Operators dilemma the fourth wave chetan sharma consulting

2012

OPERATOR’S DILEMMA
(AND OPPORTUNITY):
TH
THE 4 WAVE
CHETAN SHARMA

A MOBILE FUTURE FORWARD RESEARCH PAPER

OPERATOR’S DILEMMA (AND OPPORTUNITY): THE 4TH WAVE

Table of Contents

Introduction ........................................................................................................................ 6
Global Mobile Operator Growth – The Last 10 years ......................................................... 8
Revenue growth curves .................................................................................................... 8
First Revenue Curve – Voice ........................................................................................... 9
Second Revenue Curve – Messaging .............................................................................. 11
Third Revenue Curve – Access ...................................................................................... 14
The Mobile 3.0 era ............................................................................................................ 18
What is the 4th Curve? ....................................................................................................... 20
Why the 4th Curve is different? ......................................................................................... 22
Mobile Operator Strategy and implications for the ecosystem ........................................ 26
Delay the decline ............................................................................................................ 26
Extend the peak ............................................................................................................. 26
Invest in the 4th curve .................................................................................................... 26
The Impact of 4th Curve on Operator Financials .............................................................. 27
Investing in the 4th Curve .................................................................................................. 29
Utility players ................................................................................................................. 29
Enablers ......................................................................................................................... 30
Digital Lifestyle Solution Providers or Enabler+ .......................................................... 30
How can Operators become Digital Lifestyle Solution Providers? .................................. 31
Customer vs. User .......................................................................................................... 31
Save the customer relationship ..................................................................................... 31
Use privacy/security as competitive advantage ............................................................ 31
Separate the 4th curve organization from the mothership ............................................ 32
Change the DNA............................................................................................................. 32
Portfolio management – fail often and cheap. Embrace Beta launch .......................... 32
Collaboration.................................................................................................................. 33
Standards vs. Proprietary .............................................................................................. 33
Build Advocates.............................................................................................................. 34
How Operators See the 4th Curve? .................................................................................... 36
Tier-2 Operators on the 4th Curve ................................................................................. 38
Case Studies of Transformed Operators ........................................................................... 40
AT&T .............................................................................................................................. 40
Telefonica ....................................................................................................................... 41
Implications of the 4th wave .............................................................................................. 43
Who will capture the profits? ........................................................................................ 43

2 Introduction | www.mobilefutureforward.com
© Copyright 2012, All Rights Reserved. Use without permission is strictly prohibited.


The Need for New operating models ............................................................................. 44
Implications on the Ecosystem ...................................................................................... 47
Competition and Operator Consolidation ..................................................................... 47
New Revenue Models ..................................................................................................... 48
New Joint Venture Models ............................................................................................ 48
New Business Models .................................................................................................... 48
Regulatory Rethink ........................................................................................................ 49
Conclusions ....................................................................................................................... 50
Acknowledgements ........................................................................................................... 51
About Mobile Future Forward .......................................................................................... 52
Mobile Future Forward Publishing ................................................................................... 53
Papers ............................................................................................................................. 53
Books .............................................................................................................................. 53
About Chetan Sharma Consulting .................................................................................... 54
About the Author ............................................................................................................... 54



Disclaimer

Chetan Sharma Consulting is one of the most trusted advisory firms in the global mobile
industry. This research document presents some in-depth analysis about the future of
the mobile industry. However, the author or the company assumes no liability
whatsoever.

This paper is part of the Mobile Future Forward Research Paper Series. For past papers
and books, please see http://www.mobilefutureforward.com

Any use or reprint of the material discussed in the paper without prior permission is
strictly prohibited.



When winds of change blows, some build walls while others build windmills
– Old Chinese Proverb.



Introduction
In 2012, the global mobile industry revenue will hit $1.5 trillion.1 This revenue has
tripled in the last 10 years. Mobile operator’s revenue reached a new milestone at the
end of 2011. The total global mobile operator revenue exceeded $1 trillion for the first
time. The operator profits have more than doubled in the last 10 years. The trifecta of
fast broadband networks, well-designed mobile computing devices, and the insatiable
supply of content, applications, and services has unleashed consumer demand for more
like never before. If we look at the history of the mobile industry, the first generation
was primarily focused on voice and this era persisted for a good 10-15 years before 2G
messaging and very basic data services were introduced. A decade later, data services
started to become more interesting as 3G networks enabled faster access speeds and
new applications. When Apple released iPhone in 2007, followed by Google’s Android in
2008, the industry was turned on its head. While the implications were apparent at the
time, the far-reaching impact of these new devices on how people work and live is still
unraveling.

The changing face of the industry also impacted the business models, the revenue
streams, and the value chain power structure. For much of the last three decades, voice
has dominated the revenue streams for almost all operators. However, in 2013, voice
revenues will fall below the 60% threshold globally. The drop in voice revenues has been
compensated by the rise of messaging revenues and the data revenues. However, some
nations and operators have started to experience declines in messaging revenues. The
access revenue stream is still very much a growth story and is rising fast for almost all
the operators.

We studied the revenue growth patterns for 65 leading operators in 30 major global
markets to understand when the revenue in certain segments rise, stagnate and fall. The
underlying data yields some interesting and consistent patterns that are instructive on
how things might shape up over the course of the next decade.

The sigmoid or the S-curve growth has been well understood and applied to various
disciplines. To understand the various revenue growth curves, we segmented the
operator revenues by voice, messaging, and access and correlated them with
subscription growth. In a majority of the cases, as the subscriber penetration
approaches 70-90% band in a given segment, the Net-Revenue starts to hit its peak,
stagnates for a bit and declines. The amount of time the revenue curve stays in the
stagnation phase depends on the market competitive dynamics and usage profile of the
subscribers in a given country.

The first revenue curve of voice is already in decline for majority of the developed
markets like the US, Japan, and Western Europe. The second revenue curve of
messaging is on the decline in some nations like the Philippines, Netherlands, Taiwan,
Spain, and Italy while approaching saturation in countries such as the UK, France, and
1
State of the Global Mobile Industry, Chetan Sharma Consulting, 2012


the US. Both these curves are on the rise in developing countries, which are still in the
subscriber growth phase. The third revenue curve of access is in the growth mode
around the world for all nations; however, the margin pressure on this revenue base is
the strongest of the three as the operators rush to meet the growing data demand that is
doubling every year in most major markets. We are likely to see the growth continue for
the next 3-4 years before this curve also starts approaching its peak. At this stage, all
three revenue curves will be in decline. This means that the net revenue for some of the
operators and for some nations will start to go down, in some cases precipitously. This
will happen to operators around the world at different time intervals, unless the fourth
revenue curve2 starts to take shape in the near term to help cushion the decline.

The growth of revenue in this fourth curve will be critical. For some operators, a weak
fourth curve will be fatal. They won’t be able to arrest the fall in the overall net revenue
and investor pressure will force them to consolidate or learn to live with lower margins
or go out of business.

As such, it is important to understand the importance of the fourth curve and formulate
strategies that extend the lifetime of the previous three curves such that net revenues
and net profitability stay healthy over the course of this decade. The most interesting
dynamics of this fourth curve is that other racers are not only the fellow operators but
some new well-funded service and application providers. They are using new gear, are
not constrained by the same rules, can change gears at will, and are ruthless in their
execution. All this renders the traditional telecom organizational structure and the way
of life - obsolete.

Based on the strategy chosen, the operators will likely fall into three major buckets:
access only, enabler, and digital lifestyle solution providers. The operator might play all
three roles depending on the vertical in a given country. However, without playing a
significant role in the latter two categories, operator revenues over the long haul will
start to resemble those of utilities – billions of dollars in revenue but the margins might
shrink to 8-12% from the current 30-40%.

The next 2-5 years will be critical for operators worldwide. The strategies they pursue
and the investments they make will define their future existence for the coming decade.
Operators who are investing heavily in the 4th curve have a good shot at seeing the end
of the decade but a good many will succumb to the powers of the growth curves, leading
to consolidation in almost all markets or they will gradually morph from operators to
utility providers. Many will be caught unawares by the shifting sands of revenue and
their inability to mutate to compete effectively in the IP world.

Operator’s dilemma – The 4th wave analyzes the four mobile revenue curves in detail
and discusses the strategies needed to increase the net revenue and the investment areas
that can lead to new revenue and healthier margins for operators around the world.

2
Curve and wave are used interchangeably throughout the paper but refer to the same concept


Global Mobile Operator Growth – The Last 10 years
Revenue growth curves

The use of S-curve or the sigmoid curve to explain the growth patterns of markets is well
understood across markets. The simple observation is that after slow growth, as the
technology or the market reaches a critical mass, the growth accelerates. After a certain
high percentage of the consumers start using the service or the technology, growth starts
to slow down, reaches saturation and then starts to decline depending on how fast the
substitution effect takes place. This model can be used to explain the growth of
individual products, companies, markets, and global industries.

Revenue Growth Curves
Net Revenue

0-25% 25-70% 70-90% 90%+

© Chetan Sharma Consulting, 2012

Subscriber Penetration
Figure 1. Revenue Growth Curve in Mobile

For the purposes of this paper, we apply the S-curve model to the operator revenues in
various countries to understand the growth patterns of various revenue curves and what
they tell us about what might be in store in the future.

A typical revenue growth curve in the mobile industry is shown in figure 1. One of the
observations is that if we look at the individual growth curves of voice, messaging, and
access – the three main categories of revenue generation for the operators worldwide,
they seem to exhibit the same characteristics. The rise is slow when the subscriber
penetration is below 25% and then it picks up until the subscriber penetration reaches
the 70-90% penetration band. Then it starts to flatten and decline. As to which end of
the 70-90% band the given revenue curve attains its peak and starts the decline really
depends on the factors relevant to the individual country and individual operator. These
8 Global Mobile Operator Growth – The Last 10 years | www.mobilefutureforward.com


are generally dependent on the maturity of the market, the economic and political
conditions of the market, the regulatory regimes, the competitive forces that are at play
in the market, and the availability of substitute solutions.

In the subsequent sections, we will delve into each of the major revenue curves and
discuss the nature of growth and decline in various countries.

First Revenue Curve – Voice

The first cellular market started in Japan in 1979 and gradually all markets launched
cellular services over the course of the next 25 years. For much of this time, the primary
revenue growth driver was voice. As such, the markets that started early also reached
saturation early. For example, while the cellular market in India was just coming out of
its cocoon in 2003, Japanese voice revenues already peaked and started declining. Next,
many countries in Europe followed. Perhaps, as the precursor to the 2008 financial
meltdown, the voice revenues in many European nations peaked in 2007 and started
declining. Obviously, the micro-revenue environment was a bit different depending on
how each individual operator was doing but typically, the number 3 and 4 operator in a
given country peaked first in voice revenues and the decline began. In the US, the voice
revenues of Sprint and T-Mobile USA started declining in 2007, which led to the overall
voice revenues in the US market to retreat even though Verizon and AT&T – the top two
operators by overall revenues and total subscribers still had growing voice revenues. In
fact, they haven’t peaked yet as of the writing of this paper.

Voice Revenue Growth Curves

Finland Italy Greece
Sweden
France Germany
Netherlands US
Spain UK Austria
India
Net Revenue

Russia China Japan
Indonesia
Mexico

0-25% 25-70% 70-90% 90%+


Figure 2. Mobile Voice Revenue Growth Curves



Figure 2 shows the position of various markets on the voice revenue growth curve.
Figure 3 shows the trends in mobile voice revenues in some of the leading western
mobile markets.

The voice revenues in emerging markets of Russia, China, India, Indonesia, Mexico, and
many others are still increasing as the subscriber penetration hasn’t hit the 70-90%
band yet.

Figure 3. Mobile Voice Revenue Growth Curves for Spain, Germany, Japan, US, France,
UK



Second Revenue Curve – Messaging

The first SMS was sent in 1991 in Europe and even though SMS wasn’t intended to be a
consumer service, it ended up being the second big revenue generation category for the
operator for much of the 1990s and 2000s. In fact, in some of the emerging markets,
messaging is still the second biggest revenue generation category after voice. SMS has
been a tremendous success story for the wireless industry. With trillions of messages
being sent every year, in 2011, the total messaging revenues exceeded $200 billion
dollars. Both the number of messages and the total global messaging revenues are
expected to increase for the next 5 years. However, some subtle shifts started to appear
in 2011. Just like VoIP had started to eat into the operator voice revenues, IP messaging
started to make a noticeable impact on the operator revenues in some countries.
Operators in Spain, Netherlands, Taiwan, and Philippines were among first to feel the
brunt of IP messaging (figures 4 and 5) and the impact on what had been cash cow for
the operators. The impact on the network was negligible, but the margins were
astronomical.

The use of IP messaging was a function of slowing economy in Europe and the price-
conscious markets of Asia. In 2011, KPN the biggest Dutch operator started to publicly
make noise about the impact of players like Whatsapp on their messaging revenue. It
forced them to acknowledge in their quarterly earnings call, the impact it was having on
their overall financials. The Android and iPhone customers were using Whatsapp in
large numbers. Over 90% of such subscribers preferred IP messaging. Hence, they were
looking for a cheaper alternative to operator messaging.

Other operators are starting to see the same impact in 2011 and into 2012. Some of these
undercurrents were masked by the sizable messaging traffic and revenues but the shift is
apparent. Figure 6 shows the status of various leading mobile markets on the messaging
revenue growth curve.



Figure 4. Mobile Messaging Usage Growth Curves for Operators in Spain

Figure 5. Mobile Messaging Revenue curve for operators in Taiwan

The shift and decline in messaging wasn’t really a surprise. The SMS platform hasn’t
really evolved much in the last two decades. While the application of SMS to different
services and verticals grew, the basic nature of messaging largely stayed the same. Once


the fast 3G/4G networks were in place complimented by industry changing devices, the
stage was set for disruption in the messaging space. Even before Whatsapp, Voxer, and
Viber, the likes of Blackberry Messenger and Skype, had started the phenomenon in the
developing nations where consumers are price sensitive and creative in minimizing their
tariffs. That some of the operators were caught by surprise and didn’t anticipate the shift
points to the fundamental flaw in the DNA of some.

Messaging Revenue Growth Curves

Finland Italy Germany
Sweden
US France
Austria UK
Philippines
Spain
Canada Netherlands
Net Revenue

Taiwan
India China
Russia
Mexico

0-25% 25-70% 70-90% 90%+


Figure 6. Mobile Messaging Revenue Growth Curves

In the next 2-4 quarters, the markets of US, Finland, Sweden, France, and Italy will join
the ranks of declining messaging revenues.

Even in China, which is still considered a growth market, China Mobile, world’s biggest
operator by revenue and subscribers started to see its messaging revenue decline (figure
7). In fact, mobile apps and VAS commanded the highest share in 2011 from the mobile
data revenues.



Figure 7. China Mobile – Mobile data segment trends

Third Revenue Curve – Access

The mobile data technologies have been around since the mid-nineties with CDPD,
TACS, NMT, GPRS, EDGE and others, the market for mobile data didn’t really grow
until Apple showed up to the party with a device called the iPhone. The only exceptions
were the markets of Japan and Korea where consumers were using all sorts of data
services but primarily on the enhanced feature phones which behaved like the
smartphones.

The advent of the iPhone coincided with and to some extent accelerated the deployment
of the fast 3G networks. AT&T signed a bold deal with Apple to carry the device
exclusively in the US market. Many other leading operators did the same in other
markets. Most of the operators were not prepared for what was to come – a data
tsunami. Many of the operators immediately realized that the unlimited plans are going
to crush their financials and they quickly retreated to the tiered plans.

AT&T gave up on the unlimited plans 3 years after the launch. During this time period,
the operator sustained the most incredible wave of data growth witnessed in human
history. From 1 PB/month traffic in 2007, the data traffic grew 25000% to 35 PB/month



by Q1 2012.3 AT&T rushed to beef up its network and the backhaul. The experience at
AT&T helped other operators prepare their network when iPhone came to their network.
Android started to show the same data consumption characteristics as the iPhone by
2010.

While the investments to keep up with the data demand increased the CAPEX and
OPEX for the operators worldwide, they were able to sustain such an investment only
because the revenues from such traffic was delightfully growing at astronomical rate as
well. AT&T’s data revenue grew from $689M in 2004 to $22,000M in 2011, a 30x
increase. Other operators have seen similar hockey stick curves.

Access Revenue Growth Curves
Net Revenue

UK
Japan
US
Sweden
Finland
Germany
0-25% Netherlands
25-70% 70-90% 90%+
Spain
Indonesia Greece France
Mexico Austria China
India Italy © Chetan Sharma Consulting, 2012
Russia

Figure 8. Mobile Access Revenue Growth Curves

We are very much in the growth cycle of the access curve. In most of the major markets,
the smartphone penetration (which is a proxy for high-data usage) is still below 50%.
Markets like Hong Kong, Singapore, and Australia have already exceeded the 50%
threshold and big markets like the US are fast approaching it and will cross the
milestone in 2012.

The role of access revenues to the overall health of the mobile operators can’t be
overstated. The growth of the access curve helped compensate for the declines in voice
and messaging revenues. For example, in the US, the voice revenues declined $12B from
2007 to 2011. During the same time, the data revenues increased by $41B, easily
compensating for the decline. In Japan, the voice revenues declined by $3B but the data
revenues increased by $25B from 2007 to 2011.

3
Source: Chetan Sharma Consulting, 2012


Figure 9. US Mobile Operators Revenue Microtrends

As a result of the data tsunami, there are two types of opportunities that are being
created, one that takes advantage of the data being generated in a way that enhances the
user experience and provides value and the other in technologies that helps manage the
traffic data that will continue to grow exponentially.

To be able to stay ahead of the demand, significant planning needs to go into deal with
the bits and bytes that are already exploding. New technical and business solutions will
be needed to manage the growth and profit from the services. Relying on only one
solution won’t be an effective strategy to manage rising data demand. A holistic
approach to managing data traffic is needed.4 Our analysis shows that the cost
structure can be reduced by more than half if a suite of solutions are deployed versus a
single dimensional approach. This bringing the hockey stick curves of data cost more in
line with the revenues, thus preserving the margins.

The decision making process within the operator organizations will need to be
streamlined as well. Operators should also consider creating a senior post which focuses
on both the cost side and the solution side so they can devise and institute a sustainable
long-term policy and keep the margins healthy.
4
For a detailed discussion of the topic, please read, Managing Growth and Profits in the Yottabyte Era, Second
Edition, Chetan Sharma Consulting, http://chetansharma.com/yottabyteera2.htm


Figure 10. US Mobile Revenue Growth 1995-2011

As the industry enjoys the ride on the access curve, there are two important questions
that need to be answered:

a) When will the access curve start hitting its peak; and
b) What’s the 4th curve that will help compensate for the declines in the first three
curves?

How operators understand, react, and strategize on these questions will help define
their fortunes for the next decade. The ones that are late at acknowledging the inevitable
decline of the access curve and delay the investment into the 4th curve might find
themselves consumed by the powerful forces of the competitive markets and some
relegated to the dustbin of mobile history.



The Mobile 3.0 era
Clearly, we are living in a data-driven mobile era. Sooner or later, most operators’
revenues will be derived from data services, whether it is age-old SMS, access, or next
generation communications or value added services. In Japan, in Q1 2012, Softbank’s
data services contributed to over 65% of the overall revenues. The other two operators –
NTT DoCoMo and KDDI were at the 60% mark. It is safe to assume that all the three
operators will have more than 80% of their revenues come from data services by 2013.

Figure 11. Mobile Internet 3.0 – Leading global mobile operators

The Mobile Internet 3.05 is defined by the cloud-enabled, software driven, IP-centric,
high-speed 4G+ networks; consumers using multiple connected devices; flattened value-
chains; and operators relying on mobile data services for majority of their revenues.
Mobile data growth in this stage is expounded by the ever growing ecosystem of
developers, new data services, and the transition of the legacy network framework into
the network as a platform with monetizable open APIs that empower the ecosystem to
build compelling experiences and applications. Mobile Internet 3.0 combines the

5
For a full treatment of the subject, please read Mobile Internet 3.0, How operators can become service
innovators and drive profitability, Chetan Sharma Consulting, 2012
18 The Mobile 3.0 era | www.mobilefutureforward.com


openness of the core network with the ubiquity of the billions of IP nodes to create
compelling intelligent user experiences that delight consumers.

The growth in mobile data services is more pronounced in the western markets with the
developing markets following their lead. In China, even though the mobile data market
is just evolving, data contributes to approximately 35% of the overall revenues. All this
growth has enabled the global mobile data revenues to grow 23% in 2011 to $320
billion. Just to put this in perspective, this is more than the revenues generated by
music, Hollywood movies, ISP services, and cable services combined.6

The global mobile data revenues contributed over 30%7 to the service revenues.
Messaging continues to be a big revenue generator but its share of the overall data
revenues is gradually declining. Access is becoming a dominant revenue category
especially for the western markets. This trend is even pronounced for the smartphone
users. Consumers are paying $20-30/month for access but it is directly impacting the
messaging revenues for some operators as consumers chose to use social networking
tools to do the bulk of their messaging. Additionally, the VAS8 revenue is also lost as this
revenue moves to the over-the-top (OTT) application providers such as Google,
Facebook and others.

Given that there is constant pressure on the access profits, the issue of declining
margins must be tackled head-on. Mobile operators must look at ways to move beyond
just providing access services and position themselves from being service providers to
becoming service innovators.

6
Source: Chetan Sharma Consulting, 2011-12. Music, movies, ISP, and cable revenues from respective industry
associations.
7
The distribution of mobile data usage and revenues varies depending on the region. For markets like India,
Philippines, Indonesia, China, Russia, Brazil, messaging still accounts for 70-90% of the data revenues. In some of
the western markets like the US, UK, France, Japan, Korea, data access and VAS account for roughly 60-70% of the
data revenues. The overall data revenue is also much higher in the latter markets.
8
VAS stands for Value Added Services like navigation, advertising – services that go beyond access.
19 The Mobile 3.0 era | www.mobilefutureforward.com


What is the 4th Curve?
The 4th curve is not a single entity or a functional block like voice, messaging or access
but is made up dozens of new application areas. Some are not even dreamt up yet. As
such, this portfolio of services requires a different skill-set for both development and
monetization. Some of the services that are already in the market are listed below in
Table 1. Another key difference in the competitive landscape for these services is that the
biggest competitors for these services (depending on the region) might not be another
operator but the Internet players.

Table 1. 4th curve application areas

Application Areas Competitors

Identity, Risk Management Facebook, Google, Twitter, Microsoft, Banks

Commerce Amazon, Ebay, Google, Groupon

Payments Paypal, Startups, Google, Facebook, Visa

User Profile Google, Microsoft, Apple, Twitter, Facebook

Advertising Google, Facebook, Startups, Apple

Cloud Services Amazon, Cisco, Apple, Microsoft, Salesforce

Enterprise SIs, Vertical players

Connected Home Cable Companies, HP, Microsoft, Sony, Apple, ADT

Health Microsoft, Health Care providers

Analytics Google, Microsoft, Facebook, Amazon

For some of these services, the operator might just focus on enabling the ecosystem
while for others they might actively participate in bringing the service to the market. For
example, AT&T is deeply entrenched in the Health space with several key initiatives in
mHealth, TeleHealth, Cloud-based Healthcare, etc. while some of its European
counterparts are more focused on enablement of the health ecosystem. Deutsche
Telekom works closely with BMW for auto services while its US counterpart is less
involved with companies directly but is more focused on getting the developer
ecosystem to take advantage of its network platform.

20 What is the 4th Curve? | www.mobilefutureforward.com


The opening up of the network for innovation necessitates re-architecting the network
elements that can scale with demand and meet the specific requirements of the vertical
and the application. Table 1. lists several growth areas, the likely competitors (beyond
their fellow operators), the market opportunity, the ARPU potential and how the money
will flow into the value-chain. The market penetration indicates the potential for how
much a given solution can be adopted in the next 3-5 years. ARPU refers to the potential
monthly revenue from the customers adopting these solutions. So, for an operator with
10 million subscribers, the risk management solution has the potential to reach 5
million subscribers who pay $1-2 each thus increasing the overall monthly ARPU by
$0.5-1.

Figure 12. The 4th curve opportunities

In some areas, operators will compete head-on with the OTT players such as Google and
Microsoft but in the new complex mobile ecosystem, operators should learn to
collaborate and compete at the same time. In certain areas, like mobile advertising,
financial services, identity management, they should collaborate with their fellow
operators to provide a better front-end to the customer and the vertical industry. When
Google and Facebook can offer 250 million+ customer profiles in the US to the
advertisers, Verizon and AT&T are better off together than working alone.9

9
For a more detailed treatment of this subject, please see, “Mobile Internet 3.0: How Operators Can Become
Service Innovators and Drive Profitability,” Chetan Sharma Consulting, 2012
21 What is the 4th Curve? | www.mobilefutureforward.com


Why the 4th Curve is different?
The investment in the 2nd curve of SMS started in the mid-nineties, almost 10-15 years
before the 1st curve started to peak and decline. Similarly, the investment in the 3rd curve
started to occur in the late nineties, almost 10-12 years before the messaging curves are
approaching saturation and declining. It is safe to assume that the decline in the 3rd
curve will start to happen sometime this decade. The approach to peak and the
subsequent decline will depend on individual operator and the country circumstances,
but it will happen. So, when should the investment in the 4th curve start to occur? The
answer is now and at a much faster pace than the last 3 curves.

The reason is twofold:

a) With each cycle, the length of the curve shrinks, so the access revenue curve will
peak earlier than the previous two curves; and

b) The competitive landscape is quite different for the 4th curve (figure 13) than was
the case for the previous three. One could argue that voice-over-IP (VoIP) players
compete with the voice curve and the IP messaging players compete with the
operator messaging curve but for most of the growth for these two curves,
operators were primarily competing with each other. However, as operators
embark on the 4th curve, the competitive landscape is different from the start. In
addition to worrying about their fellow compatriots, they have to worry about
multiple competitors who can emerge from anywhere.

Also, there is no one single curve but rather a collection of dozens of curves that
in aggregate make the 4th revenue curve. It will require more prudence, more
patience, and more strategic execution to survive and ride the 4th curve.

The 4th curve has different characteristics than the previous three:

a) It is not one single curve but a combination of dozens of smaller
curves.

The previous three curves were quite distinct in their offerings. The investment
required, the type of people that needed to get hired, the product roadmap, the
vendors, and the value chains etc. were well defined over the course of time. The
purpose, the functionality, and expected returns were well understood. For
example, for the voice curve, the goal of the telecom operator was to connect to
end points and provide the best quality possible at the minimum cost.

The business models were driven by economics of the given operator in a given
country. Similarly, the messaging curve was driven by the capability of delivering
messages from one node to another and the entire industry got built around that.
For cellular access and connectivity, again, the functionality over the various

22 Why the 4th Curve is different? | www.mobilefutureforward.com


product roadmaps has been to connect the device to the network and provide the
fastest speed at the lowest cost to the operator. Infrastructure vendor roadmaps
are driven by this basic dictum. The cost to provide higher throughput must go
down in proportion. As such, the migrations from 2G to 3G to 4G have been step
functions to deliver more capacity at a lower cost/bit.

The 4th curve has different characteristics for there is no singular function of the
curve but rather it is made up of multiple mini-curves which vary in the potential,
the lifetime of the growth curve, the type of partners needed to deliver on the
promise of each mini-curve, and operators ability to execute on the promise. On
top of that, ecosystem conditions can be drastically different. For example,
mobile payments, commerce, and remittance are worth hundreds of billions of
dollars but have formidable entrenched incumbents who will fight tooth-and-nail
to protect their turf. Other nascent areas like mobile health face less of a threat
from the incumbents but more from the regulators who are stuck in the
primordial era. Some like advertising involve the Internet heavyweights while
others like Security have only the new entrants and startups to contend with.

Alone, any given mini-curve might not represent as big of an opportunity as the
previous three curves individually, however, collectively; the 4th curve has the
potential of surpassing the previous ones.

b) The barriers of entry are low on the fourth curve.

The past three curves followed a simple formula. Invest heavily in the
infrastructure which included buying spectrum and laying down the
infrastructure. The enormous capital requirements meant that only a few could
play the game. The incumbents had a built-in advantage. New entrants were rare.
The industry grew through consolidation. You want more revenue, then, buy
more subscribers. Over the course of the last 25-30 years, almost all major
markets have whittled down to three main competitors. Yes, there are a number
of MVNOs and smaller regional players. However, in the overall scheme of
things, they don’t really matter. The smaller players provide choice but can hardly
compete with the big boys on the national scale. Regulators have largely been
asleep or incapable of changing this dynamics in most jurisdictions.

c) The Competitive landscape of each of these curves is different
requiring a more agile organization.

In general, operators are large organizations. And large organizations in any
industry fall victim to complacency, politics, in-fighting, analysis-paralysis, risk-
aversion, and bureaucracy. Even tech giants like Microsoft, Cisco, HP, and Yahoo
have fallen victim to the law of large corporations. Given that the operators will
have to invest and fight for their share on multiple fronts on multiple curves, they
need to be nimble. The process of decision making and making bold bets needs to



be efficient and decentralized. They should aim to fail often and fail cheap. That’s
the only way they will be able to compete on the 4th curve.

d) Competition from new entrants starts very early.

It is true that the voice business has been under threat from the VoIP players and
the messaging business is being impacted by the messaging OTT players.
However, the competition from these players started much later in the life of the
curve. It was based on how technology evolved. By the time most of the OTT
players came into the market, voice revenues had already peaked in the western
markets and had started their descent. Messaging revenue only started to get
impacted as the curves were approaching the top plateau. The advent of the OTT
players was primarily possible because of two factors – IP broadband wireless
networks and Apple. Broadband networks allowed for new types of services to be
built and serviced that didn’t require the traditional circuit-switched network.
Apple busted through the operator closed-garden model and the wireless
industry changed forever.

The 4th curve is different. Here the competition starts early and the competitive
forces are furious. In many of the markets like advertising and security services,
the operator will be a new entrant. But, the operator is also in a unique position
where they can provide an end-to-end solution to the customers where they
already have a billing and service relationship.

e) Business models that extend beyond metering are required.

All the first three curves followed the same business models - $X for Y units of
use. $20 for 600 minutes, $10 for 1000 messages, $30 for 3GB, and so on. Of
course, the unlimited model came into being for voice and messaging. But, for
data, the reverse was true. Many operators started from unlimited to boost
demand but soon realized the folly of their judgment and moved back to the
metering model. While unlimited voice and messaging can be sustained,
unlimited data cannot - at least not without a fundamental change in the laws of
physics or economics.

The fourth curve constitutes of multiple curves and product areas that require different
skill set both for management and leaders of the organization as well as developers and
domain experts for various verticals. The incentive structure for the organization and
the people working in that organization should also be different. In fact, changing the
DNA of the company is more important than picking the areas of investment on the 4th
curve.

We will discuss this 4th curve in more detail later in the paper but first, let’s discuss the
implications of the 4th curve on operator strategy.



Net Revenue Revenue Growth Curves

Voice
Access
Messaging
VAS/OTT



Figure 13. The four revenue growth curves

Extend the Peak
Revenue Growth Curves
Delay the Decline Move up the value chain in VAS
Net Revenue

Voice
Digital Lifestyle Solution Provider
Access
Messaging

Enabler

VAS/OTT

Utility


Figure 14. Mobile Operator Strategies: The rise and fall of the 4 Revenue Curves


Mobile Operator Strategy and implications for the ecosystem
Almost all major mobile operators are public companies who have to answer to the
shareholders every quarter. They are measured by the revenue they generate each
quarter and the potential to generate more revenues in the future with existing and new
customers, and existing and new services. Thus, like other publicly-traded companies,
they have to do a delicate dance of managing a declining business while investing in
future growth. We believe that the operator strategies worldwide will be driven
primarily by the key constructs illustrated in figure 14 and described below:

Delay the decline

Both operators who are experiencing declines today and those who are approaching the
growth curve peaks have to figure out strategies to delay the decline of their voice and
messaging curves. This can be achieved by a number of key initiatives that involve a mix
of business models, consumer loyalty, integration of new technologies to reduce churn,
and embracing OTT/VAS services.

Extend the peak

For operators in India and China, who have yet to hit the peaks of their voice and
messaging curves, the strategy is going to be driven by strategies similar to the ones
discussed in the section above. For the access curve, where most operators are still going
to be riding the growth for the next several years, strategies will be driven by
technologies and business models that help manage the cost per bit to enhance the
margins per bit. Operators who are able to manage their margins better will have
significant competitive advantage. The reason Sprint is still able to offer unlimited data
on iPhone and Android devices is because their margins/bit are better than their
competitors.10 A number of operators like Rogers, Vodafone and Verizon have launched
data share plans that allow consumers to bundle multiple device per plan. This will
encourage users to become data users across multiple devices. This form of data pricing
and bundling will help extend the access curve peak in all markets.

Invest in the 4th curve

As we mentioned earlier in the paper, how operators react to the opportunity of the 4th
curve and how they decide to ride this next wave will write their destiny. Depending on
how they choose or are able to invest and compete will define what they will become in
5-10 years. Given that the 4th curve is not a singular curve but a combination of several
mini-curves that have their own profile, growth characteristics, competitive dynamics,
and opportunity landscape, operators will have to manage the 4th curve like an
investment professional would manage an investment portfolio or fund – diversify to
reduce risk and extend growth.

10
Part of the appeal is also in the simplicity of the message which helps in managing the churn.


The Impact of 4th Curve on Operator Financials
In the last 10 years, operator profits have more than doubled. Granular analysis reveals
that European profit growth has been pretty stagnant while growth in North American
and Asian markets fueled much of the profit growth over the last decade (figure 15).
Operators in South America and Africa are starting to make meaningful contribution to
the global profit pool as well.

Figure 15. Mobile Operator profit growth in Europe, North America, China and India

The review of the Debt and EBITDA numbers yield another interesting insight. The
growth in revenue has been fueled by the investments that operators have to make to
keep up with the network demand. As such, many have had to raise significant amounts
of debt. In fact, on average, the debt load has increased approximately 50% over the last
five years. For some like Bharti Airtel, China Mobile, NTT DoCoMo, Telefonica, it has
increased significantly.

If the EBITDA for the company doesn’t grow in proportion to the rising debt, the
company comes under scrutiny and financial pressure. Typically, the average
Debt/EBITDA ratio for global operators stays around 1.4 with Asian operators

27 The Impact of 4th Curve on Operator Financials | www.mobilefutureforward.com


maintaining a lower ratio compared to their North American and European
counterparts (figure 16).

Over the past few years, weak economic conditions in various geographies and pressures
on the first three curves have increased the Debt to EBITDA ratios for some of the
operators. For Deutsche Telekom, the ratio has risen by 22%, for France Telecom 23%,
for Sprint 24%, and for Telefonica 50%.

Figure 16. Debt/EBITDA ratios for global mobile operators

Others like SK Telecom, China Telecom, Softbank, Telenor, and Telstra have been able
to lower their Debt/EBITDA ratios over the same time period.

Operators’ ability to raise debt and invest in new ideas and growth curves rests on the
both the will to invest as well as their current financial condition. When the revenues
stop growing but the debt demands stay high, the ratios start to climb, putting
significant stress on the financial health of the operator. The access curve will inevitably
start to decline at some point in the future for all operators. For some it might be a
couple of years, for others it might take another 5-6 years. To even start to see the
growth on the 4th curve, one has to start investing many years prior. The competitive
landscape on the 4th curve is much more complex so it requires a different kind of
organization to play the game else the rookies will be ousted in no time.

28 The Impact of 4th Curve on Operator Financials | www.mobilefutureforward.com


Investing in the 4th Curve
Based on the strategy and performance of a given operator on the 4th curve, operators
worldwide will typically fall into three major categories:

Utility players

The Darwinian law will be in full display as operators who are unwilling or unable to
compete on the 4th curve see their margins plummet from the declines of the first three
curves and negligible growth on the 4th curve. These will typically be the operators who
are the tier 2/3 operators in a given market. Their revenue profile will very much
resemble that of utility players who generate billions of dollars in revenue but their
margins are in the range of 8-12%. Some of the tier 1 operators might fall in this
category as well.

Figure 17. Revenue and margins of US Electric Utilities

To get a sense of how the financials of companies in this category might look like, one
can study the financials of the utility sector. Figure 17 shows the revenue and margin
trends for US Electric Utilities which show that while the revenues have almost tripled
over the last 30 years, margins have been cut in half. We can expect similar trends for
the utility mobile operators or utility mobile businesses.

29 Investing in the 4th Curve | www.mobilefutureforward.com


Enablers

The next category of operators will invest in technologies that help them become
effective enablers of the larger ecosystem. They provide a robust network, an extensive
set of APIs, and the consumer/network data that powers the most popular consumer
applications and services.

Digital Lifestyle Solution Providers or Enabler+

Mobile operators who are able to transform themselves into digital lifestyle solutions
providers (DLSPs) who go beyond just providing access and devices to their customers
to empower consumers and enterprises with solutions, end-to-end solutions, will reap
greater benefits from the 4th curve. Such operators go beyond just being an enabler of
the ecosystem; they actually launch complete end-to-end solutions in given verticals like
AT&T’s digital life in home automation.

Obviously, any given operator could play a different role on the various mini-curves that
make up the 4th curve. For example, they could be a DLSP when it comes to security
services, and an enabler for the advertising services, and a utility player for the cloud
services. The net performance of any given operator will be measured by how they
perform in aggregate on the 4th curve.

30 | www.mobilefutureforward.com


How can Operators become Digital Lifestyle Solution Providers?
To be an effective and a long-term competitor on the 4th curve, operators have to
become the OTT players themselves. 11 Operators have to become one of them. This
requires innovation, financial muscles, and a ruthless mindset to capture its share from
the value chain.

Customer vs. User

The first step in the journey to becoming a DLSP operator is appreciating that
consumers of the 4th curve are not only going to be the operator’s customers today but
also users across all operators and in all countries. The moment this realization seeps in,
the strategy and business models for the 4th curve change and become much more
interesting. Instead of offering a messaging service to an enterprise customer, the
operator can offer a cross-carrier service and compete at the OTT scale. Instead of just a
few million consumers, they could potentially reach hundreds of millions of consumers.
This realization is absolutely essential for smaller operators who don’t have a 100M+
subscriber base to market their services.

Save the customer relationship

Some operators have resigned to the fact that they can’t really compete with the OTT
players or don’t seem interested in OTT services. After all, the customer is paying a tariff
for the bandwidth they use. However, the key loss in such a scenario is the customer
relationships. Once that’s lost, it is very hard to get it back. If all the customer cares
about is the access, they are unlikely to look to their operator for VAS and other OTT
services in the future. Hence, it is important for the operator to preserve their customer
relationship. If they can’t or don’t want to develop their OTT solutions, they should
partner with the players to offer branded solutions or have joint offerings that makes the
customer develop and maintain brand loyalty with the operator.

Use privacy/security as competitive advantage

Over the past couple of years, the debate over privacy and its role in the continued
evolution of information technology has been reinvigorated. To some extent, the
controversy isn’t new, nor is it surprising. Whenever there’s disruption in the market
and the boundary conditions are tested, there’s going to be consternation.
It’s also clear that if the mobile industry isn’t proactive in addressing consumer privacy
head-on from a technical, business, education and compliance perspective, there will be
a strong push to pressure the government to regulate an opportunity that hasn’t fully
blossomed yet — and in the process, hamper its evolution. Mobile operators are placed
very well in the ecosystem to broker privacy and security between the user and the app
11
Or figure out an effective revenue share model with the OTT players by adding value.
31 How can Operators become Digital Lifestyle Solution Providers? |
www.mobilefutureforward.com


ecosystem. If they play their cards right, they can turn consumer’s trust on privacy and
security as a distinct competitive advantage.

Separate the 4th curve organization from the mothership

It is not like smart people don’t work at the operators or they don’t feel the ecosystem
earthquakes, it is just that the change is difficult, esp. when the company is being
measured on preserving the legacy revenue rather than generating new revenue curves.
Operators are typically large organizations employing thousands of employees which
leads to fiefdoms, tension, and friction. Smart organizations separate 4th curve
organization from the mothership and hire as many Internet employees as possible –
the ones that will go work for Google or Facebook. The umbilical cord can stay but
efforts should be made to shield this unit from the rigors of an organization that has to
report quarterly. However, the group should be held accountable to results perhaps to
even a higher standard and providing business metrics focused on service innovation,
new customer acquisition and growth. A safe operating and testing environment is a fair
exchange for tougher standards.

Change the DNA

Steve Jobs was fond of saying that ―if you don’t cannibalize yourself, someone else will.‖
Operators by nature are risk averse. Talk of cannibalization is not encouraged. They
would rather have competitors eat their lunch than go on a diet to come out fitter and
stronger on the other end. Obviously, not all operators are created equal. Some like
Telefonica, Deutsche Telekom, Orange, and AT&T are creating new divisions and groups
to address the OTT threat and opportunity. But there is significant resistance from the
legacy organizations.

One of the reasons is that the CEOs have to answer to the street quarter after quarter
and the street wants consistency in revenue increases. A good example is messaging,
most of the western operators are seeing decline in messaging volumes/subscribers if
not the net messaging revenues. A good strategy would be to integrate SMS and IP
messaging into a single client on every single device that operators have control over.
They should work with the OEMs to implement and execute on the strategy. Apple with
iMessage is already doing it without the user even realizing it so why not the operators
who are in the best position to do it in the first place? Yet, the legacy organizations
appear frozen to that possibility. Perhaps the integration will come soon but it should be
here and now.

Portfolio management – fail often and cheap. Embrace Beta launch

Operators are used to launching perfect services. They want to dot all the i’s and cross
all the t’s. They want to ensure that services are tested perfectly, the business model
ironed out; the marketing machine is in place before any offering hits the market.



However, the 4th curve requires different operating principles. Though the quality of
products and services still needs to be paramount, they must embrace the concept of the
―beta launch‖ - something that the Internet world lives by. The 4th curve business model
doesn’t require everything to be perfected at launch but rather its functionality and
roadmap iterated based on user feedback.

Traditionally, operators have missed out on lucrative opportunities because they were
late to the party. Location, search, consumer cloud services, advertising, and others are
classic examples where operators had the expertise and the technology much before the
Internet players came to the scene, yet, never paid much attention. Now there are multi-
billion dollar opportunities being harnessed by the Internet players.

Moreover, the multitude of the curves that constitutes the 4th curve demands that the
investments be managed like a professional portfolio. Operators mustn’t act like a
subprime mortgage bond trader who had no clue of what he was doing, but rather an
experienced portfolio manager who can weigh the risks and have the perseverance to see
the vision through fruition.

Collaboration

As we have alluded to earlier, the competitive landscape is quite different on the 4th
curve. Instead of just 3-5 operators, the new landscape has dozens if not scores of
formidable opponents. The operator community collaborated well to bring GSM and
SMS to the market but the track record on collaboration on applications and services
has been abysmal in most countries. There are some good case studies in Portugal where
operators are collaborating on an advertising platform or in Czech Republic where
operators are working towards a common payments platform; however, operators have
largely competed with each other.

Success on the 4th curve requires much tighter collaboration between them than ever
before. The reason is simple - scale. For example, for advertising, Verizon and AT&T are
mainly competing with Google and not so much with each other. Google has 250M+
users in the US. The top four operators in the US have 280+. Individually, they are a
weaker opponent. Together, they can be formidable. But, they haven’t been able to work
on common initiatives that provide a unified front to the rest of the ecosystem. For
many of the verticals on the 4th curve, the only way operators can make a meaningful
dent would be to go past their legacy competitive concerns.

Standards vs. Proprietary

Standards are good. They have served our industry well. Without standards for the
network technologies, the world will be a hodge-podge of incompatible networks and
devices. However, in the apps world, standards can slow you down. A perfect example is
Rich Communications Suite (RCS) which was introduced in 2006/7 and has been only a


few months away from launch. It did finally launch as Joyn in 2012 with worldwide
operator support but by then OTT players had created similar apps that already had
scale. There will be a continued tension in the desire to standardize and the will to win.
Software solutions by nature are proprietary. There is a reason Skype doesn’t
interoperate with Facetime and Google Search and Bing don’t talk to each other. Bigger
operators have the scale to launch proprietary solutions while smaller ones rely on
standardized approaches for their customers to benefit from the same advances.

Build Advocates

Stephen David, former CIO of Procter and Gamble while speaking at the inaugural
Mobile Future Forward Executive Summit12 explained that the new measure of
Marketing is ―Advocacy.‖ Advocacy drives output that is measured in sales. Without
Advocacy, the output suffers. Advocacy helps decrease acquisition cost and increases life
time value of the customer.

Apple products have created fierce loyalists and rabid fans who will sport Apple logo
tattoos and be fierce advocates for the Apple brand. That advocacy directly and
indirectly translates into billions of dollars of profits. Similarly, Google has its loyalists
albeit it is a smaller pool. Facebook has its fan, and so on and so forth. Operators have
worked hard and succeeded in creating customers. But not advocates.

Given that we are a few quarters away from the embedded SIM phenomenon which is
bound to shake up the entire industry, building loyalty is critical to the overall health of
future revenues. Operators should understand advocacy dynamics and launch new
programs that instill brand loyalty. While we are unlikely to see an operator logo on a
shaved head anytime soon, by embarking on the advocacy building program, operators
can preserve their future revenues.

12
www.mobilefutureforward.com, 2010


Figure 18. Mobile customer loyalty index

As is evident from figure 18, loyalty is poor in prepaid markets where consumers switch
between operators ad-nauseum based on the deal of the month. Even the postpaid
markets will start feeling the tension when embedded SIM comes into play.

35 | www.mobilefutureforward.com


How Operators See the 4th Curve?
In late 2011, conveying its five year strategic plan13 to the investors, NTT DoCoMo, the
largest Japanese operator noted,

―To become an Integrated Service Company placing mobile at the core, the aim
is to expand the revenue size of New Businesses for FY2015 to approximately ¥ 1
trillion, approximately 2.5 times the level of FY2011.‖

Figure 19. NTT DoCoMo Revenues from new businesses

The focus is on creating new markets that leverage mobile. The company will try to do
that through alliance partners and joint ventures. The principal areas of its focus are:
media/content, commerce, finance/payments, medical/healthcare,
environment/ecology, M2M, aggregation/platform, and safety/security. Figure 19 shows
how DoCoMo is planning to grow these market segments. Some of the new segments
like health, M2M, platform, and environment; it expects its revenue to grow 10-20 times
the 2011 levels within four years.

13
Medium-Term Vision 2015, NTT DoCoMo, Nov 2011
36 How Operators See the 4th Curve? | www.mobilefutureforward.com


Similarly, Telefonica Digital has outlined its 4th Curve strategy to focus on a number of
segments (figure 20) with the goal of doubling the 2011 revenue of 2.4 billion € to over 5
billion € by 2015.

Figure 20. Telefonica Digital Revenue Targets14

Necessity is the mother of all inventions. In developing markets, shaped by market
needs, certain segments like mobile finance and mobile health are taking shape. For
example, in Kenya, Safaricom has been able to create a fairly healthy mobile revenue
stream with its popular service M-Pesa. In 2011, M-Pesa’s contribution was more than
2x that of mobile access and accounted for almost 14% of the overall operator revenue
(figure 21).

14
Source: Telefonica Digital Investor Conference, July 2012


Figure 21. Safaricom mobile data revenue segmentation15

Similarly, in Philippines, Smart Mobile saw a 52% increase in VAS revenue in Q1 2012.16
For China Mobile, Mobile VAS revenue is now greater than both messaging and access
revenues.17

Tier-2 Operators on the 4th Curve

From the initiatives thus far (as of mid-2012), it is apparent that the large operators who
have the resources and the desire to invest on the 4th curve in a substantial manner.
Operators like Verizon are spending billions of dollars on acquisitions and on beefing up
their offerings on the 4th curve. But how will the tier-2 operators respond to the
opportunity and the threats? Clearly, they won’t have the resources of doing $500-
600M+ acquisitions. Will they be more tactical and opportunistic or will they find their
niche in certain verticals? Will they collaborate with the ecosystem more to have joint
offerings? Will they work better with other tier-2 operators within their national

15
Source: Operator financials 2009-2011
16
PLDT Q1 2012 financial statement, April 2012
17
China Mobile 2011 financial statement, March 2012


boundaries or even abroad to compete effectively? Will such efforts prove viable? Or
should they focus on strengthening their revenue streams on the first three curves?
There are no easy answers. A lot will depend on the competitive dynamics in a given
country and the types of opportunities these operators pursue. Tier-2 operators will
have to tread more carefully than their beefier rivals as they don’t have the option for
making mistakes or costly bets. Depending on how they choose to react will determine
whether they get acquired or they can continue to operate independently.



Case Studies of Transformed Operators
While it is very early to write the history of the 4th revenue curve, we will discuss two
operators who are serving as role models for the entire ecosystem. There are many
operators around the world who are doing some really innovative work like Turkcell in
Turkey, Softbank in Japan, Bharti in India, SMART in Philippines, Sprint in US, Rogers
in Canada, Orange in UK, etc., however, AT&T and Telefonica stand out for the urgency
they have shown in transforming themselves and how early on the growth curve have
they undertaken this transformative process. For the sake of brevity, we will cover some
salient points of their program to date.

AT&T

In the US, AT&T stands behind Verizon as the number two mobile operator. However,
in two growth areas of connected devices and enterprise mobility it is generating more
than twice the traction. In fact, while it has roughly 31% of the subscriber market share,
its share of the revenue in the connected devices and the enterprise mobility segments is
more than the rest of the operators combined. How was it able to get such a good lead?

It started early, the organization has been nimble, and it transformed itself to do the
business differently than has been done in the past. In Q3 2008, AT&T announced the
Emerging Devices Organization (EDO) much before the first iPad was launched, the first
connected car (broadband), the first connected pill bottle came to the market.
Essentially, it anticipated the trend and took advantage of it.

The EDO18 organization also structured itself differently. The process to deal with
partners was simplified and time-to-market was accelerated and led to many industry
firsts.

Similarly, the enterprise mobility organization is more mature at AT&T compared to its
peers not only in the US but around the world. It has become the leading mobile apps
development organizations in the ecosystem; they have built out a services delivery arm
that is focused by industry verticals and solutions. This holistic approach to enterprise
mobility – looking at mobile device management, mobile security, mobile application
development and the ability to provide complete end-to-end solutions has helped them
win more enterprise deals than their competitors. Similarly, an early focus on machine-
to-machine (M2M) opportunity has positioned AT&T as a leader in this fast growing
category.

As a result both the Emerging Devices Organization and the Enterprise Mobility Group
are performing better than its peers. This attracted partners and more importantly
customers.

18
The scope of the organization has since been broadened to include vertically focused solutions such as Digital
Life, Connected Auto, etc.
40 Case Studies of Transformed Operators | www.mobilefutureforward.com


Another key element of AT&T’s strategy is AT&T Foundries which are essentially
honeypots for startup innovation. These centers of excellence setup in US and Israel are
a critical link between the entrepreneurs and AT&T. The fast-paced environment, the
quick prototyping approach, and focus on speed and efficiency is winning over many
startup executives who would have stayed away from AT&T in the past. Telcos in general
move slow not because they want to but because of the weight of a huge organization
where even a simple request needs to go through a myriad of hierarchal decision
processes that pretty much kills any interest from the startup. Startups don’t have the
time nor the resources to get tied up into the moribund process. The foundries serve as
an early opportunity radar for AT&T and have helped improve its overall approach to
becoming a DLSP.

Verizon has also been active in addressing the mobile enterprise and connected device
opportunity with the acquisitions of nPhase, Terremark, and Hughes Telematics.
Similarly, Sprint has organized itself to take advantage of the new opportunities in this
segment. T-Mobile USA has focused its energies on communications (Bobsled) and the
M2M segment.

Telefonica

Telefonica Digital was formed in 2011. The economic conditions in Europe have been
having a negative effect on the operator financials. The OTT threat loomed large. As
such, Telefonica had to respond and respond urgently. It put together a group primarily
comprised of software and Internet folks who understood that speed matters a great
deal for innovation and that the time is limited. Since its creation, their development
program Bluevia has gained strength and has been lauded by the developer community.
In early 2012, the group launched TU Me – the messaging and communication app that
was built in just 100 days (conception to release). With its global scale, they can reach
consumers in multiple regions.

And like AT&T, Telefonica Digital is focused on opportunities beyond communications
into M2M, Advertising, Financial Services, Cloud, Security, mHealth, and Distribution.
With the scale of 300M+ subscriber base, it can make an impact with solutions and
services it introduces into the market.

Like AT&T, Telefonica launched a startup incubation program Wayra19 across 10
countries. The program takes advantage of local talent, local resources targeted at local
consumers with the opportunity to make a global impact. Additionally, the program
provides funding for the startups and provides Telefonica with early indications of new
technologies and directions of the market that can be harnessed effectively for the better
good of the company and its ecosystem.

It remains to be seen how much is Telefonica Digital able to improve Telefonica’s
financials in the long run but it’s the right step for the company to address the market

19
http://www.wayra.org
41 Case Studies of Transformed Operators | www.mobilefutureforward.com


pressure and declining revenues. It has organized itself better than some of its peers to
take advantage of the 4th Curve.

There are other good examples like NTT DoCoMo and Omron Healthcare forming joint
venture called ―docomo Healthcare, Inc.‖ to capitalize on the mHealth opportunity.20
Many other operators are doing some good work on their path to becoming a DLSP. We
are just starting on the 4th curve journey. It will morph several times over the course of
this decade and new leaders and role models will emerge over time.

20
http://www.nttdocomo.com/pr/2012/001599.html
42 Implications of the 4th wave | www.mobilefutureforward.com


Implications of the 4th wave
It is inevitable that the 4th growth curve for the wireless industry is going to bring in
disruption in the industry structure, technologies used, revenue models, and at some
point the regulatory framework itself.

Who will capture the profits?

The most important question for the financial community will be as to who dominates
the profit pool. Historically, operators captured most of the value from the first two
curves. As figure 22 illustrates, over 82% of the mobile industry profits belonged to the
mobile operators in 2011.21

Figure 22. Global Mobile Industry Profit Share

If we look at the profit share by segments, operators still dominate and capture
approximately 82% of the profits from the aggregate curves in 2011. However, Apple
21
Obviously, the profit pool was divided amongst hundreds of mobile operators around the globe.


starts to show up amongst top two (figure 23) now. In 2011, Apple’s share of the global
mobile industry was higher than that of Verizon and AT&T and just behind China
Mobile which benefits from the biggest subscriber base on the planet and low operating
costs.

Figure 23. Global Mobile Industry Profit Share of Top 5 players

The fourth curve will present interesting competitive dynamics. The landscape is much
more distributed. Operators will have to figure out which areas and how they want to
compete and against whom. Each of the mini-curves will have their value-chains,
business models, and technology providers. They will get disrupted more frequently and
will require much tenacity and agility to survive. The long tail of revenue share will get
even longer and the industry might eventually consolidate further but it is going to be an
enormously interesting time period in the wireless industry.

The Need for New operating models

It is no secret that building and operating a network requires high CAPEX investment.
The high cost of the network is both strength and the weakness of the business. Strength
- because it builds the natural barrier to entry and that’s why we don’t seen new
operators coming into the market every day. Weakness – because operators are forced
to raise a lot of debt to fund their network deployment and if the revenue starts to take a
hit due to economic or competitive climate there is not much room to maneuver.


Figure 24. Operational efficiency of leading fortune 100 companies22

This means that the operators will have to segment the cost of doing business and the
revenue streams and optimize for higher margins. For segments that are commoditized
and provide no inherent competitive advantage, it is in the interest of operators to
collaborate rather than compete so network sharing becomes a much more practical
strategy for preserving cash flows. Similarly, outsourcing of some key IT and network
operations that don’t provide any discernible advantage by operating internally can
provide better yield for investment dollars.

Many operators in Asia and Europe are already pursuing some of the above strategies.
We envision that these will become more common place even amongst the top
operators.

The reason is simple. If we look at the operating efficiency of some of the Internet
players, their profits and revenues per employee is much higher than the operators.
Given that the competition on the fourth curve is primarily going to be from the Internet

22
Some of the firms like Facebook are not amongst the Fortune 100 but we included them in the chart to show
their relative performance in 2011. While other companies have been around for many many years, Facebook is a
newly minted public company so their depiction in the chart is more for illustrative purposes.


players, their operational metrics should start to mirror the likes of Apple and Google.
This can only happen if the operating model of the operators changes over time.

At some of the operators like AT&T and Verizon, the wireless groups are performing
much better than the overall company. For example, if we just take a look at the wireless
business, AT&T Mobility’s Revenue/Employee/Year is much more than for the whole
company and is better than even Microsoft’s numbers.23 Similarly, Telefonica Digital’s
performance is more than 2x that of its parent Telefonica. Overall, the Japanese mobile
operators are more operationally efficient (in terms of generating profits/employee)
than the leading Internet players of this era.

Figure 25. Operational efficiency of leading Telecom operators24,25

23
Based on author’s assumptions about AT&T Mobility’s number of employees. AT&T doesn’t break down their
employee numbers by units.
24
NTT DoCoMo and China Mobile are mobile only operators. Rest of the operators include their landline and other
businesses in the mix and as such their performance numbers are down. In general, mobile operations perform
better than landline operations. That’s why when measured separately, US mobile operators score much higher
than when the telco businesses are measured independently.
25
There are other operators like KDDI and Softbank who have higher performance numbers than the operators
shown in the figure but their subscriber and revenue base is relatively smaller.


Many operators might need to trim their workforce, in some cases, drastically. Or shed
money-losing businesses to optimize for overall margins. At a minimum, the operator’s
digital organizations will need to perform at the level of their Internet peers.

If we take a look at the operational efficiency (as measured by the profit being generated
by the company for every employee and every customer in a given year) in figures 24
and 25, in general, mobile operators don’t score that high because the number of
employees needed to run the business. While businesses in various verticals are
different, the value of the enterprise is ascertained by the growth potential and
consistent profits. That’s why we see anomalies like Amazon in spite of slim profits
being valued high because of growth potential while operators, retailers, and fast-food
chains valued as utility businesses because the growth potential is not on the hockey
curve.

The digital business offers operator an opportunity to change the perception about their
business. In some instances, this might be only possible through a spin-off where the
parent company is a major stake-holder.

So, for strategic and financial reasons, operators need to realign the core competences
and offerings and size up their operational structure accordingly.

Implications on the Ecosystem

There are two obvious implications to the ecosystem. Players who completely rely on
operator channel for their services are likely to see a decline in their revenue pipeline.
Secondly, the number of players they can sell to will expand dramatically which means
they will also have to adjust how they design products, establish relationships, and
conform to revenue goals. Also, for the first time, software more than hardware will
drive the revenue growth curve for the vendors.

Greater competition on the 4th curve works in the best interests of the consumer. Given
that the service layer is detached from the access layer, the choice of solutions across any
given vertical will be good for the consumer. The startup ecosystem will also benefit
from a more diverse telecom services landscape as the number of potential customers
and acquirers will increase. Regulators will have their work cut out for them to keep the
market fair and competitive.

Competition and Operator Consolidation

Competition is the central tenant of economics and in turn fairness to everyday
consumers. Competition also drives innovation and accelerates the advent of new and
nimble players to disrupt the waters and moves the ecosystem forward. The rise of the
dependence on the 4th curve will force consolidation. Essentially, the pool of competitors
is increasing, the nature of competition is changing, and the customer relationship for


Operators dilemma the fourth wave chetan sharma consulting

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