Market Trends: Eight Innovative CSPs Embark on Digital ... · PDF fileDifferent Types of Pay-per-Use Pricing Models ... diversification one of their mission ... AT&T, Deutsch Telekom

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Market Trends: Eight Innovative CSPs Embarkon Digital Service TransformationPublished: 16 June 2015

Analyst(s): Gyanee Dewnarain

Digital business is now a mission-critical priority for AT&T, DeutscheTelekom, Orange, Singtel, Telefónica, Telstra, Verizon and Vodafone. CSPs'business unit leaders can gain key insights by examining the approachesused by these eight CSPs to digitalize their business.

Key Findings■ The large number of machine-to-machine (M2M)/Internet of Things (IoT) services in

communications service providers' (CSPs') portfolios reflect the mounting interest in this area.CSPs also seek to capitalize on growing concerns around cyberthreats.

■ CSPs build digital communication and big data products in-house, use partnerships to offer IoTand cloud services and make focused acquisitions in the rich media and security domains.

■ CSPs adopt the platform business model for monetizing digital services. Success hinges onproviding the right incentives to the producers of value (developers, content and serviceproviders) and consumers of value (enterprise, consumers).

■ CSPs embrace diverse innovation mechanisms such as startup acceleration, crowdsourcing,venture capital (VC) funding and ecosystem enablement while also initiating cultural changesinternally to generate "out of the box" thinking among employees.

RecommendationsFor CSPs:

■ Segment and prioritize M2M/IoT initiatives based on the attractiveness of the vertical, yourassets, skills, competencies, the competitive dynamics and your intended role in the valuechain.

■ Position yourself as an end-to-end security service provider to enterprise by leveraging yourexisting investments in security infrastructure or through strategic partnerships and acquisitions.



■ Create blueprints for "build," "buy" and "resell" scenarios. Build when there are few commercialalternatives, buy to accelerate the build process, and resell when build or buy is too costly orwhen the product is mature or commoditized.

■ Provide the producers of value with high-quality tools and attractive revenue share models andprovide the consumers of value with compelling pricing and user experience.

■ Map innovation initiatives to the corporate strategy and establish means for integrating them.

Table of Contents

Introduction............................................................................................................................................ 3

Market Trend.......................................................................................................................................... 5

M2M/IoT, Cloud and Rich Media Dominate CSPs' Digital Service Portfolios, But Security and Big

Data Are the Fastest Growing Segments.......................................................................................... 5

M2M/IoT Services.......................................................................................................................6

Security Services........................................................................................................................ 7

Cloud and Hosting Services........................................................................................................7

Big Data and Analytics Services..................................................................................................8

Consumer Digital Services.......................................................................................................... 8

CSPs Build Communication Products In-House, Partner to Offer M2M/IoT Services and Make

Strategic Acquisitions in Rich Media................................................................................................. 8

In-House Development............................................................................................................... 9

Partnerships............................................................................................................................. 10

Investments.............................................................................................................................. 10

Acquisitions.............................................................................................................................. 10

CSPs Adopt the Platform Business Model for Monetizing Digital Services.......................................11

The Platform Business Model................................................................................................... 11

Pricing Models for Digital Services............................................................................................ 14

CSPs Embrace Diverse Innovation Mechanisms While Initiating Cultural Changes Internally............16

Startup Acceleration................................................................................................................. 17

Startup Incubation.................................................................................................................... 18

VC Investment.......................................................................................................................... 18

Ecosystem Enablement............................................................................................................ 19

CSPs Nurture Fledgling Digital Services Within Dedicated Business Units and Centers of Excellence

.......................................................................................................................................................19

Different Roles and Remits of the Digital Business Unit or Subsidiary........................................ 19

Leadership and Segment Focus Determines the Location of CSPs' Digital Activities.................20

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CSPs Ring-Fence Strategic Focus Areas and Fledgling Markets or Services.............................20

Vendors to Watch.................................................................................................................................21

Gartner Recommended Reading.......................................................................................................... 23

List of Tables

Table 1. CSPs' Use of the Platform Business Model Across Digital Service Areas................................. 12

Table 2. Different Types of Pay-per-Use Pricing Models on Offer From CSPs........................................ 15

Table 3. Innovation Activities of the Eight CSPs.....................................................................................17

List of Figures

Figure 1. Seven Building Blocks for CSP Digital Transformation.............................................................. 4

Figure 2. CSP Key Digital Service Areas................................................................................................. 6

Figure 3. CSP Implementation Model for Digital Services........................................................................ 9

IntroductionThis document was revised on 23 June 2015. The document you are viewing is the correctedversion. For more information, see the Corrections page on gartner.com.

As revenues from the legacy business plateau, leading CSPs globally, have made businessdiversification one of their mission-critical priorities. In other words, these CSPs have clearlyarticulated their vision in terms of the percentage of revenue they are expecting to generate fromdigital services or these services' contribution to growth. These CSPs are also planning theirstrategy around seven key building blocks, as shown in Figure 1. (Please see "High-Tech TuesdayWebinar: How Should CSPs Approach Digital Transformation?" for more details.)

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Figure 1. Seven Building Blocks for CSP Digital Transformation

Source: Gartner (June 2015)

This document is an update to "Market Trends: Seven Innovative CSPs Embark on Digital ServiceTransformation." While we acknowledge the fact that a larger number of CSPs have now embarkedon a digital transformation journey over the past 24 months, eight CSPs are analyzed for thisresearch: AT&T, Deutsch Telekom (DT), Orange, Singtel, Telefónica, Telstra, Verizon and Vodafone.

In particular, we analyze the digital service areas these CSPs are focusing on, the way they areorganizing themselves to deliver digital services, the way in which they are implementing theseservices, the business models they are using to monetize these services and the ways in which theyare sourcing innovation to build competitive differentiation. We analyze the implications of theirchosen approaches and provide recommendations for CSPs with ambitions to launch their owndigital-service initiatives.

For the purpose of this research, we have grouped the broad diversity of digital services that theseeight CSPs offer within the following 10 main categories:

■ Communication and Collaboration — Voice over Internet Protocol (VoIP), IM, unifiedcommunications (UC), unified communications and collaboration (UCC), audio, video and Webconferencing, Web real-time communication (WebRTC), telepresence service.

■ Cloud and Hosting — Infrastructure as a service (IaaS), platform as a service (PaaS), SaaS,colocation, hosting.




■ Rich Media — Music streaming, video streaming, gaming, e-publishing, personal cloud.

■ Commerce, Payment and Finance — Digital wallet, mobile payment, mobile commerce,mobile banking, mobile insurance, mobile advertising, mobile remittance.

■ M2M/IoT — Smart metering/smart grid, smart city, fleet management, digital signage,connected home, connected car, smart factory and so on.

■ Healthcare — Telemedicine (independent living, remote diagnostics, chronic-caremanagement), in-patient care, asset/fleet and staff management, health data recordsmanagement and medical-imaging storage services.(Please note that usually healthcare is a subsegment within M2M/IoT. However, we look at itseparately here due to the strong interest this vertical evokes.)

■ Security — Endpoint security, perimeter solutions, distributed denial of service (DDoS)mitigation, application threat protection, Web and server security, cloud security, identity andaccess management, managed security services, security operations center (SOC) andcyberdefense.

■ Big Data and Analytics — Crowd/traffic analytics, mobile marketing/advertising, smart grid,security analytics, smart procurement, smart media management, analytics as a service anddata management as a service.

■ Enterprise Mobility Management — Mobile device management, mobile applicationmanagement, mobile content management, mobile workspace management, mobile securitymanagement, telecom expense management and bring your own device (BYOD) solutions.

■ Other Digital Services — Here, we have regrouped all the other digital services that we couldnot fit into any of the aforementioned categories, such as location-based services (for example,mapping and navigation), lifestyle portals (such as restaurant booking, travel reviews),augmented reality apps and artificial intelligence software, among others.

(Please note that this is only a selection of services offered under each category — it is not anexhaustive list.)

Market Trend

M2M/IoT, Cloud and Rich Media Dominate CSPs' Digital Service Portfolios, ButSecurity and Big Data Are the Fastest Growing Segments

The eight CSPs analyzed have a broad portfolio of digital services that span several of thecategories mentioned previously and also shown in Figure 2. This graph was put together byassessing the number of digital services deployed by each CSP in each service category.




Figure 2. CSP Key Digital Service Areas

EMM = enterprise mobility management; IoT = Internet of Things; M2M = machine-to-machine


M2M/IoT Services

From Figure 1, we observe that M2M/IoT is by far the biggest area of focus for CSPs, followed bycloud and hosting and rich-media services. It is worth noting that many CSP M2M services havebeen rebranded as "IoT" over the past 12 months. Nevertheless, we are seeing some CSPs (such asTelefónica, AT&T, SK Telecom [SKT], DT, Vodafone and Verizon) starting to offer some real IoT usecases, particularly in the areas of smart city, connected home, connected car and connectedobjects (fitness bands, T-shirts, luggage, bicycles and so forth). The breadth of CSPs' IoT/M2Mportfolio is due to the large number of verticals that CSPs are addressing, such as healthcare,utilities, manufacturing, automotive, transport and logistics, retail, public sector, among others. Infact, due to the prominence of the healthcare vertical, we have considered it a stand-alone digitalservice category for the purposes of this research (instead of as a subset of M2M/IoT). Healthcare is




followed by transport and logistics, utilities and automotive in terms of CSPs' level of emphasis.Currently, however, CSPs' roles are often confined to providing connectivity for the M2M/IoTsolutions. Nevertheless, the eight CSPs analyzed aspire to move higher up the M2M/IoT value chainto offer platform services and also end-to-end solutions to selected verticals.

Security Services

We have noted a significant increase in the number of security offerings in the CSPs' digital serviceportfolio, compared to the previous iteration of this research. There is a particularly strong focus oncyberdefense (which typically includes endpoint security, perimeter solutions, application threatprotection, cloud security and security analytics). This is because CSPs see security — andparticularly cyberdefense — as a significant growth opportunity, since individuals, businesses andgovernments are increasingly aware of the implications of cyberthreats. CSPs want to positionthemselves as an end-to-end security solution provider and are expanding their portfolio to includesolutions across the entire digital journey. For example, Telstra is focusing on four core securitycapability pillars:

■ Consulting services — risk assessment and mitigation.

■ Professional services — design, implementation, configuration and integration of securitysolutions.

■ Managed services — ongoing monitoring of assets and connections.

■ Intelligence and analytics — intelligence through security data and analytics, SOCs, incidentresponses and threat reports.

Telefónica also has a broad portfolio of digital security products and services that includes solutionsfor communication security, IT security, cybersecurity, and identity and access management. It alsooffers professional and managed services to support the aforementioned solutions. In addition, ithas launched a number of strategic initiatives to reinforce its capabilities in this area such as:

■ The creation of a dedicated security subsidiary ElevenPaths.

■ Its partnership and investments in cybersecurity companies FireEye and Blueliv respectively.

■ The launch of Sinfonier, a security community that offers security researchers, intelligenceanalysts and developers free infrastructure. (It enables security experts to share information sothey can generate their own intelligence algorithms and security solutions.)

CSPs want to draw on several years' experience of keeping their massive network infrastructure,operations, IT and customer base safe from security threats, as well as on their huge investments indedicated security infrastructure such as SOCs to become managed security service providers toenterprises.

Cloud and Hosting Services

In the case of cloud and hosting services, we note a sense of pragmatism among the CSPsanalyzed. While they continue to offer IaaS, they realize that businesses and governments will




approach them for some niche use cases (with the exception of markets that have strict dataregulations, like France and Germany). The opportunity instead lies in cloud brokerage services andprovisioning hybrid cloud services. As a result, the North American CSPs (AT&T and Verizon) haveramped up their efforts, especially in the area of IaaS brokerage, while their Europeans counterpartsare focusing on SaaS brokerage by launching SaaS marketplaces. AT&T and Verizon announcedpartnerships with the likes of Amazon Web Services (AWS), Microsoft Azure and Google Drive in2014. The value-add of these "hybrid" cloud services is that they combine the control, complianceand protection advantages of a CSP's private cloud (or enterprise on-premises services) with theeconomies and elasticity of third-party public cloud services.

Big Data and Analytics Services

Big data and analytics products are still fledgling, focusing mainly on anonymized data use cases,for example:

■ Crowd and traffic analytics solutions such as Orange Flux Vision, Telefónica Smart Steps, DT'sIndoor Analytics and Vodafone's footfall and street analysis.

■ Mobile marketing and advertising campaigns based on anonymized data such as VerizonWireless' Precision Marketing Insights.

DT is currently the only CSP to offer a very broad portfolio of big data solutions aimed at enterprise,which includes services such as smart procurement, marketing and advertising campaign analytics,intelligent fleet management, intelligent news discovery, border control solutions, security analyticsand smart energy management, among others.

Consumer Digital Services

On the consumer side, rich media (in particular, video and TV) continues to be the most importantarea of focus for CSPs globally, as they augment their existing IPTV and pay-TV content portfolio,as well as their digital delivery and distribution capabilities through a series of partnerships andmerger and acquisitions (M&As). (These will be discussed in greater detail in the following section.)In the consumer domain, we also noticed a regional disparity, with CSPs in the Far East having anequally strong focus on commerce, payment and finance (as well as rich media). Asian CSPs arealso offering a much broader range of consumer digital services compared to their Westerncounterparts — despite strong competition from local over-the-top (OTT) players. Overall, we noticeCSPs' digital service portfolio shifting toward the enterprise as they struggle to compete againstOTTs in the consumer space — not to mention, finding it challenging to monetize such services.

CSPs Build Communication Products In-House, Partner to Offer M2M/IoT Servicesand Make Strategic Acquisitions in Rich Media

The digital value chain is complex and digital services require skills, expertise, competencies andassets that CSPs may not necessarily own. As a result, CSPs are procuring these capabilitiesthrough a combination of implementation approaches, which can be broadly categorized under"build," "buy" or "partner."




Figure 3. CSP Implementation Model for Digital Services


As is evident in Figure 3, partnerships and in-house developments still garner favor with the majorityof the CSPs we analyzed. Nevertheless, we have seen a significant increase in the number ofinvestments in digital startups — and some outright acquisitions of companies in strategic areassuch as rich media and healthcare.

In-House Development

CSPs seem to be opting for in-house development in areas such as Internet Protocol (IP)communication and big data and analytics. Communication and collaboration (even though it's IP-based in the context of this research) is closely related to CSPs' core business. Therefore, CSPsmay feel that they have the necessary skills and competencies to develop and launch such services.Big data and analytics is still a relatively new area, with significant noise and a fragmentedcompetitive landscape. This means that CSPs still have time to build their own big data andanalytics solutions in conjunction with key partners. (Please note that in-house development mayoften involve outsourcing various elements to vetted suppliers such as IT companies, systemintegrators [SIs], independent software vendors [ISVs] and network equipment providers [NEPs] butthe end product is usually CSP-branded.)




Partnerships

CSPs are currently strongly favoring partnerships for their M2M/IoT solutions. They are partneringwith a broad range of stakeholders across the value chain, which can be broadly categorized intothree groups:

1. Technology partners — these include application developers, OEMs, platform and middlewareproviders and infrastructure vendors.

2. Operational partners — these include professional and managed service companies, such assystem integrators and other IT companies.

3. Go-to-market partners — these include companies that typically have a user base to whichCSPs can sell digital services, for example, car manufacturers, healthcare service providers,retailers, utilities, financial service companies and so on.

The other two areas where CSPs favor the partnership approach are rich media and cloud andhosting services. In the case of the latter, CSP partners include:

■ Cloud enablers (providers of cloud infrastructure, platforms and middleware).

■ Cloud service vendors (providers of cloud computing services such as IaaS, PaaS and SaaS).

■ Professional and managed service companies specializing in cloud computing.

Investments

Since the last iteration of this research, we have seen an increase in the number of investments,particularly in startups. Between them, the eight CSPs have invested in over 210 startups during thepast 24 months. (Please note that this only includes 20% of the 450-plus startups in whichTelefónica's Wayra has invested in. This is because only these startups are being used specifically inthe development of Telefónica digital products and services.) In terms of investment focus, CSPsmade the largest number of equity investments in startups, participating in the commerce, paymentand finance domain. Several CSPs seemed to have had strong aspirations in this area, whicheventually led to disappointment. For example, after investing in more than a dozen startups in thisdomain, Verizon (in conjunction with its partners AT&T and T-Mobile) decided to sell the Softcardpayment and commerce joint venture to Google, signaling its departure from this area. The othertwo areas that are attracting CSPs' funding are rich media and big data and analytics.

Acquisitions

In terms of acquisitions, CSPs have bought companies in the following areas:

■ Rich media, wherein the North American CSPs have been very active, tallying sevenacquisitions between them. Verizon bought content delivery network (CDN) provider EdgeCast,Internet service provider OnCue, streaming technology provider upLynk and video discoveryservice VideoSurf. In 2014, AT&T set up a joint venture, Otter Media, in conjunction with TheChernin Group. The objective of Otter Media is to acquire, invest in and launch global OTTvideo services. To date, Otter Media has made a number of strategic acquisitions, which




includes content producer and aggregator Fullscreen and specialist content channelCreativebug. AT&T has also made a bid for satellite TV distributor DIRECTV, which is awaitingregulatory approval.

■ Healthcare, wherein Telstra led the pack by acquiring 10 companies in this domain includingiCareHealth, Medinexus, DCA eHealth Solutions (rebranded as HealthConnex), HealthEngine,Fred IT Group, IPHealth (rebranded as Verdi), Dr Foster, IdeaObject, Cloud9 Software andAnywhere Healthcare.

■ Security, which experienced a surge in the number of acquisitions over the past 12 months.Some of the more notable include Singtel's acquisition of Trustwave and Orange's acquisition ofAtheos.

CSPs often choose to buy companies when:

■ Time-to-market is critical and they need to get to market before their competitors.

■ They want to rapidly acquire skills, assets and competencies necessary to deliver a specificdigital service.

■ They want to quickly acquire an existing base of customers or rapidly expand their geographicalfootprint.

■ They want to augment their existing portfolio of services and add differentiating features.

CSPs Adopt the Platform Business Model for Monetizing Digital Services

The Platform Business Model

Unlike the linear business models used by CSPs for their connectivity products (which involvedeveloping a product or service in-house and selling it to customers), digital business models aremore akin to platform business models or two-sided business models. The CSP adopts the role of a"matchmaker" who connects the producers of value to the consumers of value. Over the past 18 to24 months, the eight CSPs analyzed have launched a large number of initiatives that leverage theplatform business model, particularly in the area of cloud, big data, M2M/IoT and consumer digitalservices, some of which are shown in Table 1.




Table 1. CSPs' Use of the Platform Business Model Across Digital Service Areas

Digital ServiceArea

CSPs Platform Business Model

M2M/IoT ■ AT&T

■ DT

■ Telefónica

■ Verizon

AT&T, Telefónica, Verizon and DT have all set M2M/IoT channel partner programs, offering developers keyM2M/IoT APIs to develop apps that can run on CSPs' M2M/IoT platforms. However, the approaches differ slight-ly. While AT&T, Telefónica and DT have a more open M2M/IoT developer program, Verizon is more selective, withonly certified partners permitted to access its APIs. Earlier this year, AT&T announced a number of initiatives tosimplify the development of M2M/IoT apps. This includes the AT&T M2X data storage service, an IoT connectionkit and a cloud-based visual development tool.

Cloud ■ AT&T

■ DT

■ Orange

■ Telefónica

■ Telstra

All the CSPs mentioned in the second column are brokering cloud services and have already launched SaaSmarketplaces. These SaaS marketplaces offer a broad range of apps from premium brands such as Microsoft,McAfee, Google and Box to local ISV brands and the CSPs' own branded software. CSPs offer SaaS appsacross a broad range of business functions (communication and collaboration, security, sales and marketing,CRM, among others) and also in some key verticals such as healthcare, utilities, retail and so forth. As discussedpreviously, some CSPs such as AT&T and Verizon are also brokering IaaS, such as Amazon AWS, MicrosoftAzure and Google Drive.

Big Data ■ AT&T

■ Orange

■ Telefónica

This is probably the least mature CSP platform business model — due to data security and privacy concerns.Nevertheless, CSPs such as Telefónica and AT&T have started offering developers, partners and businesses ac-cess to anonymized customer data — or other types of business or machine data — via APIs.For example, Telefónica recently announced its Fiware initiative (in conjunction with other industrial partners suchas Atos, Orange, Engineering and cities via the OASC initiative). It has built its Fiware-based smart city platform,which has been deployed in Valencia. The Fiware platform aggregates different sources of smart city data andexposes it in a standardized way to make it easier for developers to build innovative smart-city applications. Tel-efónica is also involved in initiatives like ODINE, which funds open-data startups that harness openly availabledatasets to establish new business models, develop innovative ideas or products, and accelerate growth.In 2014, AT&T Business Solutions embarked on a plan for sharing its data with businesses in a secure program-matic fashion by leveraging RESTful APIs. AT&T has created programmable interfaces to each of its datasetsthat ensure read-only access to the data, which is governed by enforceable business policies.

Consumer DigitalServices

All eight CSPs analyzed:■ AT&T

■ DT

Most of the CSPs analyzed are partnering with:■ App stores such as Google Play to offer consumers the convenience of direct operator bill-

ing services (please note that Vodafone does not offer this service).




Digital ServiceArea

CSPs Platform Business Model

■ Orange

■ Singtel

■ Telefónica

■ Telstra

■ Verizon

■ Vodafone

■ Content-streaming providers such as Netflix, making it easier for consumers to:■ Access the video-streaming service from their main TV set.

■ Pay for the service using their operator bill.

■ Enjoy good QoS (as the CSP hosts Netflix CDNs).

■ Music-streaming providers like Spotify as well as IM and VoIP providers such as WhatsApp,Skype and Line to:

■ Simplify consumer discovery and distribution of these services.

■ Improve QoS and user experience of these services.

API = application programming interface; AWS = Amazon Web Services; CDN = content delivery network; CRM = customer relationship management; CSP = communications serviceprovider; DT = Deutsch Telekom; IoT = Internet of Things; IM = instant messaging; ISV = independent software vendor; M2M = machine-to-machine; OASC = Open & Agile Smart Cities;ODINE = Open Data Incubator for Europe; QoS = quality of service; SaaS = software as a service; VoIP = voice over IP





Success in a platform business model hinges on providing the right incentives to both theproducers of value (who can be application developers, OTT players, startups, service providers,technology vendors, IT companies and so on) and consumers of value (who can be mass marketcustomers, large enterprise, small or midsize businesses [SMBs] and government, among others).Some of these incentives include:

■ Providing producers with a set of high quality technological enablers (APIs, softwaredevelopment kits [SDKs], testing tools and so forth) that are easy to use — and preferably free.

■ Offering producers the right commercial incentives — large addressable market, attractiverevenue model, help with marketing and promotions.

■ Providing consumers with innovative products and services, choice, excellent user interface anduser experience along with attractive pricing models.

■ Providing consumers with value-adds that drive retention, such as one-stop-shop solutions(unified billing or direct operator billing, single contact for customer care or multichannelsupport, privacy and security, among others).

Pricing Models for Digital Services

As digital services start to mature, we see convergence on a few types of pricing models. In theconsumer space, free, freemium, pay-per-use and advertising models dominate. On the enterpriseside, pay-per-use is the preferred pricing model sought by CSPs' enterprise customers; because itoffers flexibility and control over spend while limiting upfront investment. However, pay-per-use isactually an "umbrella" term that is currently being used to denote a number of scenarios:

■ Usage- or consumption-based fee — amount of memory, CPU cycles, disk space, networktraffic (and so forth) used

■ Reservation-based fee — the period for which the service is provisioned

■ Time-based fee — the duration for which resources or applications are used

■ Subscription-based fee — a fee per device or per user, per month or per year

Table 2 provides examples of the different flavors of pay-per-use pricing models being offered byCSPs.




Table 2. Different Types of Pay-per-Use Pricing Models on Offer From CSPs

CSP Enterprise Digital Service Pay-per-Use Pricing Model

AT&T's UC Central Subscription — Per seat, per month

DT's hospital information system and integrated care Consumption and subscription — Per patient

Orange's Flexible Computing Express Consumption

Telefónica's Digital Medical Imaging Service Consumption — Per image

Telstra's Data Center colocation services Reservation-based fee

Verizon's Unified Communications and Collaboration as a Service Subscription — Per seat, per month

Vodafone One Net Express Subscription — Per employee, per month

CSP = communications service provider; DT = Deutsch Telekom; UC = unified communications


It is also worth noting that CSPs' digital pricing model are often a function of CSPs' strategicpositioning (attacker/defender), their role in the value chain (connectivity provider/platform provider)and the breadth of the solution (application, module, platform, end-to-end solution includingprofessional and managed services).

For an example, in a connected car scenario:

■ A CSP opting for the smart utility model will charge for the connectivity on a monthly or annualsubscription basis. The CSP could split the connectivity charges according to the type of usage.For example, infotainment data is billed to the consumer while telematics data is charged to thecar manufacturer or dealer.

■ A CSP opting for the enablement model will charge for platform services on a pay-per-use basis(number of devices activated/provisioned/monitored/managed; number of analytics reportsgenerated and so on) in addition to charging for data as per the previous scenario.

■ A CSP opting for the end-to-end solution play will charge for application licensing, deviceprovisioning, solution hosting, professional services (such as consulting, implementation,configuration, integration and managed services), in addition to those previously outlined.

Overall, we find that in the consumer space, fixed subscription fees are losing favor with consumerswho are more attracted to pricing models used by OTT players such as free, freemium, in-apppayments, advertising and so forth. Similarly, businesses are moving away from perpetual licenses,significant upfront and ongoing costs, as well as long contractual commitments to pricing modelsthat are flexible and based on an enterprise's actual needs, the value that the digital service offers




the enterprise and the measurable impact on its business. Responding to this paradigm shift willhave profound technological, business and organizational implications for CSPs.

From a technological perspective, CSPs will need to use an IT platform that's capable of billing,charging and rating for these new pricing approaches. It will also need to be able to rapidlyonboard, manage and agree settlements with a broad range of partners. From a businessperspective, pay-per-use can negatively impact profitability and customer lifetime value. CSPs willtherefore increasingly rely on professional and managed services to make up the difference. Froman organizational perspective, CSPs will need to adapt the revenue recognition mechanisms,compensation and incentive schemes for salespeople. CSPs will also need to retrain their existingsales force and recruit people with the skills and expertise to sell digital services and solutions.

CSPs Embrace Diverse Innovation Mechanisms While Initiating Cultural ChangesInternally

Innovation is critical for CSPs to succeed in the digital world. It empowers them to rapidly and cost-effectively launch digital services in multiple categories, develop sustainable competitive advantage,reduce internal R&D costs and acquire learning that can drive the future strategic direction of thecompany. As a result, the eight CSPs analyzed have revamped their innovation mechanisms tomore accurately reflect the way in which Internet companies innovate. Many of them have movedfrom a one-dimensional innovation program (mainly comprised of the traditional R&D center) to amultifaceted innovation program, comprising anywhere between three and eight innovationactivities as depicted in Table 3. This is because diversity in innovation sources ensures that CSPscapture and monetize a larger number of new ideas and opportunities.




Table 3. Innovation Activities of the Eight CSPs

CSPs VentureCapital Arm

StartupIncubator/

Accelerator

R&DCenter/Lab

EcosystemEnablement

Crowdsourcing

AT&T ✔ ✔ ✔ ✔

DeutscheTelekom

✔ ✔ ✔ ✔

Orange ✔ ✔ ✔ ✔ ✔

Telefónica ✔ ✔ ✔ ✔

Telstra ✔ ✔ ✔

Singtel ✔ ✔ ✔ ✔ ✔

Verizon ✔ ✔ ✔

Vodafone ✔ ✔ ✔

CSP = communications service provider; R&D = research and development


As shown in Table 3, the eight CSPs are focusing on four main types of innovation initiatives:

1. Startup incubation/acceleration

2. R&D centers and labs

3. Venture capital (VC) investment

4. Ecosystem enablement

While R&D centers are the more traditional innovative mechanisms used by CSPs, several of them,such as Verizon and DT are launching new R&D centers dedicated to strategic next-generationtechnologies, such as big data and 5G respectively. Most CSPs have yet to embrace employeecrowdsourcing. This is because such a system requires buy-in at the executive level, strongleadership and management skills, a robust internal collaboration infrastructure and compellingincentives to encourage employee participation.

Startup Acceleration

Besides the R&D centers and labs, startup acceleration is currently the most prevalent approachamong the CSPs analyzed. Examples of accelerators include AT&T Foundry, Orange Fab and DThub:raum. Startup acceleration can be a cost-effective and efficient innovation mechanism forCSPs. It can help them significantly reduce the time to develop, launch or terminate a product or




service while minimizing upfront investments and risks. It also offers market validation of a startup'sproducts or services by deploying them on the CSP's network or within the context of the CSP'sbroader solutions. Startup acceleration typically does not involve equity participation. There areclear milestones in terms of deliverables and performance and, if these are not met, the CSP mayopt to terminate the relationship with the startup. It also aligns with the skills of CSPs that aretypically not very good at creating new markets, but are good at scaling products or services thatshow potential.

Recently, we have seen an increase in "hybrid" accelerators. This involves CSPs coming togetherwith key partners such as OEMs, IT companies, system integrators and other CSPs to create a jointaccelerator program. An example is the Challenge Up accelerator jointly launched by DeutscheTelekom, Cisco Systems and Intel earlier this year, which focuses on IoT startups from the EMEAregion. The rationale behind it is that participating startups can accelerate their go-to-marketreadiness by leveraging the combined customer bases, sales channels and technology assets ofCisco Systems, Intel and Deutsche Telekom. As a result, the likelihood for startups to succeed in themarket can increase dramatically.

Startup Incubation

On the other hand, startup incubation can be time-consuming and capital-intensive and theprobabilities of success are lower. CSPs tend to incubate early-stage startups that may not have acommercial product in the market. In addition to office space, mentoring and go-to-marketassistance, incubation tends to involve equity partition in a startup — typically less than 10% of itsmarket valuation. CSPs such as Telefónica, Telstra and Singtel are still strong believers in startupincubation. For example, Telefónica's Wayra is incubating 450-plus startups.

VC Investment

VC funding also involves investing in interesting startups but, unlike incubation — which focusesmainly on early-stage startups — the VC arms of CSPs invest in startups that are at different levelsof maturity. Seven of the eight CSPs analyzed currently have a VC fund (please note that while AT&Tdoes not have a dedicated VC arm, it invests in select startups via its Foundries program). Some ofthe investments are strategic and map onto the CSP's broader corporate vision, technologyroadmap and business strategy; some are opportunistic and aim to capitalize on a current fad in themarket; and others try to identify left-field opportunities with longer-term potential. A VC arm canenable CSPs to rapidly identify startups that are good candidates for acquisition, therebyaccelerating the implementation of a given product or service — particularly when time to market iscritical and the CSP does not have the relevant skills or expertise in-house. However, most of theCSP VC arms analyzed (with the exception of DT and Telstra) are just operating as any other venturecapitalist and rarely connect the activities of their VC arm with the rest of their innovation program.Such CSP VC arms often struggle to differentiate themselves from well-established, pure-play VCplayers. To address this issue, Telefónica's Open Future program, which regroups Telefónica'sinnovation investment related activities, has recently refocused its efforts on getting the heads ofstrategic business units involved before and after the investment process. This ensures that theyselect companies that fulfill a skills or capability gap, and eventually make the effort to incorporatethese startups into their projects.




Ecosystem Enablement

As the name suggests, ecosystem enablement involves CSPs engaging with a broad range of long,mid and short tail developers, providing them with a range of technical and commercial incentivesto develop innovative apps, content and solutions that CSPs can take to market. CSPs' approach toecosystem enablement has changed significantly over the past three years. With the exception ofAT&T, Telefónica and Singtel, most of the CSPs analyzed do not engage with long-tail developers —as the costs of such developer programs can be quite high while the returns are not alwaystangible. Instead, CSPs such as Orange, DT, Vodafone, Telstra and Verizon are increasingly turningtheir attention to enterprise or commercial developers specializing in areas such as M2M/IoT, bigdata, cloud and security.

As CSPs pursue a broad range of innovation initiatives — spanning multiple geographies,technology domains and risk profiles — innovation governance becomes critical. Innovationgovernance establishes a framework for ensuring that innovation initiatives are mapped to theoverall corporate strategy. It also manages the innovation process and sets up mechanisms forintegrating the deliverables derived from innovation activities into the actual business. Goingforward, CSPs will increasingly need to focus on ensuring that their innovation strategy iscompletely aligned with their digital transformation vision. They will need to articulate relevant keyperformance indicators (KPIs) and metrics, and assess the contribution of innovation initiatives totheir mission-critical priorities.

CSPs Nurture Fledgling Digital Services Within Dedicated Business Units andCenters of Excellence

In the previous iteration of this research, we tried to find out which CSPs had set up dedicateddigital business units or subsidiaries. However, we realize that this this is an oversimplified view ofCSPs' organizational models for digital business and the reality is much more nuanced. We exploresome of the permutations we have seen in the market in the following sections.

Different Roles and Remits of the Digital Business Unit or Subsidiary

While several CSPs have launched digital business units or subsidiaries, these have a differentstrategic focus, responsibility, area of emphasis and levels of autonomy.

At one end of the spectrum, we find dedicated subsidiaries such as those launched by Singtel(Group Digital Life) and SK Telecom (SK Planet), with their own leadership, operations and profit andloss (P&L) responsibilities. However, Singtel Group Digital Life and SK Planet are focusing mainly onconsumer digital services. The enterprise digital services are handled by the parent SKT (in the caseof the South Korean CSP) and by Singtel Enterprise Group (in the case of the Singaporean CSP).

At the other end of the spectrum, we find digital business units which adopt more of an advisoryrole and define the organization's digital strategy, identify and assess investments in newopportunities, and can also sometimes manage the organizations' innovation initiatives — such asstartup incubation and acceleration. This is, for example, the case with DT's digital business unit.




Leadership and Segment Focus Determines the Location of CSPs' Digital Activities

Leadership for digital and segment focus can determine the location of a CSP's digital activities. Forexample, the CEO of Orange Business Services (OBS), has been an evangelist for digitaltransformation in Orange, and as result, most of Orange's digital activities are now being driven byOBS. Similarly, CSPs such as Vodafone and Verizon, have a much stronger focus on enterprisedigital services, and as result, most of the digital activities reside within the enterprise arm of thebusiness.

CSPs Ring-Fence Strategic Focus Areas and Fledgling Markets or Services

Currently, one of the big questions for several CSPs is whether to diversify or double-down on theirdigital initiatives. While there is consensus on the fact that there is no single "killer" digital serviceand that CSPs will need to launch a broad range of initiatives, such an approach risks diluting focus.As a result, some CSPs such as Telstra and Vodafone are doubling down on a few strategic areas.Telstra is focusing on cloud and healthcare, while Vodafone is focusing on M2M/IoT and cloud. As aresult, Telstra and Vodafone have launched dedicated business units in these target domains.Similarly, Verizon combined its wireless and wireline healthcare platforms into a single dedicatedorganization called Verizon Connected Health Care Solutions to streamline its offerings in thehealthcare vertical, which it considers highly strategic.

CSPs also find that starting a new service or approaching a new market segment is very challengingwithin bigger and more established business units or divisions. As a result, it becomes important toset up a dedicated business unit or center of excellence to nurture the fledgling business until it isfirmly established. This was the approach used by Deutsche Telekom for its SaaS marketplace andits "externally focused" big data business. Similarly, Verizon opened a dedicated data analytics R&Dcenter in Palo Alto, California (U.S.); focusing on artificial intelligence and machine-learningactivities, separate from its traditional R&D center.

It is worth noting that in all the aforementioned scenarios, digital is being separated from the corebusiness since all the CSPs (with the exception of AT&T) concur on the need to ring-fence digitalactivities and innovation. A dedicated entity offers CSPs the opportunity to:

■ Experiment with new ideas and new business models within a sandbox environment.

■ Accelerate cycle time through the use of digital design and development methodologies suchas agile, lean and lean startup.

■ Become more customer and data-centric by creating a feedback loop with customers and usingbeta launches and minimum viable products.

■ Use different sets of metrics and KPIs to assess the performance of projects.

■ More easily onboard new hires, acquired companies and partners (especially startups).




Vendors to WatchSKT is one of the most innovative CSPs in the world. It has a strong corporate vision and strategy tocapitalize on digitalization to grow its business. It announced earlier this year that it aspired to reacha market value of 100 trillion South Korean won (SKW) by 2018, by investing in three next-generation digital platforms:

1. A Lifestyle Enhancement Platform, which focuses on content, commerce and community.

2. An Advanced Media Platform, which will augment existing media assets and increasingly focuson personalization.

3. An IoT Service Platform, which will focus on launching services such as the connected home.

In line with these, the SK Telecom portfolio (as of May 2015) comprises over 110 digital servicesacross enterprise and consumer categories. There is a strong skew toward consumer digitalservices which constitutes 70% of all services offered by SKT, through its digital service subsidiarySK Planet. A vast majority of the consumer digital services are in the area of commerce, finance,advertising and payment; it includes services such as Syrup mobile wallet, Syrup Gifticon, 11thStreet, T ad, T Shopping, OK Cashbag, Basket, PayPin, Beep, Elevenia — just to mention a few.This is followed by the rich-media segment, wherein SK Planet is offering services such as videostreaming, music streaming, e-books, personal cloud and a broad range of games.

On the enterprise side, SKT is offering services in the area of cloud and hosting, security, big dataand analytics, and M2M/IoT. Healthcare is a key area of focus among verticals.

Unlike other CSPs, SKT has been quite aggressive in pursuing business-to-business-to-consumer(B2B2C) and business-to-consumer (B2C) services, even in areas such as healthcare and IoT. Forexample, it offers a broad range of wearable devices to consumers.

As regards its implementation model, SKT is notable for its preference to build most services in-house (or in conjunction with an ecosystem of homegrown developers). There have been a fewexceptions, such as its partnership with Cisco Systems on smart city, its acquisition of security andsurveillance company NSOK and location-based commerce app Shopkick, as well as its investmentin Chinese IoT device makers Tianlong Science and Technology and NanoEnTek.

We estimate that digital services already contribute between 18% and 20% of SKT's revenue.




Acronym Key and Glossary Terms

API application programming interface

AWS Amazon Web Services

B2B2C business-to-business-to-consumer

B2C business-to-consumer

BYOD bring your own device

CDN content delivery network

CEO chief executive officer

CPU central processing unit

CRM customer relationship management

CSP communications service provider

DDoS distributed denial of service

DT Deutsch Telekom

EMEA Europe, the Middle East and Africa

EMM enterprise mobility management

IaaS infrastructure as a service

IM instant message or instant messaging

IoT Internet of Things

IP Internet Protocol

IPTV Internet Protocol television

ISV independent software vendor

KPI key performance indicator

M&A merger and acquisition

M2M machine-to-machine

NEP network equipment provider




OASC Open & Agile Smart Cities

OBS Orange Business Services

ODINE Open Data Incubator for Europe

OEM original equipment manufacturer

OTT over-the-top

P&L profit and loss

PaaS platform as a service

QoS quality of service

R&D research and development

SaaS software as a service

SDK software development kit

SI system integrator

SKT SK Telecom

SKW South Korean won

SMB small or midsize business

SOC security operations center

UC unified communications

UCC unified communications and collaboration

VC venture capital

VoIP voice over Internet Protocol

WebRTC Web real-time communication

Gartner Recommended ReadingSome documents may not be available as part of your current Gartner subscription.




"Market Trends: Four Key Tenets Drive CSP Success in Digital Transformation"

"Market Trends: Seven Innovative CSPs Embark on Digital Service Transformation"

"Research Roundup: Digital Transformation for Communications Service Providers"

"Market Trends: Enterprise Digital Services Drive CSPs' Diversification Strategy"

"Market Trends: Big Data Is a Key Building Block for CSP Enterprise Digital Services"

"Market Trends: Ten Leading CSPs Accelerate Efforts to Grab the M2M Opportunity"

"Market Trends: Cloud Is a Critical Enabler for CSP Enterprise Digital Services"

Evidence

Gartner conducted primary research via interviews with a range of stakeholders (CSPs, equipmentvendors, IT companies) and secondary research with the help of Gartner's secondary researchservices team.

This document is published in the following Market Insights:Business Process Outsourcing WorldwideCarrier Network Infrastructure WorldwideCarrier Operations & Strategies WorldwideConsulting & Solution Implementation Services WorldwideConsumer Services WorldwideEnterprise Communications Applications WorldwideEnterprise Network Infrastructure WorldwideEnterprise Network Services WorldwideIT Outsourcing WorldwideIT Services Asia/PacificIT Services EuropeIndustry Market Strategies WorldwideInfrastructure Support Services WorldwideManaged and Professional Network Services WorldwideMobile Communications WorldwideMobile Devices WorldwideSecurity Solutions WorldwideServices Market Metrics WWSmall and Medium Businesses Market StrategiesSoftware Applications WorldwideSoftware Asia/PacificSoftware EuropeSoftware Infrastructure WorldwideTelecom and Internet Markets Asia/Pacific




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