Dr. Sören Grabowski
Moscow, June 8th, 2011
Future transformation and integration of Telecom and Media
A.T. Kearney 05.20110 2
Evolution of the consumption patterns and Internet value chain
Selected trends 2020: Net Neutrality, Social Communications and Media
Redistribution of the revenue streams and new partnership models
Russian realities and a word of caution
Agenda
A.T. Kearney 05.20110 3
Industry trends and uncertainties point towards three likely scenarios of how the communication industry could evolve
Global communications
industry scenarios
Full service world: Pipe Dream
All cloud: Commodity pipe
Mobile Play: Status quo
Major industry uncertainties
Regulatory role
Delivery service paradigm
Customer preferred
relationship
Share and role of user generated
content
Major industry trends
Stagnant core
Size matters
Data explosion
Integration finally happens
Device and service
integration
LTE
New neighbors, new threats
New business models
Industry Scenario Approach
Source: A.T. Kearney analysis
A.T. Kearney 05.20110 4
Industry scenarios range from a high value-added role for MNOs to a fully commoditized, web-payer-dominated world
Industry scenarios
Global communications market scenarios
Full service world: Pipe Dream
All cloud: Commodity pipe
Mobile play: Status quo
• Mobile industry evolves along same path as fixed – operators provide access with no value add – dumb pipe
• Operator split between wholesales and fixed
• OTT players capture service revenues
• Handsets commoditize like PCs (OEMs that transform into all-out web-players win, e.g., Apple)
• Operators integrate the value chain, driving convergence across content, delivery and device
• Acquire online players and media firms
• Disintermeditate OEMs by going direct to ODMs – use subsidies to control device
• Mobility as all encompassing service
• Industry definitions stay stable
• Limited additional convergence; evolution is incremental
• Each player leverages its assets for revenue sharing
Source: A.T. Kearney analysis
A.T. Kearney 05.20110 5
Each scenario results in a different value chain configuration with a specific set of winners and losers
End state value chain configuration by scenario
Device Service Distribution
OEM Applications & online services
Network operator
Service provider (MVNOs)
Platform software
All cloud
Mobile play
Full service world
All cloud • Software and online services players
succeed in the online services battle thus capturing major part of profit pools
• OEMs and operators driven out of new income sources
Mobile play • No major changes in value chain • More activity for media players starting to
provide online services • OEMs still have a significant role, specially
integrated OEMs like Apple
Full service world • Operators consolidate and converge. They
control distribution and contact points along the value chain
• Operators provide online services and become a dominant players
Online services
Online services
Devices
Devices
Fixed operator
Mobile operator
Mobile operator
Fixed operator
Mobile operator
Devices
Online services
Online services
Online services
Fixed operator
Mobile operator
Mobile operator
Media
Fixed operator
Source: A.T. Kearney analysis
A.T. Kearney 05.20110 6
Evolution of the consumption patterns and Internet value chain
Selected trends 2020: Net Neutrality, Social Communications and Media
Redistribution of the revenue streams and new partnership models
Russian realities and a word of caution
Agenda
A.T. Kearney 05.20110 7
Personal Advertising – Internet ads take over the ad world
Ten trends will shape the telecommunications industry till 2020 creating a rich, but horizontal segmented environment
Telco trends 2020
Augmented Reality – Sensor, machines and data ease life
Cloud commodity – IaaS is commodity, SaaS grows
Lean operations – Simple and reduced to the bone
Consolidation in distance – limited synergy effects
Fragmented Infrastructure – Network of Networks
End of Net Neutrality – Natural evolution of QoS in networks
Social Communications – Disaggregating largest community
N-Screen Environment – Content anywhere on all devices
New TV – The end of any schedule
1
2
3
4
5
6
7
8
9
10
Source: A.T. Kearney analysis
A.T. Kearney 05.20110 8
Massive Data Increase
Due to massive traffic increase, net neutrality will end – one way or the other as the invest is not sustainable
1) Data included for Western, Central and Eastern Europe, for Consumer and Business users Source: A.T. Kearney Whitepaper “A Viable Future for the Internet”
End of net neutrality
2
8409
14611 YoY
+35%
3236
1
11 13 06A 10 12 07A 09A 14
399
1217
764
YoY +107%
32 3 185
11 77
08A
Fixed - PB/month -
Mobile - PB/month -
Massive Add‘l Investments Options for Change
Modification of retail price schemes
Traffic-dependent charges for all traffic
Enhanced quality services over the public internet
Enhanced quality services based on bilateral
agreements
Europe1)
If congestion hits the Internet, QoS-based services (via CDNs) are in demand by OTT providers
2,4 0,3 2,7
1,5 3,0
5,2 5,2 5,2 5,2 4,4
5,2 5,2
Capex Trendline
Additional Capex Required
14
14
5
13
11
08A
12 12
5
12
13
6
11
13
6
10
13
09A
Fixed - €bn/year -
Mobile - €bn/year -
€9.8 bn add‘l
CAPEX
+ €116bn
for FTTx (50% HH)
€21 bn add‘l
CAPEX
(LTE not incl.)
A.T. Kearney 05.20110 9
Social networks like Facebook internalize inter-personal communications, crowding out telcos
3
Facebook:
• 250 mn mobile users using 200 service providers in 60 countries
Google:
• 1.5 mn Google Voice users 7 months after launch
• 150 mn mobile users for Google Maps alone Chat Status
Apps/Gaming
VoIP Calls Wall Posts
Messages
Sharing
Ads
Places
Coupons
Source: Facebook; Google; A.T. Kearney
3
Social communications
While telcos have always focused on providing connectivity to their subscribers, social networks are serving the communication needs of their communities
A.T. Kearney 05.20110 10
Media, personal content & services are accessible any-where from any device – stored distributed in a cloud
N-screen environment
On-the-Move
Audio
Laptop
Source: A.T. Kearney
4
Enterprise
Tablet Smartphone
Smart TV
Electronic Paper Car
Router
Set-top Box
Servers Router
Video Conf.
Desktop
Tablet Smartphone Laptop
Enterprise Cloud Consumer Cloud
Internet
Home
NAS Server & Storage
Cloud
Server & Storage
Server & Storage
A.T. Kearney 05.20110 11
Evolution of the consumption patterns and Internet value chain
Selected trends 2020: Net Neutrality, Social Communications and Media
Redistribution of the revenue streams and new partnership models
Russian realities and a word of caution
Agenda
A.T. Kearney 05.20110 12
Option 1: Increase average retail prices
Option 3: Enhanced QoS over Public Internet Option 4: Enhanced QoS based on bilateral agreements
Option 2: Standard termination charges for all traffic
Giving the unsustainable economics for carriers, new commercial models need to evolve to handle the traffic
Additional payment flowTraffic flow
End Users
Internet Core
Connec-tivity
Provider
Online Service Provider
€Access charge: Increase in
retail prices supported by differentiated pricing
Last mile
RAN
Aggregation/ Backhaul
Retail Connectivity Provider
Additional payment flowTraffic flow
End Users
Last mile
RAN
Aggregation/ Backhaul
Internet Core
Connec-tivity
Provider
Online Service Provider
€ € €
Payment is passed down to the ‘last mile’ providers via termination charges factored into wholesale prices at each
level/handover point
Retail Connectivity Provider
Differentiated pricing for guaranteed QoS
End UsersAdditional payment flowTraffic flow
Internet Core
Connec-tivity
Provider
Online Service Provider
€ €Commercial agreements to
distribute additional revenues for end-to-end services
Last mile
RAN
Aggregation/ Backhaul
€
Retail Connectivity ProviderEnd Users
Additional payment flowTraffic flow
Internet Core
Connec-tivity
Provider
Online Service Provider
€
Last mile
RAN
Aggregation/ Backhaul
Managed Services Delivery
Technology Enabler e.g. Akamai
Services Retail Connectivity Provider
Private network
Public Internet
Content Delivery Services
Net Neutrality – Alternative Commercial Models
Probably a combination of models is necessary
Source: A.T. Kearney
A.T. Kearney 05.20110 13
• A higher share of subscribers – primarily
high-volume users – pays flat-rate access tariffs, especially for data plans
• VAS still primarily transaction-driven
• For some subscribers, third party-
advertising pays for (part of) the access – mostly in the low usage segment
• MNOs create revenue-share models with service providers
• MNOs widely adopt tiered pricing models for data access to better monetize high volume users
• Revenue for mobile voice and data and services are primarily transaction-based, i.e., subscribers pay by units consumed, either for every single unit or for bundles with a specified number of units (e.g., minute, SMS, MB) – only few high-volume users have flat fees
2006 2010 2014
New Value Capture: In a changed ecosystem new MNO business models will need to evolve
Evolution of MNO revenue models (Mature Markets)
F = Revenues from flat-rate tariffs; P= Revenue share from partnerships; A = Revenue from advertising revenue sharing; T = Tiered-pricing based revenues; U = Usage / transaction based revenues Source: A.T. Kearney
MNO business models need to evolve to capture new revenue sources through new pricing structures and partnerships
Illustrative
0% 100% 0% 100% 0% 100% 0% 100% 0% 100% 0% 100%
U
F
U
F
+
High usage
segment
Low usage segment
Access (voice & data)
Services
+
U
F
U
F
Access (voice & data)
Services
+
U
F
U
F
Access (voice & data)
Services
T
P P A
A.T. Kearney 05.20110 14
Evolution of the consumption patterns and Internet value chain
Selected trends 2020: Net Neutrality, Social Communications and Media
Redistribution of the revenue streams and new partnership models
Russian realities and a word of caution
Agenda
A.T. Kearney 05.20110 15
Russia’s current data consumption trend is already on a surging slope with data ARPU doubling over a period of just two years
Source: Global Wireless Matrix, A.T. Kearney analysis, Client data
0,7 0,7 0,70,9
1,11,2 1,3 1,4
Q3 2009
Q3 2010
Q2 2009
Q2 2010
Q1 2009
Q1 2010
Q4 2009
Q4 2010
Customers are increasing their non-voice consumption irrespective of operators’ access technology and capacity
Data ARPU evolution in Russia (EUR, Q1 2009-Q4 2010)
ARPU Data ARPU
Neth
erlands
27%
Norw
ay
26% 25% 24%
Sw
itzerland
19%
Port
ugal
35%
Austr
ia
31%
Germ
any
28%
Spain
23%
Belg
ium
23%
Russia
Sw
eden
Data contribution as % of ARPU, (June 2010, %, global examples)
A.T. Kearney 05.20110 16
And there is no fundamental difference in Russia neither in device preferences nor in the user behavior
1) Age 15+ - Home and Work Locations, excludes traffic from public computers or access from mobile phones or PDAs Source: Gartner, MForum Analytics (2011), comScore Media Metrix (2011), A.T. Kearney analysis
1,2
2,73,4
4,4
7,0
0,7
296,6
139,3122,3
80,0
37,4
2010E 2009 2005 2008 2007 2006
172,4
Russian players are likely to join worldwide value chain trends
Smartphone Sales statistics (mln. units)
Top 10 Countries for Social Networking (August 2010, Total Worldwide Audience1))
4,9
5,0
5,0
5,3
5,8
6,2
7,3
7,6
9,2
9,8
Turkey
Russia
Israel
Canada
Indonesia
Finland
Spain
Puerto Rico
Philipinnes
United Kingdom
Average time spent by visitor, hours per month Russia Worldwide
A.T. Kearney 05.20110 17
Media and Telecom integration
Source: A.T. Kearney
Critical factors for Russia
Individual operators and providers
1
Regulators
2
• Russia offers a attractive field for operators to extend activities and to model the market according to their own needs
• However, new value chain will rather lead to the redistribution of the revenue streams among the players and to less extent to the increase of customer spending
• Efficient execution, access to state-of-the-art know how, lean operational models and sound partnership strategies are key for the defending profitability
• Existing regulation in Telecommunications lags behind technology trends, the entrance of the new players (e.g. internet service providers) leaves even less options for traditional technology-based regulation
• With further evolution of the value chain the role of cross-industry (telecom, media, finance, antimonopoly) regulatory cooperation will increase
• Thus, a broader understanding and consensus should be reached for the success, the right balance has to be found to ensure healthy competition and sustainable industry development
A.T. Kearney 05.20110 18
Copyright ⓒ 2011 by A.T. Kearney This document is exclusively intended for your personal use. Distribution, quotations and duplications – even in the form of extracts – for third parties is only permitted upon prior written
consent of A.T. Kearney. A.T. Kearney used the text and graphs compiled in this report in a presentation; they do not represent a complete documentation of the presentation.
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Dr. Sören Grabowski
Principal
Head of Communications, Media &
High Tech-Practice – Moscow & Kiev
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