IMPROVING MONETISATION IN THE UK MOBILE SECTOR

Mathias BorglinOrakarn Chantaramungkorn

Chris CorbishleyPatrick O’NeilZhaoyu Qian

Reena SharmaSopika Tanthmanatham

BearingPoint Consulting Project

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EXECUTIVE SUMMARYMobile operators (MOs) are currently facing a major challenge as well as a huge opportunity to boost profits and build more attractive business models for the future. They must increase their profits in order to (1) achieve targets set by investors and (2) invest in next generation networks. Yet operators find themselves in a position where discretionary cash is becoming scarce and their organisations necessarily more lean, making it essential for them to explore new ways of leveraging existing assets, technologies and competencies as well as investigate new growth areas through strategic partnerships and savvy investments.

In this report we break down the issue of ‘improving monetisation’ amongst UK operators in terms of increasing profits by reducing costs, making more cost-efficient investments in network infrastructure, and improving revenues, specifically new revenue streams in the consumer and enterprise markets. Through a combination of primary and secondary research, we have set out our recommendations based on converging and diverging stakeholder viewpoints on how different UK operators can monetise new data services and manage the transition to a new mobile economy based on ‘bits’ and not ‘minutes’.

TABLE OF CONTENTSIntroduction 7

Problem Definition: Regulation, Rivalry, Recession 7The Value Chain 8Our Approach 10Criteria for recommendations 11

Cost Optimasation and Infrastructure 12Capex spending in the mobile telecoms sector 12Recommendations 15

Revenue Opportunities in Consumer Markets 17Bundling 17Mobile Advertising 18mCommerce 18Recommendations 19

Revenue Opportunities in Enterprise 20Unified Communications 20Recommendations 25

Conclusion 26

GLOSSARY 27

References 30

Appendixes 34Appendix I: Interviewees 34Appendix II: Interview transcripts 36Appendix III: O2 Wallet Overview 45

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INTRODUCTION

Source: Ofcom

Figure 1: UK Registered Mobile Lines & Penetration Rates

Problem Definition: Regulation, Rivalry, RecessionThe mobile telecoms industry is at present being negatively impacted by three key factors: regulation, rivalry and recession.

Operators such as Orange, Vodafone, T-Mobile and O2 are operating in a highly

mature industry which makes the UK one of the most competitive markets in the world. The flattening out of registered lines is a clear sign that their market base is stagnating (Figure 1), whilst key performance indicators such as average revenue per user (ARPU) and EBITDA are declining as a result of the regulator putting pressure on traditional revenue streams from voice and messaging

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Source: Ofcom

Figure 2: UK Service Mobile Service Revenue

services. Meanwhile data revenues are not sufficient to make up the delta (Figure 2).

However, overall growth in the communications market1 suggests operators are missing out on some important opportunities as a result of their precarious position in the industry value chain. Recession is compounding these problems by making it increasingly difficult for cash-starved operators to innovate and compete with new entrants, as well as invest in

next generation networks in order to meet the growing demand for mobile data.

The Value ChainIntense rivalry is not only present amongst the mobile operators. Indeed a significant threat is now posed by powerful new entrants on both sides of the value chain, including mobile handset manufacturers like Apple providing their own over-the-top (OTT)

1. Ofcom, “International Communications Market Report 2012”, http://stakeholders.ofcom.org.uk/binaries/research/cmr/cmr12/CMR_UK_2012.pdf (accessed 5 Jul 2012).

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Source: Own analysis

Source: Own analysis

Figure 4: Mobile sector value chain after the introduction of smartphones

Figure 3: Mobile sector value chain before the introduction of smartphones

services, MVNOs and internet giants such as Google. This fundamental shift has led to fears of operators becoming the ‘dumb pipe’, providing a commodity service from which everyone else benefits but them.

The following figures (3 and 4) give an indication of how the value chain has been disrupted as a result of new entrants being able to establish a direct relationship with end users.

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Our ApproachWe broke down the issue of ‘improving monetisation’ in terms of increasing profits, which can be separated into cost and revenues. Firstly, how operators can make more cost-efficient investments in network infrastructure and secondly which new revenue streams have the highest growth potential in both consumer (B2C) and enterprise (B2B) markets.

Our research was carried out using a combination of secondary sources, (industry reports, Ofcom data, trade press) and conducting a series of primary interviews with high-level industry participants whose feedback formed the basis of our recommendations.

Interviewee selection was designed to capture the converging and diverging perspectives of different industry stakeholders. Amongst those interviewed were:

Source: Own analysis

Figure 5: Our approach

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• Mobile Operators: Head of Consumer Product Marketing at O2 Telefonica Enterprise Product Manager at Vodafone

• Equipment Vendor: Chief Technical Officer of Huawei UK

• Systems Integrator: mCommerce Specialist from IBM & Citi Group

• Institutional Investor: Director of First Capital

• Regulator: Senior Associate at Ofcom

For more information on the persons interviewed see Appendix I.

Criteria for recommendationsAs a general industry report our recommendations do not represent a ‘one size fits all’ solution for all UK operators. Instead they are a set of options to be considered based on the ethos of individual operators.

The three criteria used in making our recommendations were:

1. Does it leverage the operator’s core assets and capabilities?

2. Is it an attractive market with high and sustainable growth potential?

3. Does it help improve the operator’s position in the industry value chain?

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COST OPTIMASATION AND INFRASTRUCTURECapex spending in the mobile telecoms sectorPrevious years of strong growth in the telecom industry have allowed operators to build up a large cost base with focus on building

infrastructure and upgrading technology, but without necessarily optimising the returns. Indeed, if we look at global capex levels in the telecoms industry, the amount has been growing almost constantly since 2003 (Figure 6).

Source: Adapted from: We need to talk about Capex by PwC

Figure 6: Global capex levels in the telecoms industry 2003 -2011

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2. PwC, “We need to talk about CAPEX - Benchmarking best practice in telecom capital allocation”, www.pwc.com/communications/capex (accessed 13th Jul 2012).

3. Capital Economics, “Mobile Broadband and the UK Economy”, http://www.4gbritain.org/wp-content/uploads/2012/04/Mobile-Broadband-and-the-UK-Economy-30-April-2012.pdf (accessed 13th Jul 2012)

4. Ernst & Young, “Top 10 risks in telecommunications 2012”, http://www.ey.com/Publication/vwLUAssets/Top_10_risks_in_telecommunications_2012/$FILE/2012_TelecomsBusinessReport_13Feb2012_low%20res.pdf (accessed 13th Jul 2012).

As confirmed in our interviews, most operators agree that their capex planning is driven by technology advancements and not by business objectives or market demand, resulting in over 20% of capex being spent on projects that fail to achieve a positive ROI, whilst the rest barely cover the cost of capital.2 Roll-out of 4G/LTE in the UK will require increasingly large capex, with reports suggesting total investments of nearly £5.5 billion by 2015,3

thus operators must identify ways of reducing

Source: Adapted from: We need to talk about Capex by PwC

Figure 7: Average ROI in the telecoms industry 2001-2010

spend to achieve a positive ROI.

The global average long-term ROI has been below cost of capital for the last 10 years (Figure 7). With the recent economic downturn and the boom in data traffic, pressure is now on operators to spend wisely in order to regain the trust of institutional investors.4 An interview with John Yeomans, Director of First Capital confirmed a new emphasis on telecoms identifying more cost-efficient

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alternatives for universal IP infrastructure as well as the convergence of fixed and mobile networks.

Managing opex spending in the mobile sectorOver the past five years, most European operators have seen rising operating costs compared to revenues. In order for operators

to maintain healthy margins they must manage these costs effectively, the three major cost areas being (1) Network (maintenance), (2) Customer acquisition and retention (sales and marketing) and (3) Interconnect with the networks of other operators (Figure 8).

The promise of LTE is that network running costs will be lower than the existing patchwork of legacy 3G technologies. Yet in order to

Source: Adapted from Quest for Margins by Capgemini

Figure 8: Opex breakdown for a European Mobile Operator

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5. See Appendix for interview with Bruno Basalisco, Senior Associate, Ofcom6. Capgemini, “Capgemini Quest for Margins: Operationsal Cost Strategies for Mobile Operators in Europe”, Telecom & Media Insights, Issue 42 http://www.

capgemini.com/m/en/tl/tl_Operational_Cost_Strategies_for_Mobile_Operators_in_Europe.pdf (accessed 14th Jul 2012).7. Carol Wilson, “LTE Will Reshape Entire AT&T Network”, Light Reading Mobile, http://www.lightreading.com/document.asp?doc_id=193566 (accessed 14th

Jul 2012).8. Gideon Spanier, “Vodafone and O2 to save ‘hundreds of millions of pounds’ by sharing networks”, The Independent, http://www.independent.co.uk/

news/business/news/vodafone-and-o2-to-save-hundreds-of-millions-of-pounds-by-sharing-networks-7827959.html (accessed 14th Jul 2012).9. Ernst & Young, “Top 10 risks in telecommunications 2012”, http://www.ey.com/Publication/vwLUAssets/Top_10_risks_in_telecommunications_2012/$

FILE/2012_TelecomsBusinessReport_13Feb2012_low%20res.pdf (accessed 13th Jul 2012).

get there, struggling UK operators have had to consolidate their networks under sharing agreements, whilst continuing delays in the licensing of spectrum by Ofcom has prompted operators to identify alternative solutions for dealing with increased data traffic. This is in stark contrast to a heavily incentivised US market which has seen five new MNO entrants as well as incumbents investing nearly $4 billion a piece in LTE infrastructure.5

RecommendationsBased on our cost breakdown, there are a number of areas where measures can be taken to improve margins, especially within network opex.

Wired Backhaul NetworkOne way that operators have reduced opex is by investing in their own wired backhaul networks. Most operators use their own microwave backhaul and then lease backhaul capabilities, which despite carrying only 35% of traffic, makes up 65% of the costs.6 By investing in backhaul, telecoms may reduce their dependency on third-party providers and increase EBITDA margins by up to 1.85%, as well as keep up with increasing data demand from customers. This also reduces the need

to make expensive wireless infrastructure investments.7

A recent example is Vodafone in Germany and Italy who estimates cost savings of up to €60 million in Germany alone from building their own backhaul network. Their £1 billion acquisition of Cable & Wireless puts them in an advantageous position against their UK competitors who lack the scale to make the same huge investments in fixed-line.

Network sharingAn option for reducing required investments and improving monetisation of existing assets is in the sharing and outsourcing of network capacity. Recent examples of this are Everything Everywhere formed by T-Mobile and Orange and the newly formed joint venture between Telefonica UK (O2) and Vodafone UK. This will help them increase quality of service for their customers while reducing the required number of masts saving them “hundreds of millions of pounds”.8 In terms of EBITDA and margin improvements, operators with nationwide coverage could improve their margins by 1.4%. It will also help them build-out more rapidly their 4G/LTE capacity, reducing the expected roll-out time by up to two years.9

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10. Nicky Atkins, “Arqiva agrees offer to acquire spectrum interactive limited”, Spectrum Interactive Limited, http://spectruminteractive.co.uk/m/News/a/Arqiva-offer/ (accessed 14th Jul 2012).

11. PwC, “Managing your megabytes - How fear of data charges is driving mobile users to WiFi” PwC Communications, http://www.pwc.com/sg/en/tice/assets/ticenews201204/consumer-mobile-feb-2012.pdf (accessed 16th Jul 2012).

Wi-Fi InvestmentAnother option for telecoms to reduce required investments in expensive mobile infrastructure is to redirect some of its investment into establishing ubiquitous Wi-Fi networks. By using Wi-Fi technology in densely populated areas and large corporations, capacity pressure on mobile infrastructure can be reduced. A recent example of this is the acquisition of Spectrum Interactive by Arqiva, a communications infrastructure company10.

Indeed most consumers are used to connecting through Wi-Fi. In 2011 4.9 million people in the UK used Wi-Fi hotspots11, an increase of 600% since 2007. Most consumers also view Wi-Fi as the most accepted measure to reduce strain on the mobile network (Figure 9), a view shared by operators such as O2, whose head of consumer marketing, Richard Porter explained that O2 WiFi has been an effective way of balancing data traffic (see Appendix II).

Source: Managing your megabytes by PwC

Figure 9: Customer attitude towards changes in data services

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BundlingBundling as a typical consumer lock-in strategy, has been adopted by most operators to retain and attract customers. The most widely used forms are “experiential bundling” and ‘Quadruplay’. Experiential bundles offer standard mobile network services (on a monthly contract) with differentiated customer experiences, such as O2 Moments or Orange Wednesdays. Quadruplay is a 4-service package which bundles fixed line, broadband, pay TV and mobile services together. Operators and MVNOs (such as Sky and Virgin) with a larger and stronger position across all these assets are offering ‘quadruplay’ or ‘triple-play’ bundles to lock-in their customers, giving them a unique competitive edge.

As data revenues begin to show potential for top line revenue growth, operators can compete by bringing out new types of data bundling, such as ‘shared data plans’ across multiple devices and users, responding to the huge expansion of mobile data traffic and connected devices, including smartphones, tablets, e-book readers and gaming devices. By offering data plans, operators can increase ARPU, boost data revenue by absorbing subscriptions across multiple devices whilst driving adoption of more expensive, higher-quota data plans. It has so far been launched in the US, where it is estimated that multi-device plans could drive US data revenue from $81.4 billion in 2011 to $151.9 billion in 2016.12

12. Gartner, “Gartner Says Communications Service Providers Must Adopt Multidevice Data Plans to Take Advantage of Expanding Cellular Connectivity”, http://www.gartner.com/it/page.jsp?id=2004215 (accessed: 19 Jul 2012).

REVENUE OPPORTUNITIES IN CONSUMER MARKETS

“There is a lot of value in the relationship we have with our customers; an overall wrap that starts with connectivity, be it broadband, mobile or Wi-Fi, but also goes beyond that into an experiential piece we can bring to them, like Priority Moments, Priority Sports, plus a whole load of content experiences currently in the pipeline”.

Richard Porter, O2 Telefonica UK

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13. MobiThinking, “Global mobile statistics 2012”, Part C: Mobile marketing, advertising and messaging, http://mobithinking.com/mobile-marketing-tools/latest-mobile-stats/c (accessed: 20 Jul 2012).

14. Ibid15. Coda Research, “Why mCommerce?”, The essential of mCommerce or Mobile Commerce, http://www.cart2mobile.com/why-mcomm/Index.aspx

(accessed 9 Jul 2012).16. Ying-Feng Kuo and Ching-Wen Yu, “3G telecommunication operators’ challenges and roles: A perspective of mobile commerce value chain”, Elsevier B.V.,

http://www.sciencedirect.com/science/article/pii/S0166497205001124 (accessed 18th Jul 2012).

Mobile AdvertisingGlobal expenditure on mobile advertising (search, display and messaging) in 2011 was $5.3 billion, and is expected to double every year to $20.6 billion in 2015.13 With the increasing penetration of smartphones, advertising is a growing market from which operators can capture value by ‘monetising the customer relationship’.

In the UK, O2 is already launching advertising products via its O2 Media business such as O2 priority moments for local advertisers. Statistics show that geo-location based advertising including mapping and search tools deliver the highest revenue amongst all types of mobile advertising, which fits with operators’ core competencies and strengthens their position in the value chain.14 However, a move such as this invariably raises privacy concerns. A Senior Associate at Ofcom stated that although mobile network operators are

allowed to use customer’s phone number and location data for marketing purposes once they have consent, data protection law laws coming into place over the next two years will start to make things difficult for the major players including Google, Facebook and even MNOs.

mCommercemCommerce, defined as the buying and selling of goods and services via wireless devices over mobile internet, is expected to increase 65% annually to reach $24 billion in 2015.15 This follows trends around increasing smartphone penetration and ubiquitous mobile broadband increasing users perceived need for mobility.

Mobile network operators play a key role in the mCommerce value chain by providing mobile communication networks that are irreplaceable and difficult to imitate.16 They are the intermediary between upstream value

“We are looking to monetise our customer relationship in a third party way through our O2 Media Business. This can be done by advertisers, such as local businesses, paying to share that relationship as well as location-specific information used to target them with specific offers.”

Richard Porter, O2 Telefonica UK

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17. IMRG, “As e-retail market rebounds, mobile sales record extraordinary growth”, http://www.imrg.org/ImrgWebsite/User/Pages/Press%20Releases-IMRG.aspx?pageID=86&parentPageID=85&isHomePage=false&isDetailData=true&itemID=7327&specificPageType=5&pageTemplate=7 (accessed 21st Jul 2012).

18. Kelkoo and the Centre for Retail Research, “Mobile retail set for phenomenal growth”, http://www.fashionunited.com/executive/report/mobile-retail-set-for-phenomenal-growth-20120302488470 (accessed 18th Jul 2012).

chain members and the end user. Hence they can offer diversified value-added services to the industry such as financial and retail services. Financial services, such as mPayment (which includes mBanking giving customer-access to their bank accounts to transfer money) and mWallet (customers using their mobiles to purchase goods and services) are areas currently being explored. Yet it is not in these areas where operators can capture the most value. For instance, mPayment is based on physical payment at point of sale over a fixed-line network whereby the handset manufacturer provides the enabler via an NFC chip.

On the other hand retail services, or mRetail, has the potential to leverage operators’ capabilities in billing, transaction security and delivery of content. Key partnerships or investments in e-commerce platforms such as O2 Wallet (see overview in Appendix) could allow operators to compete with Google by offering a secure service to shoppers, including options to browse for product information, compare prices in-store, store locators and purchase products securely over the mobile network. Mobile retail has shown 300% Year-On-Year growth for Q1/2012 in the UK17, a market expected to reach £4.5 billion in 2012 - more than any other European nation.18

RecommendationsMobile Operators should pursue opportunities where they can add the most value and improve their position in the value chain. We recommend adopting multi-device data bundling as it will help MOs retain and extract more value from their customers, while having a competitive advantage over MVNOs such a Sky and Virgin.

Additionally, operators must develop an e-commerce and billing platform which is adapted for on-demand payments made via mobile internet. That way they can monetise over-the-top services such as mRetail or mobile app stores more effectively. This general recommendation came out of an interview with the CTO of mobile equipment vendor, Huawei who explained that their R&D dollars are currently being spent on developing more sophisticated operations support system (OSS) for mobile operators to separate the billing of mobile minutes (or bits of data) and on-demand mobile purchases to allow operators to offer secure payment services to their mCommerce customers.

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19. Kevin Tea, “Mobile Cloud Is The Next Game Changer”, Business Computing World, http://www.businesscomputingworld.co.uk/mobile-cloud-is-the-next-game-changer/ (accessed: 18 Jul 2012).

20. Andrew R Hickey, Mobile Cloud Demand skyrocketing: Report, http://www.crn.com/news/cloud/231902081/mobile-cloud-demand-skyrocketing-report.htm;jsessionid=jFIgrAlNy2bhGXSMHmnqZA**.ecappj01 (accessed: 19 July 2012).

REVENUE OPPORTUNITIES IN ENTERPRISE

Unified CommunicationsVodafone are the leaders in mobile enterprise, and have stated their mission is to become a total communications provider through managing corporate networks for their enterprise customers in both fixed and mobile. These are highly lucrative contracts, which are perhaps only accessible to operators designed to deliver enterprise services, especially one such as Vodafone who recently acquired one of the largest fixed line enterprise networks in the UK.

Unified communications offers a single platform for managing fixed and mobile communications, thus Vodafone would be the only UK operator able to provide it. Yet there are still plenty of new revenue opportunities for operators looking to offer managed mobile

network services to enterprise customers, with 75% smartphone penetration in the workplace, more companies are utilizing tablets and smartphones to boost productivity at work. Opportunities within this space include new services such as One Net which provides a single mobile calling plan for SMEs and allows the answering of landline calls on your mobile, as well as a growing new trend called ‘bring your own device’ (BYOD) which allows the secure integration of personal mobile devices into corporate networks.

Mobile Cloud Computing Mobile Cloud Computing (mCC) is one of the fastest growing segments in cloud computing.19 According to Juniper Research, the mCC market is expected to grow 88% between 2009 and 2014 to reach $9.5 billion,20 with the largest

“We are looking to change the way Britain works by becoming a total communications provider for our enterprise customers. We are currently the leaders in mobile enterprise, we want to become leaders in fixed as well (following the acquisition of Cable & Wireless)”

Simone Vaccari, Enterprise Product Manager, Vodafone UK

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21. Bill Lesieur, “Maravedis: Are operators prepared to leverage the mobile cloud?”, Fierce Broadband Wireless, http://www.fiercebroadbandwireless.com/story/maravedis-are-operators-prepared-leverage-mobile-cloud/2012-02-01 (accessed: 18 Jul 2012).

22. Ibid

23. Marguerite Reardon, “Telcos see future in the cloud”, Mobile World Congress - CNET Reviews, http://reviews.cnet.com/8301-13970_7-57386622-78/telcos-see-future-in-the-cloud/ (accessed: 19 Jul 2012).

24. Tobias Ryberg, “The Global Wireless M2M Market”, Berg Insight, http://www.berginsight.com/ReportPDF/ProductSheet/bi-globalm2m4-ps.pdf (accessed 17th Jul 2012).

revenue contributions coming from enterprise mobile cloud applications.21 Although market forecasts anticipate exponential growth, many operators show lack of clear strategies for fully utilising the prospective 4G networks with mobile cloud services. Therefore, operators will have to design business models to differentiate themselves from competition and improve profitability.22 The challenge facing operators is how to manage their networks to deliver services to their customers efficiently whilst overcoming regulation concerns over the free flow of data traffic (as yet undetermined) and possible network congestion.23

Machine-to-Machine (M2M)Machine-to-Machine (M2M) which is connecting computers, devices and equipment to receive and transmit data remotely over a network, represents a significant new revenue opportunity for MNOs as increasing number of devices, such as cars, video surveillance cameras, home appliances and health monitors, are embedded with mobile broadband technology. The number of cellular M2M connections is expected to reach 359.3 million in 2016, with Compound Annual Growth Rate (CAGR) of 27%24 (Figure 10).

Source: Berg Insight

Figure 10: Cellular M2M network Connections

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25. John Horn, “Fastest M2M Growth: fleet, security, asset management”, Telecom Engine, http://www.telecomengine.com/article/fastest-m2m-growth-fleet-security-asset-management (accessed 17th Jul 2012).

26. Machina Research, “Connectivity Drives Market”, Consumer Lifestyle News, http://cln-online.org/index.php?option=com_content&view=article&id=2437:connectivity-drives-market&catid=39:top-stories (accessed 15th Jul 2012).

27. Vodafone Group Plc, “Annual report”, http://www.vodafone.com/content/dam/vodafone/investors/annual_reports/Vodafone_Annual_Report_12.pdf (accessed 10th Jul 2012).

28. John Horn, “Fastest M2M Growth: fleet, security, asset management”, Telecom Engine, http://www.telecomengine.com/article/fastest-m2m-growth-fleet-security-asset-management (accessed 17th Jul 2012).

M2M benefits multiple business sectors such as automotive, utilities, logistics, security, and healthcare. The automotive sector accounts for the majority of M2M devices today, but other sectors such as fleet management (logistics), healthcare and security are expected to overtake it by 2020.25

AutomotiveM2M in automotive business is growing as a strong demand for services such as car stolen recovery, mechanical problem diagnosis and entertainment. Moreover, manufacturers want to differentiate their offerings and build new revenue streams. It is expected that 90% of new cars in 2020 will have some form of in-

vehicle connectivity.26 For example, BMW uses Vodafone M2M SIMs in their latest 2012 model to provide the BMW ‘online service’, a 24/7 personal concierge service for drivers and emergency call functions.27 Although in its early stages, there is vast potential for M2M to generate new revenue streams and improve user experience.

Fleet managementWithin logistics, fleet management is one of fastest growing sectors in M2M as the number of fleet management systems is expected to grow from 2 million units in 2010 to 5 million in 2015 in Europe, with a 21% annual growth rate.28 The M2M fleet management

“M2M is thought to be one of the fastest growing segments for the next few years and companies are going to rely on this sort of machine to machine communication of data”

Simone Vaccari, Enterprise Product Manager, Vodafone UK

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29. PwC, “Touching lives through mobile health Assessment of the global market opportunity”, http://www.pwc.com/in/en/assets/pdfs/telecom/gsma-pwc_mhealth_report.pdf, (accessed 19th Jul 2012).

solutions enable a real-time monitoring of the status of vehicles such as its location, maintenance schedule and technical status. Such applications demonstrate a positive impact to both businesses and customers as it brings greater efficiency, cost saving and can reduce carbon emissions.

Mobile Health Mobile health (mHealth) is the utilization of mobile communication technologies to deliver

Source: PwC

Figure 11: mHealth Revenue Forecast (2013-2017)

high quality healthcare services. The global mHealth market is expected to reach $23 billion by 2017 with Asia Pacific and Europe each capturing approximately 30% of market share.29 (Figure 11)

The mHealth field is complex and offers opportunities for stakeholders across several industries to advance their organizational objectives. Figure 12 shows the various stakeholder relationships involved in the mHealth value network.

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30. KPMG International, “Issues Monitor: Sharing knowledge on topical issues in the Media &Telecommunications Industries”, http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/issues-monitor-media-telecommunications.pdf (accessed 20th Jul 2012).

31. PwC, “Touching lives through mobile health Assessment of the global market opportunity”, http://www.pwc.com/in/en/assets/pdfs/telecom/gsma-pwc_mhealth_report.pdf, (accessed 16th Jul 2012).

32. Mckinsey.com (2010) mHealth: A New Vision for Healthcare. [online] Available at: http://www.mckinsey.com/client_service/initiatives/mhealth [Accessed: 19 Jul 2012].

Source: McKinsey32

Figure 12: mHealth ecosystem

MNOs are uniquely positioned to influence how the ecosystem develops, as they possess the necessary assets required to improve access, reach and quality of mobile healthcare services.30 As such, they stand to become key beneficiaries from the expected growth

in the mHealth market, predicted to gain approximately 50% of the market share ($11.5 billion) by 2017.31

Despite these innate capabilities, mobile operators currently expanding their mHealth service portfolio are partnering with healthcare

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33. KPMG International, “Issues Monitor: Sharing knowledge on topical issues in the Media &Telecommunications Industries”, http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/issues-monitor-media-telecommunications.pdf (accessed 20th Jul 2012).

34. Berg Insight, “Security Applications and Wireless M2M”, http://www.berginsight.com/ReportPDF/ProductSheet/bi-sec3-ps.pdf [accessed 20th July 2012]

35. Ibid

36. Steve Wexler, “Cisco Jumps Into The M2M Market”, UBM TechWeb, http://www.networkcomputing.com/wireless/231600077 (accessed 18th Jul 2012).

organizations and medical hardware and software companies to enhance their network capabilities.33 These competences will strengthen their position in the value chain and serve as a strong barrier to entry for prospective entrants, enabling operators to realize long-term economic gains.

Security M2M devices for security applications is expected to grow to nearly 22 million by 2014, from 2.3 million in 2009.34 This is accelerated by the number of alarm systems, vehicle tracking systems and wearable integrated tracking devices, that can be used for protecting individuals.35 The security sector is perhaps the most significant in M2M, as automotive, fleet management and healthcare all rely on the security applications developed by operators in the M2M market.

RecommendationsWhile Unified Communications and mobile Cloud Computing should continue to be part of the operators’ core offerings, M2M represents a significant growth opportunity for MNOs looking to achieve sustainable differentiation by attracting new customers and generating revenues. However, there are two issues that should be considered:

Network CongestionIt is expected that “there will be 25 billion connected IP devices by 2015, with M2M traffic expected to grow by 258%”.36 With the significant growth in M2M solutions, traffic optimization and management will be required to ensure that network resources are utilised in the most efficient and beneficial way.

Highly Fragmented IndustryThe M2M industry is complex and highly fragmented as it requires the integration of different products to effectively implement a M2M solution. To reduce this fragmentation, operators need to expand their opportunities through alliances and affiliations. For instance, major operators from Asia Pacific (NTT Docomo, SingTel, Telstra), Europe (Telefonica, Vimpelcom and KPN) and Rogers from Canada have all collaborated to set the standards and utilize core technologies to accelerate market growth.

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37. Wayra Academy, http://www.wayra.org/en (accessed 28th Jul 2012)

CONCLUSION

Our industry interviews uncovered diverging viewpoints amongst stakeholders concerning the exact sources of profitability for mobile operators in future. On the one hand, MNOs such as O2 and Vodafone are exploring new revenue opportunities in over-the-top services, mCommerce, mobile advertising and M2M. On the other, institutional investors seem certain that telcos are being commoditized and must focus their efforts on meeting data demand and achieving operational excellence.

It is not clear how the industry will evolve as a result of 4G mobile broadband, nor which segment of the value chain will benefit the most. However, mobile operators have a chance that may come once in a generation, to improve their position and move into new areas other than basic conveyance services. Provided MNOs get the product right by developing outside the main organisation (such as Telefonica Digital are doing with

their wayra academy),37 there is a chance they can develop innovative new services to help them monetise their network investments and compete with new entrants.

Recommendations To summarise, our recommendations on how operators can improve monetisation in the UK mobile sector are:

1) Invest in new operations support systems to deal with non-minute based billing i.e. billing and payment systems which are better suited to the era of ‘bits’ and on-demand payments carried out over mobile internet, instead of text and premium rate calls for instance. A new billing or mCommerce platform would enable operators to monetise new data services associated with mRetail, advertising and M2M.

“I have not yet found a telco, fixed or mobile, that has reliably cracked doing anything as a business above basic bit transport. If I were advising any telco or mobile operator, I would say stick to your knitting, stick to bit transport”

John Yeomans, Director, First Capital

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2) Consider alternative data networks to run alongside 4G network infrastructure, such as public Wi-Fi and whitespace spectrum, which could reduce congestion on core networks and help meet the growing demand for mobile data.

3) Explore M2M applications in other growth industries, other than logistics, mHealth and security, such as manufacturing, retail and inventory management.

Included is a link to a short video where it is possible to hear views from industry experts:

http://youtu.be/TAK8RSHTIqk

GLOSSARY4G/LTE (4G Long Term Evolution)A 4G wireless communications standard that will provide up to 10x the speeds of 3G networks for mobile devices. It is one of several competing 4G standards along with Ultra Mobile Broadband (UMB) and WiMax (IEEE 802.16)

ARPU (Average Revenue Per User) A measure of the revenue generated per subscriber. A key performance indicator for the telecoms industry.

Backhaul Network Backhaul Network switches calls between pairs (or more) of Customer Access Network (CAN) infrastructures to create end-to-end continuity so that people and/or computers can communicate. The Customer Access Network is a non-switched structure that directly connects the Backhaul Network to the Customer Premises Equipment.

Bundling Grouping various telecommunications services, wireline and/or wireless, as a package to increase the appeal to potential customers and reduce advertising, marketing and other expenses associated with delivering multiple services

BYOD (Bring Your Own Device) Employees taking their own personal device to work, whether laptop, smartphone or tablet, in order to interface to the corporate network

CAGR (Compound Annual Growth Rate) A steady year-over-year growth rate of an investment over a specified period of time

CAPEX (Capital Expenditure) Telecoms is one of the most capital intensive industries that have high capital expenditure. Capital expenditure is funds used by a company to acquire or upgrade assets such as property or equipment.

Cost of Capital The required return necessary to make a capital budgeting project, such as investing in new infrastructures, worthwhile. Cost of capital includes the cost of debt and the cost of equity.

Cloud computing A model for delivering information technology services in which resources are retrieved from the internet through web-based tools and applications, rather than a direct connection to a server.

EBITDA A measurement of a company’s operating profitability. It equals to revenue less expenses before interest, tax, depreciation and amortisation.

Fixed-line A telephone line that traveled through metal wire or optical fiber as part of a nationwide telephone network.

Interconnection Interconnection involves a linking up of one telecom operator to the infrastructure facilities of another. Interconnection is crucial for communicating across networks, and makes it possible for the subscribers of two different operators to communicate with each other. It is essential for extending the scope and efficiency of the telecom network, and is especially important for new operators entering the market who normally use the existing facilities of another operator for providing their services.

IP infrastructure A knowledge-based structure supporting and interconnecting all national and regional IP systems

Legacy Voice and text services M2M (Machine-to-Machine) M2M networks are defined as communication without or with limited human end user intervention. Note that the human end user is not typically the initiator of the input but only occasionally and optionally the recipient for the output.

MNO (Mobile Network Operator) A Mobile Network Operator is a tele-communications service provider organization that owns the complete telecom infrastructure for hosting and managing mobile communications. MNOs are also known as carrier service providers, mobile phone operators and mobile network carriers.

MVNO (Mobile Virtual Network Operator) A Mobile Virtual Network Operator is a mobile operator that does not own spectrum or have its own network infrastructure. It has business arrangements with traditional mobile operators to buy network time.

NFC (Near Field Communication) A technology standard for very-short-range wireless connectivity that enables quick, secure, two-way interactions among electronic devices. NFC technology typically takes the form of a small chip embedded in a phone or a plastic card.

OPEX (Operating Expenses) Expenditure that a business incurs as a result of performing its normal business operations.

OSS (Operation Support System) platform Operation support system for telecom operators to carry out their customer billing. It allows them to calculate network usage and charge customer the right amount based on ‘minutes’ or number of ‘bits of data’ going over their network.

Over-the-Top (OTT) services Over the Top (OTT) refers to video, television and other services provided over the internet rather than via a service provider’s own dedicated, managed IPTV network. Therefore, OTT service providers do not need carriage negotiations or any infrastructure investment on the part of the provider.

Quadruplay 4-service package which bundles fixed line, broadband, pay TV and mobile services together

ROI (Return on Investment) A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment.

Top line revenue Gross sales or revenues of a company which is normally shown on the “top” of a company’s income statement.

UnifiedCommunications According to the International Engineering Consortium, unified communications is an industry term used to describe all forms of call and multimedia/cross-media message-management functions controlled by an individual user for both business and social purposes.

Whitespace Unused broadcasting frequencies

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APPENDIXESAppendix I: Interviewees

John Yeomans Director at First Capital

Specialises in digital media and communications. He is a Director of FirstCapital, a European investment bank specialising in M&A and raising capital for growth technology businesses; of SharedBand Ltd, which manages access to telecom networks over multiple IP connections; of Violin Ltd, which facilitates targeted TV advertising; and of Worksnug, a global social network to improve the experience of mobile workers.

Richard Porter, Head of Product Marketing at Telefonica O2 UK

Responsible for product marketing in the consumer mobile division. Targeted on revenue and customer satisfaction for a broad range of products across voice, messaging, mobile internet and portals. Also responsible for revenue and deals associated with third-party content.

Irving Wladawsky-Berger Strategic Advisor, Innovation & Strategy CitiGroup

Retired from IBM in 2007 after 37 years with the company. Since then, he has collaborated with colleagues at IBM on a number of initiatives including Cloud Computing and Smarter Planet. In 2008 he joined Citigroup as Strategic Advisor, working on innovation and technology initiatives including the transition to mobile digital money and payments. He is also a regular contributor to the Wall Street Journal’s CIO Journal.

Carl PimblettTechnical Sales Director (UK & Ireland), Huawei Technologies

Technical Director responsible for pre-sales activities into Service Provider and Distribution Channel markets for Huawei Technologies in UK and Ireland. Staff responsibilities include Product Management, Pre-Sales Engineers, Bid Management and Commercial Contracts Management teams.

Simone VaccariEnterprise Product Manager at Vodafone UK

Product Manager for smartphone mobile internet (data connectivity), with P&L responsibility of >£80m. Key responsibilities include: developing innovative and customer centric propositions from market insights, sharing best practice with other Vodafone markets, and managing product portfolio life-cycle collaborating with marketing and sales. KPIs include: smartphone penetration and ARPU (average revenue per user).

Bruno BasaliscoSenior Associate at OFCOM

Through his professional experience within Ofcom and economic consultancy he has strong expertise in both quantitative and qualitative economic techniques and a deep knowledge of the communications industries.

Appendix II: Interview transcripts

John Yeomans, Director at First Capital

Are mobile operators playing their part in providing payment services to consumers? What about Google? And credit card companies? - There are lots of different ways to implement mobile payments - Any method that relies on a data communication using the mobile terminal is a bit

problematic because of the problems in building in coverage and those kind of things - The way I see this technology going is mobile phone that contain a security chip like an

RFID device, and the actual communication is in the retailers terminals and FPOS system and mirrors the present systems that are card based and transaction based and fixed line based - Unless you can reliably communicate 99.999 % of time using this terminal, you are not

going to have Tesco guys saying “oh sorry we have just drifted out of coverage” we cant do that. Can you pay by cash? - I would question what part the mobile operators have in this. If it’s a question of putting

chips in phones, that’s the job of mobile handset makers - What is mobile operators part in this other than sell handsets with chips in them? - I don’t think there is much in it for the mobile operator - Should they be focusing more on mRetail and shopping based opportunities? - Have not yet found a telco fixed line or mobile that is as reliably correct at doing anything

as a business above basic bit transport - If I were advising any telco or mobile operator I would say stick to your knitting and do

bit transport - Thus what else should they do? - Music portals, defaulting data connection to operator portals – this was amateur frankly. - T-Mobile provides mobile communications to 25% of people in this country - Google is trading in all countries in the world and isn’t constrained to which mobile

operator they work in. - Mobile advertising – O2 Telefonica has done it the best - Operators see that a major phenomenon has happened. - Mobile billing system with O2 is being successfully used with premium rate but we are

typically talking about something that is geared towards collective amounts of up to 5 or 10 pounds. It’s not like a credit card. It is not set up to accept payments of 300 pounds

- Funny to authorize payments by mobile network when existing payment systems are all in place

In the UK shareholders and investors have lost a lot of money, if we look at C&WW or BT, share prices have plummeted in the last 5-6 years. How does the City perceive mobile operators? - Sadly UK has screwed up its fixed line businesses for a long time - The 5 mobile operators in the UK are owned by deutsche telecoms, Telefonica,

Vodafone, France telecom, and 3 - The city when it evaluates mobile operators in the UK sees that there are 3 European

telephone operators primarily fixed line with mobile extra, then there is UK mobile telephone operator with a fair few fixed line interests outside the UK. - The city largely looks at these as Telco’s not as fixed or mobile operators - It’s true that the more valuable parts of these businesses are the mobile parts of these

businesses - City has got a bit confused - In the 90’s it was an investment business, about 3 years ago it was a profitable but

dividend business – getting a bit more competitive - Confused now because the dynamic between smartphone and data growth which is

forcing massive investment - Verizon outstripped voice for the first time 18 months ago - O2 did the same in the UK - 10 years time – data will be 10 times or more than voice - Inevitable consequence is that mobile operators have got to invest - The city looking backward is saying they want a dividend from investment and looking

forward it is going to take more investment. They are going to have to cut their dividends and how is that going to happen. - We set up in this country with 4 mobile operators – we have collapsed that to 3 with the

Everything Everywhere joint venture - O2 and Vodafone have agreed now that they are sharing infrastructures - Mobile coms is just like fixed coms - They are trying to compete at a higher level at things like customer service and if they

can, yes they want to do these apps but I don’t think it will happen

What do you think of the possibility of there being just one mobile operator in future? - It will be defined by the market. You’ve got the market and regulation. You have two

contradictory things - Regulatory law and competition law- if you get more than 25% of the market, you are

potentially a monopoly - AT&T, Verizon and Sprint Nextel - T-Mobile trying to merge with AT&T - regulators did not allow it to go through - Everything Everywhere was allowed to happen - A lot of pressure to consolidate and the regulator is trying to keep competition but

natural outcome is 2 or 1 - its all a matter of time - Could regulators relax to the point of allowing BT an LTE license to move into the

space? - BT is too small to do it now – BT didn’t need to demerge - BT dug itself into debt in the early 2000’s

M2M - Neul – the cloud, whitespace - When they freed up television broadcast spectrum, which is prime spectrum in the

range of 400-800Mhz, there is now a lot of more or less unused spectrum. - 1960s they left spare bit f spectrum to avoid interference because the transmitters were

not perfectly stable - We have got a lot better but there is still a risk - Problem is it is a dirty spectrum – can pick up interference - In a modern day world, that can be managed by frequency hopping like the military do - Neul sees it’s market as completely machine to machine - People have been saying M2M will take off for the past 20 years - I am skeptical because any large organization gets set in its ways - M2M – Whole thing run by a sim – so far very inflexible – rather than lower amount

of users and higher fees, there should be volume in users and cheaper fees – that is what M2M needs.

Looking at M2M but specifically mHealth and mobile apps and payments (enterprise side). Have operators set up any differently in this area in respect to meeting the needs in that market? - Standards take 2 years - Takes another year of jockeying and another year of commercial support - Deutsche telecom or Vodafone have commercial support

You think there is an incentive from their part in that they’ll basically be pushing people onto the network – basically more traffic on their networks that won’t compete with their 9-5 consumer type market? - If it’s done right – of course that’s the prospect - Principal is great –things like environmental monitoring etc. it is great although I think

it will take longer than a lot of people think

You set companies like Workslug that are built on being able to work on the move by taping into public spaces and availability. What is your perspective on whether or not LTE is the best option especially in built up areas and what public Wi-Fi companies might be? - I think it’s fascinating - I think this is the most important issue in mobile and Wi-Fi at the moment which is

bridging the gap between mobile and Wi-Fi - I have little doubt that LTE will role out – Verizon has 70% population coverage of

it’s customers, most of the rest of the world has less than 10%, the UK has none because we haven’t allocated the frequencies yet - This is where the pinch point in mobile com’s is – 90%+ of most peoples data is in

building - For me personally – 80% of data on my smartphone is through Wi-Fi because I’m

usually in my office, flat, my home or at other offices - The operators sell you phones, the operators are planning the role out of LTE, which is

an out-of-building solution to solve all your problems but actually the solution is most obviously there – in-building with Wi-Fi - Most operators have woken up to the fact that they need more Wi-Fi including public

Wi-Fi including shopping malls, cafés etc. - What you do outside of Wi-Fi areas is trivial compared to within Wi-Fi areas. - Out-of-building solutions are expensive and would not necessarily penetrate in-building

areas, which is where you need it. - So they are now all rushing to set up Wi-Fi - We couldn’t set up space stations fast enough for O2 - What operators should be doing is getting coverage for as much as possible and then tie

everything up seamlessly

Do you know of any operators that are currently looking to do that? - If you look at O2 here, it uses a solution from Kineto wireless, if you look at orange it

uses a more old fashion solution based on UMA technology, if you look at 02, it’s just rolling stuff out as much as they can and getting access to people.

- This is something where the likes of BT could do pretty well. - If you look at FON – it supplies routers cheaply and the deal is there is a small part of

the band-with that is free for people passing outside - The problems with Wi-Fi are clear – it is unlicensed spectrum and problems like not

knowing where to log on - Seems to be that the Wi-Fi mobile thing is the absolute core underlying issue within

where the rest fits - Mobile operators cannot do anything except tell their customers to turn on their Wi-Fi

Interesting because we saw Vodafone buy out Cable and Wireless so they are obviously moving into fixed line. - Our mobile operators - 3 are run by Europe’s largest fixed line operators - Vodafone is buying a billion of assets in the UK - The game is fixed line and mobile coming together and that will be more and more true

Richard Porter, Head of Product Marketing at Telefonica O2 UK

Where are the greatest growth opportunities for consumer mobile? - There are a number of companies like O2 that have grown up from a core mobile

business but now have a much broader portfolio of offering such as consumer Wi-Fi, consumer home broadband and home phone. - Consumers would still think of us as predominantly a mobile business, the broad

portfolio is much wider than that. - “In terms of growth areas there is a lot we can do for consumers in terms of Machine

to machine business. There is a lot of growth in that market and that will directly benefit consumers.” - LTE is another area of growth and will provide us with the ability to deliver great new

experiences for our customers

What is the danger that mobile operators are becoming a commodity service provider? - “The twenty million dollar question” - Creation of Telefonica digital is a global business playing in a completely space leveraging

all of the network assets we have and customer relationships we have across the world and then overlaying the digital product set that puts O2 and Telefonica right in the space of being a leading provider of digital experiences to customers. There is a lot of value in that experience piece for customers, the relationship that we have, the support we give for the overall wrap that starts with connectivity in many forms whether it’s broadband, Wi-Fi or mobile and runs right through the handset experience, the sales and service wrap which is the retail store, the voice support channels but beyond that in the experiential piece. We have priority ticketing, the O2, recently launched priority sport with Nike - Yes this a great asset and we have to continue to leverage it but there is a lot of value to

be extracted from customers in that much broader relationship

What role can mobile operators play in mCommerce, mobile advertising applications and M2M? - We sit in the value stream - We sit between the person with the tablet and the suppliers that want to connect it those

consumers - We will let advertisers pay to have relationships with consumers on our base by targeting

very specific things for them - We are looking at how we can explore and grow that across the Telefonica footprint - In content and applications, particularly mobile payments – for many years we have

been part of that value chain particularly through premium SMS.

- More and more transactions are being done on the mobile phone - “We recently launched O2 Wallet which puts us right in the middle of that payments

value stream and we see that as an absolutely key area going forward”

What are the current dynamics between mobile operators and handset manufacturers? - To deliver an outstanding experience to the customer, we need great technology

underneath, the network, and the service wrap and we need the presentational piece – the device, to be great as well. - We work closely with the manufacturers and what we want is to make sure that the

experience is great, that the devices work with all of services and products but that there is a choice for the customer - They need us, we need them and the consumers need it all to work together. - We are looking at how to create a phone in an html5 browser and that brings a new

way of using devices and adding traditional phone functionality on them – particularly useful in Latin America

What is O2’s biggest differentiator? - That experiential relationship - As an O2 customer you get priority on tickets 48 hours before anybody else - That sort of experiential wrap brings a massive o2 differentiator for us and the leap we

have just taken with Nike is to extend that similar breadth into the sport space

What has prompted the large-scale consolidation of network infrastructure? What consequences will it have? - O2 and Vodafone have had a sharing agreement whether that is cell space and power - We are taking that up a gear and taking the economies of scale o places where its

increasingly hard to differentiate and taking the economies of scale there and sharing with Vodafone and investing the money that we save in a much better customer experience in the broader business so we can use that investment to differentiate in a different way rather than on a core network which is increasingly less of a differentiation piece - You do not necessarily need 6 or 7 networks in a country

Are investments in public Wi-Fi networks a good alternative to building LTE infrastructure? - We have O2 Wi-Fi - You can use it if you have a sim from another operator in the UK - Increasingly consumers will use the different ways of connecting in a more balance way - Could choose broadband at home with high bandwidth, Maybe choose LTE when out

and about but when in Starbucks I might hook up to Wi-Fi

Simone Viccari, Enterprise Product Manager at Vodafone UK

What are the most successful enterprise products from Vodafone? Corporate network, unified communications, M2M, smartphone, can you bring your own device – Can you tell us a bit about each and which ones are most valued? - Vodafone’s aspirations for the business enterprise unit is to ‘change the way Britain

works’ – how we will do that is through a series of different products – unified communications, one net (which gives customers a geo phone number). - We have a lot of different products, which enable us to comply with that, the only issue

is that they are very hard to sell. - I look after smartphone data for enterprise products within the core team - MDM – different section of enterprise that looks at more innovative products which

gives us sustainable differentiation in the market and would enable us to comply with the change the way Britain works but most of the customers now are asking for core products – fewer customers are asking us for the other products so if you look at our old revenue line – 85% on core products and 15% on M2M/MDM products - It’s because customers are going through the transition and they don’t know where the

added value is yet. - We are trying to sell them to customers by creating case studies - When a company gets the product we try to make a case and see what the company is

getting out of it. - Structured between core, innovative products (growing slowly but there is growth) - Long journey – not easy to change the perception of customers - M2M is growing a lot. The biggest account is with Centrica and M2M is thought to be

one of the fastest growing segments for the next few years and companies are going to rely on this sort of machine to machine communication of data - The aspiration of enterprise within Vodafone – we are the leaders in mobile

communications in enterprise and we want to be in fixed line - Once we have the backing of Cable and Wireless we will have a big source of revenues

Logistics, automotive and mHealth. Do you think there are other industries where you think M2M could be developed? - Ring-fencing would be an innovative way to use M2M - Ring-fencing could be deployed in a variety of ways but am not that involved in it

What would the roll out of LTE bring enterprise products at Vodafone? What kind of products could you offer your customers as a result? - Orange is releasing LTE is September/October and is renegotiating spectrum with the

government - There are a lot of hopes around LTE in how we can use it to the full potential - Investing a lot of capex in past two years and making all of our bay stations LTE ready

so as soon as we have the spectrum we can just switch it on and have the whole country covered up - How would we use this for enterprise? - Many companies today are mobilizing the workforce and are challenged due to

downloading a lot of data - We have a penetration of smartphones of 75% - some companies are not taking internet

as its not filling in all of their needs – this is where LTE could fill that gap - I’m not sure the deployment strategy of LTE

What role does smartphones have in enterprise? With total communications could you imagine a world where all work phones are smart phones? - As more applications are deployed on the enterprise side, more companies are depending

on smartphones and tablets as the main tool to work - As an adequate ecosystem develops, ore enterprise companies who originally wanted no

involvement will be.

Appendix III: O2 Wallet Overview