.20110 6





Agenda

A.T. Kearney 05.20110 7

Personal Advertising – Internet ads take over the ad world

Ten trends will shape the telecommunications industry till 2020 creating a rich, but horizontal segmented environment

Telco trends 2020

Augmented Reality – Sensor, machines and data ease life

Cloud commodity – IaaS is commodity, SaaS grows

Lean operations – Simple and reduced to the bone

Consolidation in distance – limited synergy effects

Fragmented Infrastructure – Network of Networks

End of Net Neutrality – Natural evolution of QoS in networks

Social Communications – Disaggregating largest community

N-Screen Environment – Content anywhere on all devices

New TV – The end of any schedule

1

2

3

4

5

6

7

8

9

10


A.T. Kearney 05.20110 8

Massive Data Increase

Due to massive traffic increase, net neutrality will end – one way or the other as the invest is not sustainable

1) Data included for Western, Central and Eastern Europe, for Consumer and Business users Source: A.T. Kearney Whitepaper “A Viable Future for the Internet”

End of net neutrality

2

8409

14611 YoY

+35%

3236

1

11 13 06A 10 12 07A 09A 14

399

1217

764

YoY +107%

32 3 185

11 77

08A

Fixed - PB/month -

Mobile - PB/month -

Massive Add‘l Investments Options for Change

Modification of retail price schemes

Traffic-dependent charges for all traffic

Enhanced quality services over the public internet

Enhanced quality services based on bilateral

agreements

Europe1)

If congestion hits the Internet, QoS-based services (via CDNs) are in demand by OTT providers

2,4 0,3 2,7

1,5 3,0

5,2 5,2 5,2 5,2 4,4

5,2 5,2

Capex Trendline

Additional Capex Required

14

14

5

13

11

08A

12 12

5

12

13

6

11

13

6

10

13

09A

Fixed - €bn/year -

Mobile - €bn/year -

€9.8 bn add‘l

CAPEX

+ €116bn

for FTTx (50% HH)

€21 bn add‘l

CAPEX

(LTE not incl.)

A.T. Kearney 05.20110 9

Social networks like Facebook internalize inter-personal communications, crowding out telcos

3

Facebook:

• 250 mn mobile users using 200 service providers in 60 countries

Google:

• 1.5 mn Google Voice users 7 months after launch

• 150 mn mobile users for Google Maps alone Chat Status

Apps/Gaming

VoIP Calls Wall Posts

Messages

Sharing

Ads

Places

Coupons

Source: Facebook; Google; A.T. Kearney

3

Social communications

While telcos have always focused on providing connectivity to their subscribers, social networks are serving the communication needs of their communities

A.T. Kearney 05.20110 10

Media, personal content & services are accessible any-where from any device – stored distributed in a cloud

N-screen environment

On-the-Move

Audio

Laptop

Source: A.T. Kearney

4

Enterprise

Tablet Smartphone

Smart TV

Electronic Paper Car

Router

Set-top Box

Servers Router

Video Conf.

Desktop

Tablet Smartphone Laptop

Enterprise Cloud Consumer Cloud

Internet

Home

NAS Server & Storage

Cloud

Server & Storage

Server & Storage

A.T. Kearney 05.20110 11





Agenda

A.T. Kearney 05.20110 12

Option 1: Increase average retail prices

Option 3: Enhanced QoS over Public Internet Option 4: Enhanced QoS based on bilateral agreements

Option 2: Standard termination charges for all traffic

Giving the unsustainable economics for carriers, new commercial models need to evolve to handle the traffic

Additional payment flowTraffic flow

End Users

Internet Core

Connec-tivity

Provider

Online Service Provider

€Access charge: Increase in

retail prices supported by differentiated pricing

Last mile

RAN

Aggregation/ Backhaul

Retail Connectivity Provider


End Users

Last mile

RAN


Internet Core

Connec-tivity

Provider


€ € €

Payment is passed down to the ‘last mile’ providers via termination charges factored into wholesale prices at each

level/handover point

Retail Connectivity Provider

Differentiated pricing for guaranteed QoS

End UsersAdditional payment flowTraffic flow

Internet Core

Connec-tivity

Provider


€ €Commercial agreements to

distribute additional revenues for end-to-end services

Last mile

RAN


€

Retail Connectivity ProviderEnd Users


Internet Core

Connec-tivity

Provider


€

Last mile

RAN


Managed Services Delivery

Technology Enabler e.g. Akamai

Services Retail Connectivity Provider

Private network

Public Internet

Content Delivery Services

Net Neutrality – Alternative Commercial Models

Probably a combination of models is necessary


A.T. Kearney 05.20110 13

• A higher share of subscribers – primarily

high-volume users – pays flat-rate access tariffs, especially for data plans

• VAS still primarily transaction-driven

• For some subscribers, third party-

advertising pays for (part of) the access – mostly in the low usage segment

• MNOs create revenue-share models with service providers

• MNOs widely adopt tiered pricing models for data access to better monetize high volume users

• Revenue for mobile voice and data and services are primarily transaction-based, i.e., subscribers pay by units consumed, either for every single unit or for bundles with a specified number of units (e.g., minute, SMS, MB) – only few high-volume users have flat fees

2006 2010 2014

New Value Capture: In a changed ecosystem new MNO business models will need to evolve

Evolution of MNO revenue models (Mature Markets)

F = Revenues from flat-rate tariffs; P= Revenue share from partnerships; A = Revenue from advertising revenue sharing; T = Tiered-pricing based revenues; U = Usage / transaction based revenues Source: A.T. Kearney

MNO business models need to evolve to capture new revenue sources through new pricing structures and partnerships

Illustrative

0% 100% 0% 100% 0% 100% 0% 100% 0% 100% 0% 100%

U

F

U

F

+

High usage

segment

Low usage segment

Access (voice & data)

Services

+

U

F

U

F


Services

+

U

F

U

F


Services

T

P P A

A.T. Kearney 05.20110 14





Agenda

A.T. Kearney 05.20110 15

Russia’s current data consumption trend is already on a surging slope with data ARPU doubling over a period of just two years

Source: Global Wireless Matrix, A.T. Kearney analysis, Client data

0,7 0,7 0,70,9

1,11,2 1,3 1,4

Q3 2009

Q3 2010

Q2 2009

Q2 2010

Q1 2009

Q1 2010

Q4 2009

Q4 2010

Customers are increasing their non-voice consumption irrespective of operators’ access technology and capacity

Data ARPU evolution in Russia (EUR, Q1 2009-Q4 2010)

ARPU Data ARPU

Neth

erlands

27%

Norw

ay

26% 25% 24%

Sw

itzerland

19%

Port

ugal

35%

Austr

ia

31%

Germ

any

28%

Spain

23%

Belg

ium

23%

Russia

Sw

eden

Data contribution as % of ARPU, (June 2010, %, global examples)

A.T. Kearney 05.20110 16

And there is no fundamental difference in Russia neither in device preferences nor in the user behavior

1) Age 15+ - Home and Work Locations, excludes traffic from public computers or access from mobile phones or PDAs Source: Gartner, MForum Analytics (2011), comScore Media Metrix (2011), A.T. Kearney analysis

1,2

2,73,4

4,4

7,0

0,7

296,6

139,3122,3

80,0

37,4

2010E 2009 2005 2008 2007 2006

172,4

Russian players are likely to join worldwide value chain trends

Smartphone Sales statistics (mln. units)

Top 10 Countries for Social Networking (August 2010, Total Worldwide Audience1))

4,9

5,0

5,0

5,3

5,8

6,2

7,3

7,6

9,2

9,8

Turkey

Russia

Israel

Canada

Indonesia

Finland

Spain

Puerto Rico

Philipinnes

United Kingdom

Average time spent by visitor, hours per month Russia Worldwide

A.T. Kearney 05.20110 17

Media and Telecom integration


Critical factors for Russia

Individual operators and providers

1

Regulators

2

• Russia offers a attractive field for operators to extend activities and to model the market according to their own needs

• However, new value chain will rather lead to the redistribution of the revenue streams among the players and to less extent to the increase of customer spending

• Efficient execution, access to state-of-the-art know how, lean operational models and sound partnership strategies are key for the defending profitability

• Existing regulation in Telecommunications lags behind technology trends, the entrance of the new players (e.g. internet service providers) leaves even less options for traditional technology-based regulation

• With further evolution of the value chain the role of cross-industry (telecom, media, finance, antimonopoly) regulatory cooperation will increase

• Thus, a broader understanding and consensus should be reached for the success, the right balance has to be found to ensure healthy competition and sustainable industry development

A.T. Kearney 05.20110 18

Copyright ⓒ 2011 by A.T. Kearney This document is exclusively intended for your personal use. Distribution, quotations and duplications – even in the form of extracts – for third parties is only permitted upon prior written

consent of A.T. Kearney. A.T. Kearney used the text and graphs compiled in this report in a presentation; they do not represent a complete documentation of the presentation.

A.T. Kearney

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Phone : +7 (495) 212 01 00

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Dr. Sören Grabowski

Principal

Head of Communications, Media &

High Tech-Practice – Moscow & Kiev

[email protected]

Documents

Grabovsky a.t.kearney telco-form_08.06.11