Professional Documents
Culture Documents
2012 TelecomsBusinessReport 13feb2012 Low Res
2012 TelecomsBusinessReport 13feb2012 Low Res
Contents
Introduction The Ernst & Young risk radar 2012 Editorial committee Sector context Executive summary The top 10 business risks: 1. 2. Failure to shift the business model from minutes to bytes Disengagement from the changing customer mindset 10 11 1 2 1 3 14 15 16 18 19 20 22 25 02 03 04 06 08
3. Lack of confidence in return on investment 4. Insufficient information to turn demand into value 5. 6. 7. 9. Lack of regulatory certainty on new market structures Failure to capitalize on new types of connectivity Poorly formulated M&A and partnership strategy Privacy, security and resilience
8. Failure to define new business metrics 10. Lack of organizational flexibility Whats below the radar? Contacts
Introduction
Amid the recent global economic uncertainty, the telecommunications sector has performed relatively well, with operators once again emphasizing their strong defensive qualities and well-developed capex management capabilities. However, in a sector where new over-the-top entrants are competing fiercely for revenues from emerging service areas, the question is: Is now the time to shift from a defensive to offensive posture? For many telecoms executives, the answer today is a resounding Yes.
As in previous years, we in Ernst & Youngs global telecommunications network seek to help operators maximize value and tap into new sources of growth through our ongoing series of reports identifying the key risks to their businesses. By addressing the top 10 risks highlighted in this study, we believe that telecoms providers will position themselves to take their businesses forward more effectively and make the most of the growth opportunities that emerge. This report was produced by collecting and synthesizing the insights of our practitioners and sector professionals, supplemented by research and analysis by the Ernst & Young Global Telecommunications Center. During the research process, we asked our sector professionals to evaluate the most important strategic challenges for telecoms businesses globally and to rate the severity of these risks for the sector. As in previous years, our 2012 study indicates that operators face a wide array of risks, and that the relative positioning and scale of these risks have continued to change. An understanding of how to respond to these shifts will help operators manage risk more effectively, optimize performance and increase operational efficiency. It will also empower them to capitalize on the profound changes under way in the telecoms ecosystem, ranging from rapid advances in technology to new customer behaviors and expectations. The most fundamental of these changes is encapsulated in the risk that tops our list: the migration of sector value from minutes of usage to bytes of traffic a change that must be mirrored in operators business models. Many of the other risks in our top 10 spring directly or indirectly from that seismic shift. To help companies formulate and execute the right responses, we provide an analysis of each of the top 10 risks. We also report on risks currently below the radar that our panelists believe may move up the risk tables in future years. I would like to thank all our contributors for their time, insight and cooperation in the preparation of this report. This is a valuable dialogue that we hope to continue for many years to come.
Jonathan Dharmapalan
Global Telecommunications Leader
Jonathan Dharmapalan
The Ernst & Young risk radar presents a snapshot of the top 10 business risks in an industry sector, by dividing risks into four quadrants that correspond to Ernst & Youngs Risk Universe model. These quadrants are:
Compliance threats originating in politics, law, regulation or corporate governance Operational threats impacting the processes, systems, people and overall value chain of a business Strategic threats related to customers, competitors and investors Financial threats stemming from volatility in the markets and in the real economy The radar below plots the top 10 risks for telecoms operators on the risk radar, and lists the risks that are currently just below the radar.
2.
3. Lack of confidence in return on investment 4. Insufficient information to turn demand into value 5. Lack of regulatory certainty on new market structures Failure to capitalize on new types of connectivity Poorly formulated M&A and partnership strategy
Fi n
Co m pl
e nc ia
6.
7.
eg ic
r pe O
at io n
t ra St
Editorial committee
Jonathan Dharmapalan
Global Telecommunications Sector Leader Jonathan Dharmapalan is Ernst & Youngs Global Telecommunications Leader, leading a team of over 2,000 telecoms professionals across the world in their work with the worlds leading operators. With 25 years of experience, Jonathan has served some of the largest companies in the telecommunications sector. He has significant experience in both mobile and terrestrial communications.
Holger Forst
Global Telecommunications Markets Leader With 20 years of experience, Holger Forst has been the Global Client Service Partner for Deutsche Telekom AG since 2007. In 2011 Holger was appointed the joint Ernst & Young Global Telecommunications Markets Leader.
Prashant Singhal
Global Telecommunications Markets Leader Prashant has extensive experience of over 15 years in Assurance and Advisory Business Services, servicing Indian and multinational telecom clients. In 2011 Prashant was appointed the joint Ernst & Young Global Telecommunications Markets Leader.
Olivier Lemaire
EMEIA Telecommunications Leader Olivier has 15 years of experience working in the telecommunication industry. As an Audit and Business Advisory Partner and chartered accountant, he has been rendering audit, transaction support and advisory services to many international telecom operators across Europe, Africa and Middle East. Olivier has been leading the Global Telecom Revenue Assurance team for 6 years and led several revenue assurance global studies. He is also experienced in group reporting under IFRS. Since September 2011 he is the leader of Ernst & Youngs telecommunications practice for the Europe, Middle East, India and Africa (EMEIA).
Luis Monti
Americas Telecommunications Leader Luis has 19 years experience in the telecoms industry, and has worked with several large telecom groups. Luis is the leader of Ernst & Youngs telecommunications practice for the Americas region.
David McGregor
Asia Pacific Telecommunications Leader David has been with Ernst & Young for over twenty six years and has worked in a number of countries including the UK, USA and Australia. He is the coordinating core assurance partner on Telstra and the telecommunications and media & entertainment leader for Asia Pacific.
Rohit Puri
Director, Global Telecommunications Center Rohit is a Director within Ernst & Youngs Global Telecommunications Center, and currently leads the development and implementation of the Centers strategy. He brings over 12 years of professional services experience focusing on telecoms finance and business strategy.
Bala Balakrishnan
Telecommunications Partner United States
Adrian Baschnonga
Senior Analyst, Global Telecommunications Center Adrian Baschnonga helps produce and deliver thought leadership for the Global Telecommunications Center. He advises clients on strategic issues in the telecommunications sector and is a regular speaker at industry events.
Bala has over 20 years of consulting and industry experience within telecoms and other industries. Bala has assisted several cable and telecommunication companies with the definition and implementation of strategic initiatives, including channel strategy, sales effectiveness, marketing effectiveness and analytics, CRM strategy and implementation, product profitability, and operations effectiveness initiatives.
4 Top 10 risks in telecommunications 2012
Vincent de La Bachelerie
Telecommunications Partner France
Dennis Deutmeyer
Global Telecommunications IFRS Leader
Mark Gregory
Telecommunications Partner United Kingdom
Vincent de La Bachelerie has been involved in the telecommunications sector for 20 years. Vincent has extensive experience working as lead partner on large telecom groups. He has also participated in other projects for telecommunications operators including consulting and advisory work, merger and acquisition projects and valuations.
Dennis has over 24 years experience providing auditing and advisory services to of our largest U.S. telecommunications clients. Dennis is the Global IFRS Leader for the Telecom Sector.
Mark has over 25 years experience in more than 40 countries as an advisor to the telecommunications industry, working in strategy, regulation, cost and pricing analysis and market analyses. In his career he has undertaken engagements for several large telecom groups.
Manesh Patel
Telecommunications Partner India
Michael G. Stoltz
Telecommunications Partner United States
Jeremy Thurbin
Telecommunications Partner France
With over 19 years of experience working with Indian and multinational companies in the telecommunications sector, Manesh Patel currently leads the telecommunications risk advisory services group in India.
With 35 years of experience serving global clients, Mike has extensive experience working as lead partner on large telecom groups. He has also participated in other projects for telecommunications operators, including risk reviews, regulatory, operational assurance and improvement and valuations.
Jeremy is a partner in the Paris Assurance practice experienced in telecoms and media. His experience covers the audit of the 30b French fixed line, internet and mobile operations, the internal control 404 audit, and the international operations. He has extensive experience of internal audit, fraud, internal control and risk management issues within the telecommunications industry.
Pieter Verhees
Telecommunications Partner Netherlands
With over 15 years of experience, Pieter Verhees is currently working with leading fixed and mobile telecom operators, in and outside Europe, delivering and implementing complex projects, including price squeeze methods and models, costing models, cash-flow forecasting capabilities, performance management and regulation.
Sector context
Safe haven positioning threatened by questions over future growth
Telecommunications has weathered the downturn and subsequent economic uncertainty and volatility relatively well compared to many other sectors. As a result, the sector is quite solidly positioned as a defensive safe bet in the eyes of investors (though the mobile segment is slightly more exposed). Looking ahead to future structural trends in the sector, players in Europe and other developed markets are likely to benefit from some easing of the regulations on mobile termination rates, while landline is set to see the pace of its structural decline slow down. More generally, the outlook is positive as smartphone growth opens doors to new opportunities in the sector. But this silver lining comes with a cloud: investors are taking an increasingly ambivalent view of the sector, asking questions about the levels of capital expenditure that will be needed to support future growth. They are also questioning whether operators will take their fair share of future expansion in service revenues, or whether the over-the-top players will once again seize the initiative in monetizing new offerings. Reaping the rewards of a defensive status
Through its history, the telecommunications sector has often demonstrated its robustness in downturns and periods of market uncertainty. The recent past has been no exception. The sector is riding out the economic storms relatively well. For example, as Figure 1 shows, the fluctuations in telecoms revenue growth in Europe have been far smaller than the volatility in European GDP over last three years. This picture is being replicated in other regions across the world, with operators robust defensive positioning generally regarded as being reinforced by strong cash flow and rising dividend yields. In Asia, the high valuation multiples currently being applied to mobile players signal continued confidence in the outlook for the sector. And in North America, investors remain optimistic about the ongoing impacts of increasing smartphone penetration and investment in 4G networks.
% change y/y
6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 01 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11
However, challenges remain. Experience shows that operators revenue performance tends to be linked to employment rates which are trending downward and under threat of an accelerating decline. And of the sectors segments, the stillgrowing mobile segment is the most economically sensitive, having seen its voice volumes fall significantly during 2009 in the wake of the recession.
Operating cash ow margin (%) 25 20 15 10 5 0 Global Americas Asia ex Japan FY 2011 Japan Europe FY 2013 Africa
FY 2012
1Eurostat; Deutsche Bank, European Telcos: The best way to play, 5 September 2011 (reports were sourced from author website unless otherwise noted). 2Macquarie, Global Telecoms, 15 September 2011.
Driven by such cost control measures, operating cash flow metrics are forecast to improve for global operators. Investors are positive on North American telcos due to early investment in 4G and high smartphone penetration, while high valuation multiples in Asia reflect confidence in continued revenue growth. This improving picture, highlighted in Figure 2, both reflects and reinforces the current assessment by investors and analysts that the global telecommunications sector can weather any financial storms that may be ahead.
At the same time, global smartphone shipments continue to escalate at impressive rates, with wireless data growth set to remain strong across all regions although minutes of use (MoU) are flattening in mature markets such as the US.
2008 2009 2010 2011 2012 2013 2014 2015 Mobile connections
Revenue (US$m) 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 2009 2010 2011 2012 2013 2014 2015
Population
Annual smartphone shipments (m) 600 500 400 300 200 100 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011E FY 2012E 0
3Ovum, UNFPA, 2008 Population Revision Database, Ernst & Young analysis; Deutsche Bank, Global Telecommunications, 25 July 2011. 4Ovum Mobile Voice and Data Forecast 2011-2016, January 2012; Cisco Visual Networking Index.
Executive summary
The top 10 business risks for telecoms operators
The top 10
1 2 Failure to shift the business model from minutes to bytes Disengagement from the changing customer mindset
Aggregating our interview responses worldwide, here is a summary of each of the top 10 business risks for telecoms operators.
3 Lack of confidence in return on investment 4 Insufficient information to turn demand into value 5 6 7 Lack of regulatory certainty on new market structures Failure to capitalize on new types of connectivity Poorly formulated M&A and partnership strategy
As value shifts from minutes of usage to volumes of data, operators need to move away from their legacy strategies focused on customer retention, which have had the effect of commoditizing the value of minutes and bandwidth in customers eyes. Instead of concentrating on fighting churn, operators need to target revenues from new services that tap into rising demand and master a wider array of charging models to monetize these services.
With global technology brands now top of mind for consumers, and technology cycles quickening, operators need to understand and respond to fast-changing customer expectations and behaviors if they are to fight off the competitive threat from over-thetop providers. This will require operators to communicate clearly the underlying value of the network and the sources of added value that differentiate their offerings in new service areas. Innovation in the service model could also be used to build brand loyalty in the same way technology players have done.
While operators have proved adept at managing capital investment and balancing it flexibly with free cash flow and dividends, it is increasingly clear that tight capex control can limit their ability to grow new services quickly. So they need to maintain their commitment to investing in growth opportunities, while tracking technology and consumer developments closely to ensure they target their financial investments at the right areas at the right time.
To drive profitable customer propositions and improve their time-to-market for new services, operators need accurate, timely and comprehensive business intelligence and customer analytics, underpinned by aligned and integrated operational support and billing systems. These elements pave the way for efficient growth by enabling operators to produce better business intelligence for decision-making, helping them understand customer changes before their competitors, and allowing them to reuse network data in collaborative partnerships. Better information can also help operators reduce operational costs and ensure regulatory compliance.
Uncertainty over regulators approaches to new market structures is undermining operators willingness to invest. It is increasingly crucial for governments and regulators to adopt pro-investment policies to sustain the sectors momentum and for operators to form workable stances on a range of issues, including the increasing relationship between fixed and mobile policies. At the same time, all these groups must work together to achieve greater clarity over regulatory approaches.
The metrics and key performance indicators (KPIs) that operators use to manage their operations internally and communicate their performance and prospects externally have not kept pace with the shift in business models from minutes to bytes. Many internal metrics are still service- and networkoriented, and do not provide enough granularity to improve the customer experience. Also, commonly used external metrics such as average revenue per user (ARPU) fail to give investors a full picture. Operators urgently need to define a new and different set of metrics that puts the customer first and leads to improved financial performance.
New types of connectivity such as machine-to-machine (M2M) are redefining the concept of connectivity, requiring operators to adopt new strategies. Instead of continuing to think of connections in human terms, operators need to develop new understandings of connectivity and target new growth areas. This will mean identifying core competencies for use in composite value chains and delineating clearly between the need to build capability and the need to partner or outsource.
Customers place more trust in operators than in social networks, regarding operators as security guarantors across a range of services. Yet they still hold operators responsible for threats from third parties even for mobile malware attacks and rogue apps. Operators should work closely with governments to clarify their responsibilities in areas such as anti-terrorism and content for children, and collaborate with suppliers and partners to tackle privacy and security issues in new service areas such as cloud security and mobile apps.
Though M&A activity has accelerated recently, its nature and risks have changed. Footprint control increasingly takes precedence over footprint growth, and political, macroeconomic and regulatory risks are increasing. But acquisitions and partnerships are essential for success in emerging market segments such as mobile advertising and cloud computing. Operators need to clearly discriminate between when they should acquire and when they should partner. The ability to sustain partnerships will emerge as a strategic differentiator. Effective management and implementation of M&A and partnerships offers significant operational upside to telecom players.
Losing ownership of the client was ranked as the telecoms sectors top business risk in 2008 and 2010. Our analysis shows that this risk has now been overtaken by the urgent need to develop and deliver new data-enabled services that will generate fresh revenues from users. And the customer-focused risk of disengagement from the changing customer mindset has slipped to number two, as the ongoing fragmentation of the sector value chain makes it increasingly clear that no single participant can ever truly own the customer. The risk of failing to shift from minutes to bytes reflects the new challenges now facing operators around the world, as a result of aggressive moves by competitors entering from other sectors and rapid change in telecoms established value chains. Pivotal to these changes is the migration of value from charging for minutes of usage to carrying rising volumes of data across networks.
10
Operators are embracing this message, as demonstrated by a raft of announcements in late 2011 of cloud-based unified communications and collaborations services for businesses, often supported by new data center investments. Small and medium-sized businesses are expected to act as early adopters for these cloud-based services, an area where operators are continuing to make good headway. In parallel with these initiatives, operators should seek to master a wider array of charging models, ranging from flat-rate to per-event and ad-supported. And cross-sector growth strategies will require vertical market business models, tailored to the particular sectors a need well served by the low costs and high scalability and configurability of cloud services. All of these changes, in turn, require changes to IT and charging systems.
Landline phone
Mobile phone
Games console
HDTV receiver
HD-ready TV
Smartphone
As we previously noted, there is now very little prospect of any individual participant in the value chain fully owning rather than sharing the customer. So, as well as slipping to second place behind the need to migrate from minutes to bytes, our number one risk in 2010 of losing customer ownership has evolved into the risk of becoming disengaged from the customers changing mindset. This risk is underlined by the extent to which technology brands are now top of mind with customers. As Figure 7 shows, todays top four global brands are all technology players, with the top-ranked operator brand coming in at number six.
Figure 7. Top 10 global brands 20117 Rank 2011 1 2 3 4 5 6 7 8 9 10 Rank 2010 2 20 5 4 1 7 6 10 11 8 Rank 2009 5 27 4 3 1 8 6 10 14 7 Brand Google Apple Microsoft IBM Walmart Vodafone GE Toyota AT&T HSBC Industry group Technology Technology Technology Technology Retail Telecoms Diversified Automotive Telecoms Financial services
Laptop
One of the reasons for this acceleration is that operators fixed and mobile networks are now a platform for access to a wide number of sectors and services, such as television, retail and banking. As this explosion in online/mobile applications gathers pace, disruptive players are leveraging their rising brand values to extend their service propositions. At the same time, devices are playing a pivotal role in shaping the mobile customer experience.
7Brand Finance, Global 100, September 2011. 8Ofcom, Communications market report: UK, 4 August 2011.
11
e-Reader
Ambivalent outcomes
However, tight capex control has ambivalent outcomes and increasingly risks sidelining operators from future growth. External forces such as regulation and customer demand mean operators remain cautious about investing in infrastructure. These same considerations together with uncertainty over new market structures are also contributing to persistent doubts over the revenue potential of new services. As Figure 9 shows, levels of capital intensity remain largely stable worldwide and are now relatively consistent in all regions. Growth-driven capex in emerging markets is falling back from its previous highs, and the release of new spectrum is lagging in some developed markets. Nevertheless, there is a risk that tight capex control can undermine service quality, competitiveness and the growth prospects of new services.
Figure 9. Telecoms capital intensity by region 2008Q2 20119
Fixed and mobile capex/sales (%) 30 25 20 15 10 5 0 2008
2009
2010 Europe
Q2 2011 MEA
North America
In our 2010 report, the risk of ineffective infrastructure investment was ranked in fourth place. This year, the risks around investment have risen to third, while also evolving into a lack of confidence about the level of returns. In the past two years, operators have been quite successful in tackling the challenge of the data deluge on their networks, thanks to a combination of smart investment and growing use of alternatives such as WiFi and offloading to backhaul. These factors, together with operators readiness to flex capex to maintain free cash flows and dividends, have underlined their strong capex control and reinforced their defensive status. There is also a trend toward moving capex spend into opex through outsourcing, in order to smooth capex spend over time.
12
Figure 10. Global high-speed mobile connections10 Connections split by technology (000) 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2009 2010 2011 2012 2013 2014 2015 2016
Not having all these elements in place threatens operators efforts to increase time-to-market and build customer-centricity. It can also undermine the potential returns on their ongoing investments. This risk relates to the inappropriate systems and processes that ranked eighth on our list in 2010. However, the issue now is both more holistic and more pressing.
Added urgency
The requirement to ensure the right systems and processes are in place is being given added urgency by a widening gap between what operators know they need to do and what they are achieving. As Figure 11 shows, they agree that time-to-market is increasingly important. Yet operators time-to-market for new services has not improved in the last two years, and the percentage of operators that can bring products to market quickly has actually fallen since 2008. As technology and product life cycles shorten, this represents a growing risk especially since disruptive market entrants are repurposing customer data dynamically for new services. In contrast, operators are struggling to repurpose their information assets, due largely to patchworks of legacy systems that hold fragmented customer and network information, and a lack of real-time analytics to build a single view of the customer across multiple devices and territories.
Figure 11. Time-to-market telco perceptions and performance11
% service providers that say time-to-market is very important to remaining competitive
WCDMA HSPA
This is a complex task. It requires confronting challenges such as uncertainties in supply and demand amid factors such as spectrum releases, soaring usage of high-bandwidth applications and shifting market structures as network sharing and consolidation continue to gain ground. Also, many operators have multi-technology strategies and fail to fully understand the complementarities and optimization factors between them. Operators need to tackle all these challenges while continuing to invest in network infrastructure. All too often, their capex planning is driven by a focus on protecting cash flow or by pressure to build out greater bandwidth capacity even though the business case remains ambiguous, thus limiting the future revenue and margin potential of new services. These drivers for capex planning should change, for several reasons. For example, industrial policies in many markets will require substantial increases in super-fast broadband coverage over the years to 2020. Also, customers in all segments and markets are increasingly concerned about network quality.
2011
70
2008 50 55
59 60 65 70 75
As operators undertake the shift from minutes to bytes and seek to justify continued investment in new infrastructure and services, information becomes increasingly vital to their ability to create value. To drive profitable customer propositions, companies need accurate, timely and comprehensive business intelligence and customer analytics, underpinned by the right operational support and billing systems.
2011
65
2008 50 55 60 65
67 70 75
10Ovum, Mobile Regional and Country Forecast: 201116, July 2011. 11Amdocs, Amdocs survey: time to market grows in importance, 14 April 2011 (125 senior sector executives).
13
As new market structures emerge, the regulatory approach to these evolving sector ecosystems remains unclear. Consequently, policy challenges are undermining operators willingness to invest. This means that 2010s third-placed risk of rising regulatory pressure has now narrowed into this years more specific risk factor and that it is increasingly crucial for governments and regulators to adopt pro-investment policies to sustain the sectors momentum.
Shifting standpoints
The challenges and uncertainties around the policy approaches to new market structures include shifting regulatory standpoints on wholesale broadband access pricing, and the trend toward imposing network separation as a pro-competition tool in super-fast broadband. Going forward, new spectrum releases will shape 4G market structures and the rules vary from market to market in areas such as spectrum caps and trading. In new and emerging areas such as mobile money, regulatory jurisdictions and policies continue to lag behind the technology a challenge compounded by the broadband as a human right lobby. On top of these uncertainties, there is continued regulatory pressure on legacy parts of the business, such as MTRs and roaming. In combination, these issues have pushed regulatory frameworks to the top of the list of challenges facing ISPs (see Figure 13). And in tough fiscal conditions, operators know that telecoms can be a rich source of government taxation as well as a focus for government investment.
Figure 13. Survey: challenges facing ISPs12
Q. What is the key issue facing ISPs over the next ve years? Regulatory frameworks Return on investment Launching new services Access to capital 0 15 20 40 60 % respondents 24 20 41
Improved time-to-market
12Ernst & Young/ITU Telecom World poll, November 2011 (85 online respondents).
14
Seeking certainty
These factors are creating an urgent need for greater regulatory certainty and, alongside greater clarity and consistency from regulators, achieving this will require operators to engage with a wider set of stakeholders. Consolidation in markets worldwide will continue to impact pricing and investment, and the need to fund next generation access and spectrum releases (see Figure 14 for European examples) will require broad market consensus on the regulatory position. And overarching questions remain about the impact of the net neutrality agenda across the whole of the technology, media and telecoms ecosystem. To engage effectively on these areas of uncertainty, operators need to form workable sector stances on a range of issues. These include the increasing relationship between fixed and mobile policies for example, in the regulatory approaches in adjacent markets (e.g., financial services) traffic management of data services and the drive to increase broadband coverage in rural areas.
Figure 14. European 800 MHz spectrum auctions13 Date Country MHz Total price (m) Italy 60 Price/ Notes MHz/ pop Spectrum won by two of three existing network owners; simultaneous 1800MHz and 2600MHz auction 900/1800/2600MHz auctions also took place in mid-2011; further 900MHz spectrum to be released in Q4 2012E All three network owners won spectrum; 1800MHz auction took place in Oct 11 two of three network owners won spectrum in first round Three of four network owners won spectrum; 1800/2600MHz spectrum awarded at same time to all network owners (total price 445m)
This new risk, which has come straight into our top 10, springs from the fact that new types of connectivity notably M2M links require new types of strategies. As M2M takes off in various vertical markets (see Figure 15), the very concept of connectivity is rapidly being fundamentally redefined.
Sep 11
2,962 0.82
Jul 11
Spain
60
1,205 0.47
Mar 11
Sweden
60
228
0.42
May 10 Germany 60
3,600 0.73
13Ernst & Young research. 14Analysys Mason, Imagine an M2M world with 2.1 billion connected things, January 2011.
15
Across the global telecoms sector, the rationale for consolidation remains strong and partnership structures are gaining ground by offering new routes to growth. At the same time, the role and dynamics of M&A are changing, and operators are adapting their strategies to reflect these shifts. These developments have seen this risk rise two places from ninth in 2010.
Target segments
Utilities, fleet management, security, health care, consumer electronics Home security, resource management, smart metering and grid, telematics, logistics, retail Environmental monitoring, remote maintenance and control, tracking, health care, metering, automotive telematics and fleet management
Deutsche Telekom
Vodafone
Automated SIM pre- and post-paid provisioning; policy management; API integration with customer systems
Deal value
# of deals
16
The changing risk landscape creates increasing uncertainty over deal valuations and prompts greater board scrutiny and stakeholder caution (see Figure 18). Meanwhile, the changing nature of M&A deals reflects the fact that footprint control is now more important than footprint growth for some players. Also, shifts in the value chain are heralding new M&A trends, such as the creation of joint tower management entities. Under these circumstances, acquisitions and partnerships in emerging market segments remain important. In the cloud space, 2011 saw the launch of a raft of new services supported and enabled by a diverse range of acquisitions, partnerships and investments.
Figure 18. Deal factors in telecoms17 Q. Which of the following factors have increased/decreased over the last six months? Price expectation gaps Regulatory pressures Board/audit committee scrutiny Competition for assets Stakeholder caution Decreased -7% -4% -4% -7% -7% Increased 39% 69% 46% 61% 45% 46%
17
and externally
External stakeholders such as investment analysts are currently trying to gauge the value of telecoms companies by reviewing revenue, ARPU and basic subscriber growth numbers that fail to provide a full picture of a sector moving from a high-growth to a pure investment-yield story. Legacy penetration rates fail to give a clear view of the addressable market for new services, and reliable metrics for new growth segments such as mobile apps and advertising are lacking. One critical issue is that analysts are not generally focusing on or gaining access to the types of cost- and investment-related metrics that can point to how operators can become more effective at converting investment dollars into profitability. Financial metrics such as return on invested capital (ROIC) offer greater insight than EBITDA as a way to measure and communicate intrinsic value.
In combination, operators internal requirement for information to turn demand into value, and their need to sustain confidence among investors and other external stakeholders, are driving a further sector imperative: an urgent demand for fresh ways to measure and communicate financial progress through a new and different set of KPIs.
Rationale
Measures efficiency to utilize the capital invested to generate returns Indicates the efficiency and profitability of the telcos capital investments RGU per sub describes the average number of services taken subscribers, reflecting bundle take-up Share of the TV market helps communicate IPTV strategies
transmitted utilization
Revenue market
share
M2M connections Mobile payment users Smartphone take-up App store revenue
18
The new KPIs for this environment will need to include metrics such as revenue generating units (RGUs) per customer and segment market shares and track the penetration of new services into the installed base. They will also have greater sensitivity to households and existing coverage areas, provide deeper insights into network utilization patterns such as urban versus non-urban traffic, and delve deeper into customers smartphone behaviors. Additional internal operational metrics will also help operators improve the customer experience, with more insights into quality of experience, and KPIs built on aggregated data drawn from a variety of systems and processes, such as service configuration, billing and customer care.
Unexpected items on bill SMS text phishing Unsolicited messages/spam Malware/viruses Rogue apps that can steal data/spy 0% Carriers Content/app provider 55 54 46 36
74 8 7 11 10 50%
6 9 11 15 18 23 37 22 21 20 17 100%
This risk area has risen by one place since 2010, reflecting the conflicting pressures that operators face. On the one hand, operators are widely regarded by customers and business partners as security guarantors across a range of services. On the other, they have to try to fulfill this role while coping with an array of threats that are expanding rapidly in number and severity. The challenges are compounded by rising concerns among customers. As mobile phones evolve into personal data hubs, end users are facing privacy and security dangers that are escalating and multiplying, as threats converge from a range of environments, including SMS, cloud, Web 2.0 and mobile apps. As a result, customers are now as concerned about data integrity as call quality (see Figure 21).
A recent survey by Futuresight for the GSMA highlighted privacy issues. The survey showed that a large majority of mobile users in developed markets feel uncomfortable with personal data being collected and repurposed by applications or shared with third parties for promotional purposes. It also found that four out of five end users believe safeguarding their personal information is very important, with customers voicing concern about areas such as targeted advertising, location-based services and third-party information-sharing.
19Adaptive Mobile, Mobile Trust & Security Barometer US, September 2011 (survey consists of online interviews with 2,000 smartphone users).
19
Timing of implementation
Regulatory issues
Group New unit established to drive Industrial operational efficiency, crossDevelopment market streamlining and other synergies Sep 11 Telefonica Telefonica Digital Headquartered in London, with 2,500 employees from Global Services unit, Jajah, Telefonica R + D among others New operating unit designed to leverage economies of scale and drive transformation into fully global company Merger of existing sales and retail customer service
Global Resources
Jul 11
Telstra
Applications Created to spearhead investment and Ventures in new and emerging broadband businesses
20
Segment-based
Consumer Enterprise Wholesale Fixed
Product-based
Mobile Other
Function-based
Finance HR Operations
Geography-based
Domestic Regional Intl
21
The top 10
1 2 Failure to shift the business model from minutes to bytes Disengagement from the changing customer mindset
In addition to identifying the top risks, we also asked our telecoms commentators to identify risks that sit directly below the radar, and which may rise up the agenda in years to come. The four risks they highlighted are split evenly between the categories of compliance, operations, financial and strategic.
3 Lack of confidence in return on investment 4 Insufficient information to turn demand into value 5 6 7 Lack of regulatory certainty on new market structures Failure to capitalize on new types of connectivity Poorly formulated M&A and partnership strategy
10 Lack of organizational flexibility 11 Evolving service cannibalization scenarios 12 A more pressing green agenda 13 Concentration of equipment vendors 14 Difficulties in managing debt and cash
22
Fi n
l cia an
Lack of regulatory certainty on new market structures Lack of confidence in return on investment Failure to shift the business model from minutes to bytes
Co m pl
e nc ia
Disengagement from the changing customer mindset Failure to capitalize on new types of connectivity
Insufficient information to turn demand into value Poorly formulated M&A and strategic partnerships
eg ic
e Op
23
ra tio ns
t ra St
24
25