industry outlook 2012

Industry Outlook2012

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Any views and / or opinions expressed in this publication by individual authors or contributors are their personal views and / or opinions and do not necessarily re�ect the views and / or opinions of Informa UK Ltd.Informa Telecoms & Media is the leading provider of

research, events and training to the global telecoms and media industry.

Every year, 10,000 companies use our services to evaluate market opportunities, benchmark their competitors and grow their businesses.

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RESEARCH AND CONSULTING

Our research business delivers independent strategic insight, global market data and primary research. We work in partnership with our clients to inform their decision-making with actionable advice and support.

Key services include:

CONFERENCES & EXHIBITIONS

Our 100+ annual events and exhibitions are critical in driving the industry’s agenda. We bring together high-calibre decision-makers from the mobile, �xed, alternative, wholesale, MVNO, broadband and satellite operator communities.

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The Telecoms Academy team delivers a public portfolio of over 50 training programmes every year. These include intensive �ve-day Telecoms Mini MBA and specialist next generation technology courses.

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As analysts we spend our lives immersed in the telecoms and media industries, absorbing new information, speaking to key decision-makers and making connections between trends and developments across different countries and continents. The annual process of condensing these interactions into coherent themes for our Industry Outlook report is as challenging as it is rewarding.

At any given time we have twenty or more analysts on the road, attending and speaking at events, researching market developments or briefing clients. We strive to deliver insight and guidance by distilling the information and knowledge that we acquire in these meetings. One of the other tools that we use is industry surveys. Sometimes these cover an industry niche – we have carried out surveys in recent

weeks on mobile roaming and content delivery networks (CDNs). But once a year we conduct a broad industry survey, the results of which we publish in our Industry Outlook report.

It is always interesting to see where opinions and attitudes change and where they remain constant. For the last three years we have asked the question “Do you see Google as a threat or an opportunity to your business”. Remarkably, the responses that we received this year were almost identical to those we got back last year despite the fact that Google’s presence in the telecoms industry has increased massively in the last 12 months.

You can find the full results of our survey at the end of this report. Our analysts have also used some of the responses in the opening sections of the four main sections of this report. These cover our four key research themes for 2012:• Thetransformedtelco• Re-engineeringthebroadbandbusinessmodel• Services,ecosystemsandconnecteddevices• Seizingnewrevenueopportunities

I hope you enjoy this report which also contains highlights of some of the research that we have published in recent months.

And we look forward to working with you in 2012.

Yours,

Mark NewmanChief Research Officer – Informa Telecoms & MediaEmail: [email protected]

Welcome

4 ©2011 Informa. All Rights Reserved. Industry Outlook 2012

Informa Telecoms & Media's research business has been the leading provider of strategic insight, key market data and forecasts for more than 25 years.

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CASE StUDIES

Market SurveyClIENT: Value-addedsolutionsproviderformobileoperators.OBJECTIVE: TotransformitsservicepropositionandvalidateviewsoftheAsiaPacificmarket.

SOlUTION: “UsingournetworkofresearchcontactswetestedtheviewoftheAPAC

marketbyconductingaseriesofin-depthstrategicinterviewsandrunningasurvey.ThisresultedinthepublicationofaWhitePapertakingtheclient’smessagetoaregionalaudienceandwasfollowedupbyaseriesofstrategicbriefingstoC-levelserviceprovideraudiencesintheregion.”

White PaperClIENT: Tier1handsetvendorOBJECTIVE: Toassesstheeffectofdifferentsmartphoneoperatingsystemsoncurrentmobilebroadbandnetworksandestimatetheenergyrequirementsthatthesecreateonthenetwork.

SOlUTION: “Couplingourin-houseresearchanddatawithabespokeanalyticalmodelandwide

networkofcontacts,wewereabletoimplementamodelingtool.TheresultwasaWhitePaperusedbytheclienttopromoteitssmartphoneecosystemandplatformtomobileoperators,therebyillustratingenergysavingsthatwillbecomeimportanttoitsmarketingefforts.”

Charles MoonPrincipal Analyst

Nicholas JotischkyPrincipal Analyst


Contents

Welcome ........................................................................... 03

Benefit from our expertise ............................................ 04

Our services ...................................................................... 05

Consulting and customized research ......................... 06

2012 Outlook: Maturing markets, data and over-the-top realities will shape operator strategies ............... 08

tHE tRANSFORMED tELCO

Introduction.................................................................................. 10

VDSl-vectoring strategies: The copper technology that’s making FTTH look passé ........................................................ 14

Managed services and outsourcing survey 2011: Transformed operator attitudes .......................................... 20

European operating groups turning to network sharing to cut costs ................................................................................... 30

RE-ENgINEERINg tHE BROADBAND BUSINESS MODEL

Introduction ................................................................................. 36

The end of all-you-can-eat pricing is bringing Internet companies to the negotiating table .................................. 40

Standards process gives Wi-Fi a performance boost, but seamless integration with cellular is the priority .......... 46

Case study: Belgacom makes the best of a bad hand with copper-centric NGA strategy ...................................... 52

SERvICES, ECOSyStEMS AND CONNECtED DEvICES

Introduction ................................................................................. 56

Weak business models and networks undermine the connected home ....................................................................... 60

Mobile NFC ecosystem and value chain .......................... 68

Current trends in mobile application store content ... 84

SEIZINg NEW REvENUE OppORtUNItIES

Introduction ................................................................................. 96

The connected train: opportunity review of passenger services ........................................................................................ 100

Telefonica targets SME growth in latin America with SaaS ............................................................................................... 112

Carriers are increasingly laying claim to Android Market through billing and ‘content channels’ ........................... 117

Survey Results ................................................................ 120

Our Analysts ................................................................... 128


Year-on-year robust revenue growth has become a fading memory for many telecoms operators in Europe, North America and parts of Asia. The broadband (fixed and mobile) access business continues to perform strongly but new revenues are barely compensating for declines in voice. New-service revenue streams continue to prove elusive as consumers find what they want from the Internet and applications stores rather than from the tired offerings of operators. It’s a similar picture for TV companies. The world is moving online. Online players – big and small – are the ones racking up new users and, in some cases, revenues.

Google, Facebook and Twitter have migrated from the desktop PC onto screens stored in pockets and handbags and onto the big screen in the corner of the living room. Facebook is viewed primarily as a mobile service in the developing world: In Indonesia, for example, it accounts for a third of all mobile data traffic. Google is signing up more new users via the four-million-per-week new Android devices than it is from PCs. Online-video provider Netflix has as many customers as a mid-sized US cable network and contributed to the demise of former video king Blockbuster.

Start-ups are also making their mark. What’s App, an IP-messaging service that was blamed by Dutch operator KPN for a decline in its SMS revenues in 2011, has been in business for less than a year.

None of this is to say that the telecoms and traditional TV businesses are no longer profitable. Operators are still throwing off huge amounts of cash which they are plowing back into new networks. But they have become more like utilities and less like service providers. Keeping hold of customers and revenues and defending their territory has become their key modus operandi.

In emerging markets, however, it’s a different story. Growth in basic (mobile) voice connectivity may be slowing but there is a huge potential in bringing the Internet to the mass market, typically via the mobile phone. Only 10% of mobile users in the Middle

East, Africa and latin America today are using 3G but, as new networks are rolled out and low-end smartphones fall to below US$100, there will be an explosion of data usage.

Every year, Informa Telecoms & Media conducts an industry survey to gauge the sentiment of the sector and to understand the key issues and strategic priorities for the next 12 months. We thank those of you who completed our survey this year.

Your replies give us a pretty good picture of how the industry is feeling about its prospects as we plan for 2012. We asked whether you think telecoms is a maturing industry or one which still has plenty of room for growth. The replies show a clear split between

Outlook 2012: Maturing markets, data and over-the-top realities will shape operator strategies

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FIg 1Which of the following best describes the current status of the telecoms sector in your home market? (Choose one)

Dynamic Maturing Flat / declining revenues

Source: Informa Telecoms & Media Industry Survey 2012

NOTE: Base, n=573


Europe, where just 21% of operator respondents said they saw telecoms as a dynamic sector with strong opportunities for vendors and operators, and emerging markets such as Africa and latin America where the figures were 66% and 75%, respectively (see fig. 1).

As the telecoms industry matures, operators have come to understand that it is more cost-effective to invest in retaining existing customers rather than acquiring new ones. When asked the question “What will be the single most important area of focus for operators in 2012?”, more respondents (37%) chose “Customer experience management” rather than “Network deployments and developments (NGN and lTE)” (29%). This is despite the fact that more than one in three respondents worked for technology vendors which are investing heavily in next-generation networks and devices. The option “Efficiencies, cost control and best practice” came in third place with 17% of the votes.

A key driver for operators’ focus on customer experience and the rollout of new services is the need

to slow price erosion. The price of communications services is falling in most regions with more than one in four operator respondents expecting price levels in consumer markets to decline by more than 5% per year over the next two to three years (see fig. 2).

With the growing power of over-the-top players in consumer markets, both operators and network vendors are now starting to invest more heavily in the business market, with a particular focus on mobility and vertical sectors. Outside the respondents’ core telecoms and media sectors, energy, utilities and financial services were seen by respondents as the vertical markets with most potential followed by public sector and safety and health (see fig. 3).

As we approach 2012, the concepts of ecosystems and partnerships are starting to come more into focus not just for the over-the-top players but for more traditional telecoms service providers and technology vendors. Without them, telecoms operators will struggle to retain a role in the development of new services for consumers and may find they lack the skills needed to enter new M2M and enterprise markets. Fortunately for them, they retain the cushion of a US$1.5 trillion access business and a pent-up demand for basic broadband connectivity.

FIg 2How will prices of consumer telecoms services change in your home market over the next two years? (Choose one)

Decline by more than 5% per year .......................................................................................... 27.5%

Decline by 0-5% per year ............................................................................................................ 36.9%

Remain flat in real terms ............................................................................................................. 22.5%

Rise by 0-5% per year ................................................................................................................... 13.1%


NOTE: Base, CSP Respondents only, n=222

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FIg 3Which vertical markets is your organization targeting for profitable top-line growth? (Choose top 3)

NOTE: Base, n=573


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Without such an evolution, operators will lose ground – and business – to the so-called over the top players. And they will fail to capture new revenue opportunities in mobile broadband, M2M and connected verticals.

With the slowdown in new connections, and operators’ limited success in selling services to their customers, efficiency and cost control have become the key modus operandi for many telcos. The lean telco is a thread that runs through most of the issues and strategies surrounding the operator business. With flat – and in some cases stagnating – revenues in mature markets, operators are under pressure to cut opex levels.

Network sharing is gaining momentum, particularly as operators seek to justify investment in lTE.

Operators are also coming to recognize that they may need to partner with each other both to reduce costs and to develop platforms and capabilities that allow them to roll out new services.

Investment in next-generation fixed and wireless networks is challenging for any operator whose revenues are stagnating in real terms. New approaches to extending the life and improving the speeds delivered by copper and 3.5G networks are also combining to make the case for investing in new network technologies more challenging.

Operators are also starting to place a greater emphasis on strategies to retain existing customers than attracting new ones. Customer experience has evolved from a customer-care approach to an important part of an operator’s corporate strategy to improve customer loyalty.

CHANgES IN tECHNOLOgy, USAgE tRENDS AND tHE COMpEtItIvE LANDSCApE ARE FORCINg tELECOMS OpERAtORS tO EvOLvE A

BUSINESS MODEL tHAt HAS SERvED tHEM WELL FOR MANy DECADES.

The transformed telco

the transformed telco


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INtRODUCtION

The transformation that is required by telcos to capture new business opportunities is more evolution than revolution: Telcos must build upon their existing capabilities and piece together strategies that unlock value that is coveted by a wide variety of players within the smartphone, M2M and connected-vertical ecosystems.

MAxIMIZINg CUStOMER LIFEtIME pROFItABILIty tHROUgH CUStOMER ExpERIENCE MANAgEMENt

The CEO of a major US operator recently commented that “improvement in churn is the quickest, fastest, most significant way of improving your bottom line”. Although operators are rightly focusing on growing average customer spend, winning the loyalty of customers and extending their stay on the network arguably plays a stronger role in maximizing customer profitability. But delighting the customer in a hyper-competitive marketplace is notoriously difficult and requires building a strategy that goes way beyond today’s unsophisticated and embryonic loyalty programs.

A company-wide strategy is needed to address churn and an outstanding customer experience should be embedded in all aspects of operator strategy, from marketing and advertising to the network and smartphone portfolios.

The importance of customer experience management to communications service providers (CSPs) was underlined in our survey with 39.2% of CSPs identifying customer experience management as the single most important area of focus for 2012 (see fig. 1), exceeding by some margin the importance of network deployments and developments, such as lTE and fiber rollouts.

MANAgINg tHE OvER-tHE-tOp tHREAt tO CORE vOICE AND MESSAgINg SERvICES

When KPN’s CEO Eelco Blok announced in April 2011 that the operator was attributing a 2% decline in its service revenues to smartphone customers substituting core voice and messaging services for so-called over-the-top (OTT) services such as WhatsApp and Viber, it wasn’t just KPN that was left surprised. By acting as the whistleblower on this rapidly-emerging behavior amongst consumers, KPN managed to spook the entire financial community.


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FIg 1What will be the single most important area of focus for operators in 2012?

Customer experience management

Network deployments and developments (NGN and lTE)

New digital service developments (digital services)

Efficiencies, cost control and best practice

Partnerships with other operators and Internet players


NOTE: CSP respondents only, n=225



But are all operators at risk? Our view is that market forces are indeed aligning in a way that is building impressive momentum in terms of relevance and penetration behind OTT-based IP-communication services. The magnitude of the OTT phenomenon is potentially huge and the matter for operators is urgent. OTT players may only be having a small impact on operators’ voice and messaging revenues today, but their impact on revenues will quickly grow in line with accelerating smartphone adoption. According to our “back-of-the-envelope” calculations, every 10 percentage-point increase in smartphone penetration could cost European operators up to US$1.5 billion in lost voice and messaging revenues.

But how should operators respond to this threat? What emerged clearly from the survey was that the best form of defence is attack. Defensive moves such as blocking, disrupting or charging for OTT applications are unlikely to win out and, interestingly, our survey reflected that this is well understood by operators – just 10% of the CSPs that responded believe in such an approach (see fig. 2).

INNOvAtION AND pARtNERSHIpS

The CEO of US Cellular recently got up on stage in front of a room of financial analysts and declared that she’d turned down the iPhone because of Apple’s prohibitive terms. It was a brave statement to make, not least because so few operators to date have dared speak openly about the often fractious discussions with Apple. It reminded me of another fascinating story I’d heard when a senior telco executive was asked to describe the relationship with Apple. His response? “We pick up the phone, place an order and they tell us where and when to pick the iPhones up”.

A nice anecdote, but the serious questions that these stories bring us to are around the nature of relationships between telcos and their suppliers. Do the operators really need Apple? And does Apple need the operators? On balance, it’s a yes on both counts. Operators need Apple devices as they have proved to be the single-most successful and consistent devices in driving data-attachment rates and data-revenue growth. Apple cannot afford to sideline operators as to do so would mean to kiss goodbye to hundreds of billions in subsidy funds and tens of thousands of retail points of presence – an oft-understated reason for Apple’s phenomenal sales growth. These relationships are often tense and fraught with power struggles, but the importance of strong partnerships between CSPs and device manufacturers cannot be understated and

is highlighted in our survey (see fig. 4 on page 120) with CSPs polling device manufacturer partnerships as the most important for top-line growth in 2012.

WHAt tHIS MEANS FOR 2012

To successfully transform, telcos need to wake up and harness the strengths that lie right under their noses. It should not be forgotten that telcos control the pipes that underpin the Internet, offer unmatched capabilities in customer support and, through the hundreds of billions that are invested in device subsidies and building vast distribution networks, are critical to the expansion of the smartphone ecosystem. Evolving into a truly transformed telco is about building a lean and pragmatic business fully attuned to its existing strengths and exploiting them to become an enabling platform for an ever-expanding ecosystem of players.

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FIg 2What is the most important strategy that operators should implement to manage the threat of OTT voice and messaging services?


NOTE: CSP respondents only, n=225

The following supportive analysis has been taken from the Intelligence Centre


kEy pOINtS

• Thepotentialofatechniquetoincreasethespeedandreachofbroadbandovercopperiscausingincumbentsworldwidetorethinktheirnext-generationaccessstrategies.

• Vectoringworksbyeliminatinginterference,knownascross-talk,betweendifferentVDSLlines.

• Perhapsthemainbenefitofvectoringisthelargecostsavingsadeploymentpromisesoverafiber-to-the-home(FTTH)rollout.VectoredVDSLcanalsoberolledoutmuchmorequicklythanFTTHandtheresultwillbefewerandslowerFTTHdeployments.

• ThetechnologywillbedeployedovertensofmillionsoflineswithprimemarketsfordeploymentbeingmostWesternEuropeancountriesandNorthAmerica.

• Althoughthemass-marketversionisnotyetavailableonthemarket,rolloutswillbegineitherinthesecondhalfof2012oratthestartof2013.

• Vectoringisalsoatechnologythatcanworkinconjunctionwithothertechnologiesthatseektoprolongthelifeofcopper,suchasreducingthecopperlooplengthandpairbonding,enablingtelecomsoperatorstopotentiallyofferwellabove100Mbpsovercoppernetworks.

OvERvIEW

Vectoring is a technology that seeks to eliminate cross-talk, or the interference between different copper pairs, by jointly processing the actual signals of multiple pairs in a binder. Vectoring is a technology that applies to VDSl networks; it cannot be used to improve performance over ADSl lines.

The idea behind vectoring is for operators to continue to use parts of their existing copper networks rather than moving directly to FTTH. The strategic rationale is to be able to increase the speeds over copper networks and to be able to offer these speeds as quickly as possible. Incumbent operators in highly-penetrated markets, such as the Netherlands and Belgium, are

facing pressure from cable operators that can offer 100Mbps across all of their networks. Vectoring aims to enable incumbents to fight back and reduce churn to competitors by matching their speeds and at a non-prohibitive deployment cost. The cost reductions are important because operators are increasingly finding that consumer willingness to pay more for higher speeds is limited, therefore reducing the cost of super-fast broadband rollout is essential.

Benefits of vectoring: improved bit rates and reachVectoring can increase significantly the bit rates that a VDSl network can deliver. For example, chipset vendor Ikanos claims that vectoring can allow downstream bit rates of 100Mbps at loop lengths of 500m (see fig. 1). In addition, the company states that service reach can be improved; for example, the service reach of a 50Mbps service is increased by around 600m. The increase in reach could be important in reducing the number of street cabinets an operator requires, thereby saving costs. Vectoring also offers the possibility of significantly improving upstream bit rates.

As well as increasing the maximum bit rate, vectoring also greatly improves the consistency in performance between the lines. This is important because of factors such as the varying diameter of copper lines – there can be significant variation in performance

vDSL-vectoring strategies: The copper technology that’s making FTTH look passé

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FIg 1Ikanos vectoring test results

Source: Ikanos

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between different DSl lines, even ones using the same technology. Therefore improving the consistency in performance is important because it allows the operator to increase the marketable download speed and so compete better with cable. Vectored VDSl also has benefits in helping to ensure line stability, leaving it on a par with ADSl.

Large cost savings versus FTTHOperators face a choice of deploying fiber all the way to the home or rolling out fiber to the cabinet and using copper for the final section into the subscriber’s home. Typically the ratio of costs for a fiber-to-the-node (FTTN) rollout to an FTTH rollout is 1:3, but varies by country. In terms of costs, VDSl vectoring also has a significant advantage because networks can be upgraded on an incremental basis – basically, on a line-card-by-line-card level basis as opposed to investing in a complete optical line terminal for an FTTH deployment. This reduces the risks for ISPs in deploying vectoring and leads to a model that is more “pay as you grow” than

incurring the large upfront costs that must be invested in an FTTH network.

In addition, many operators are facing issues in the time taken to roll out fiber to the home. This can be an issue both because of the need to gain right of way and permission to dig up roads and also because of the need to roll out fiber in multi-dwelling apartment buildings which may, for example, require the permission of all the residents in that building. Vectored VDSl eliminates many of these problems.

Line-card-level for the mass market; system-level vectoring for niche deploymentsThere are two basic kinds of vectoring, line-card-level, for which chipsets are already available in the market, and system-level vectoring, which will be on the market in 2012.

In practice, line-card-level vectoring will be of lesser value. It jointly processes the signals of the ports on a

System-level vectoring

Vector groupVector group

Line-card-level vectoring

Line cards

DSLAM

Only vectors across a single line card. This means there could be lines from a

di�erent line card in the same distribution cable. This limits the

bene�ts of vectoring.

Vectoring occurs across multiple linecards meaning that all lines in the same

binder are part of the same vector group.

FIg 2Comparison of system-level and line-card-level vectoring

Source: Informa Telecoms & Media



single line card, typically around 24. However, in VDSl deployments, ports have typically been allocated on a first come, first connected rule. This means that there are lines from different line cards in the same binder and so processing the signals from one line card alone will not be enough to eliminate the cross-talk. This means that the gains in bit rate are lessened.

Operators could try to groom or rewire their lines so that all lines on the same line card are in the same binder. Even then, however, operators need to identify which lines need to be placed on the same line card, in other words, those that are causing most cross-talk. This can be difficult to achieve. In practice, the case for line-card-level vectoring may revolve around deployments with very small cabinets typically serving businesses. Another possible deployment scenario for line-card-level vectoring is using VDSl for the in-building part of fiber-to-the-building (FTTB) networks.

System-level vectoring will jointly process the signals of around 192-384 lines normally using four or more line cards and so will be able to remove the problems – that are present with line-card-level vectoring – of having lines from different line cards in the same binder (see fig. 2).

Therefore, system-level vectoring is likely to be the technology of choice for most of the service providers deploying vectoring. However, while the cost per bit with system-level vectoring goes down significantly, the overall cost is greater than for line-card-level vectoring. A number of operators are already trialing system level vectoring (see fig. 3).

StANDARDS REMAIN INCOMpLEtE BUt CpE ISSUES SHOULD BE RESOLvABLE

Central office issuesAlthough vectoring can save on civil infrastructure costs, there are other costs involved in a deployment. Despite the fact that there is an ITU standard for the technology, the so-called G.vector standard, there are still proprietary elements to the technology. A DSlAM vendor will typically pre-select a chipset vendor and then will design its vectoring line card around this vendor’s chipset, which means that it is not easy to switch vectoring chipset provider. But of course the same kinds of issues also apply to FTTH and GPON networks, which still lack full interoperability between different vendors.

CPE issuesWork is being done to ensure that existing VDSl customer premises equipment (CPE) will be vectoring-

compatible via a firmware upgrade. Some CPE will be upgradable and be able to deliver the full performance benefit of vectoring. Others will be “vectoring-friendly”, which means the device will be able to report back to the central office with information about the cross-talk on the line but the customer will not receive the performance benefit from vectoring.

If all devices within the node are not brought up to at least vectoring-friendly standard, it will not be possible to fully eliminate cross-talk and none of the subscribers will be able to receive the full performance benefit of vectoring. According to Ikanos, around 90% of current CPE that contain its chipsets are either vectoring-compatible or vectoring-friendly; in March 2011, the company also introduced a new family of G.Vector-compliant chipsets for CPE available on the market.

Chipset availability: semiconductors nearing the marketAt the moment, there is no commercial semiconductor available for line-card-level vectoring. In 2010, Ikanos announced its technology, called NodeScale Vectoring, but that must first pass ongoing lab and field trials before it is made commercially available. In a parallel process, equipment manufacturers are working with Ikanos to develop their vectoring line-cards.

The result of this work is that, according to Ikanos, vectoring will become available in the second half of 2012; for example, the Dutch incumbent KPN is aiming for a commercial launch of vectoring in the second half of 2012. While Ikanos has a head start in the development of chipsets for system-level vectoring, there are other chipset manufacturers, such as lantiq and Broadcom, which are also working on the technology having previously concentrated their attention on line-card-level vectoring.

AppLICABLE SCENARIOS

VDSL from the central office is not the best situation for vectoringIt is becoming increasingly common for operators to deploy VDSl from the central office because this enables operators to offer higher speeds – although not as high as FTTC – at a lower cost than FTTC. This is not a scenario that will bring most of the benefits from vectoring. Typically, only around a 10% performance gain will be achieved with vectored VDSl from the central office, because the large increase in computational power that vectoring requires works best when the node size is smaller, such as in an FTTN or FTTC deployment. Nevertheless, if the central office is serving 400 subscribers or less, the technology will

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work well; however, this size of central office is not prevalent.

These issues with VDSl are important because operators can be faced with a choice of whether to deploy FTTN with vectoring or VDSl from the central office since the technologies do not work very well together. Although vectoring can deliver significant cost savings over FTTH, VDSl from the central office can deliver significant savings over FTTN: A typical cost ratio might be one for VDSl from the central office and five for FTTC. There have already been a number of deployments of VDSl from the central office in recent times in Western Europe, Telenor in Norway and Telekom Austria in Austria for example, potentially limiting the market for vectoring.

Shorter copper loop lengths will help maximize vectoring benefitsThe performance gains from vectoring also change depending on the length of the copper last mile. Generally speaking, the shorter the copper loop the better performance gain vectoring will bring. This is because vectoring seeks to cancel interference caused by the termination point of one copper pair and the

start of another, known as far-end cross-talk. Therefore, at shorter loop lengths, this interference will be stronger. However, at longer loop lengths, it is impulse noise or interference caused by disparate sources such as refrigerators and AM radio signals that is the dominant source of interference. According to ZTE, the gains achieved by vectoring at loop lengths of more than 1,000m are not significant, but once loop lengths fall to 600m ZTE notes average gains in downstream bit rates of 60%.

Vectoring produces benefits across all frequenciesVDSl vectoring will work across all VDSl frequencies – for example, 8MHz, 17MHz and 30MHz – in providing both increased rate and reach. However, the greatest increases in rate will be for 17MHz and 30MHz band plans while the greatest increase in reach will be at 8MHz. There is also interplay between the frequency that is being used and the length of the copper loop. For example, the gains from vectoring will begin to tail off at distances of less than 600m for an 8MHz plan, at 300m for a 17MHz plan and 200m for a 30MHz plan. However, vectoring will still give a better performance than for non-vectored lines, even at these loop lengths.

Italy:Telecom Italia

Turkey:Turk Telecom

Austria:Telekom Austria

France:France Telecom

Netherlands:KPN

Switzerland:Swisscom

Luxembourg:P&T Luxembourg

FIg 3Vectoring selected trials


ZTE Alcatel lucent Alcatel lucent and ZTE



Unbundling issues: not a cause for too much alarmOne often-mentioned downside of vectoring is its incompatibility in scenarios where there are subscribers served by ADSl lines unbundled at the central office by alternative operators. The logic is that, in order for vectoring to work, an operator needs to have control over all lines in the binder. In reality, the situation is a little more complex and problems only really arise when there is unbundling at the same point of the network as the incumbent has placed its DSlAMs.

This means that an FTTC deployment from an incumbent with ADSl unbundling from the central office allows vectoring to work well, although with some performance loss. There would be problems if an incumbent and unbundler were both deploying VDSl from the central office. This is because, for the vectoring to work properly, there would need to be communication between the DSlAMs of the different providers and no work has been done in this area. But, in any case, the performance benefits with vectoring with VDSl from the central office are limited.

Some problems with SLU: Europe’s regulators are deciding what to do about it Another scenario is an incumbent deploying FTTC and an alternative operator unbundling sub-loops at the cabinet or node level – which would mean that vectoring would lose many of its benefits. For example, while some lines would still receive a performance benefit others would not, thereby removing the improvement in consistency of line performance that vectoring delivers.

In practice, the demand for sub-loop unbundling (SlU) has been low and the risk for an alternative operator in deploying FTTC where an incumbent already has such a network are large. There may also be issues of space with not enough room to deploy different operators’ DSlAMs in the same cabinet and the need to build two separate street cabinets. It would also be difficult for an alternative operator to build up a sufficient market share to make SlU profitable given that the incumbent was also offering VDSl in the same area.

Nevertheless, there have been cases of SlU in Germany and the UK. Even with SlU, the gains from vectoring are not necessarily lost. For example, if an operator uses SlU with ADSl2+ and the incumbent uses VDSl2 then there will be little performance loss from vectoring.

However, regulators are deciding whether a provision for SlU should stop vectored VDSl. The Belgian regulator BIPT made a decision to propose the removal of the SlU obligation and this proposal went before the

European Commission in a test case on the issue. In July 2011, the EC agreed with the BIPT’s proposal to remove the SlU obligation, although it could be reinstated if technologies develop that allow vectoring to work with SlU. This decision is not surprising given that the EC has also set ambitious targets for high speed broadband rollout: by 2020, 30Mbps broadband should be available to all EU citizens and half of all European households should subscribe to services offering at least 100Mbps speeds. A move to allow vectoring would help meet these goals, particularly given the time and expense of an FTTH rollout.

The issue of alternative operators forgoing the ability to offer SlU is also unlikely to be hugely important as many have already amortized their investments in ADSl unbundling so – from a financial perspective – they can comfortably move to another model. Incumbents and unbundlers also have a common enemy in the form of cable operators already offering superfast broadband via their DOCSIS 3.0-enabled networks. The higher speeds that vectoring allows would help the alternative operators compete with cable even if they were forced to use a more wholesale-based model. In any case, the number of countries that have regulation for SlU is low so this issue is not relevant at all for operators in South America, for example.

Vectoring scorecard by regionInforma Telecoms & Media has produced a scorecard determining the viability of vectoring in different regions, which indicated significant differences in the advantages of deploying vectoring in each region (see fig. 4).

0 2 4 6 8 10Total

12 14 16 18 20

Africa

Middle East

Latin America

Eastern Europe

Asia Paci�c

Western Europe

North America

FIg 4Vectoring scorecard by region

Regulation for SlU

Penetration of copper network

Costs of rolling out FTTH network

Penetration of FTTH/B from alternative operators and DOCSIS 3.0 cable


NOTE: 1 = very unfavorable for vectoring, 5 = very favorable for vectoring

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The fact that fiber can be deployed overhead in Japan makes the costs of an FTTH rollout much lower there, which reduces the attractiveness of a vectored VDSl rollout. Similarly, the low costs of labor and the high proportion of multi-dwelling apartments in Eastern Europe increase the attractiveness of FTTH/B compared with vectored VDSl. Generally, if there is SlU regulation, conditions for vectoring are less favorable.

If the copper network passes a large number of homes, this will make vectoring more attractive giving it a larger addressable market and the technology will also become more viable if FTTH networks are expensive to roll out. Generally, the higher the penetration of FTTH/B from alternative operators and DOCSIS 3.0 cable, the more attractive vectoring will become compared with just rolling out standard VDSl2 with fiber to the cabinet.

The result of the scorecard is that North America fares best, but that vectoring is attractive in all regions where there is significant copper plant.

INFORMA vIEWpOINt

Vectoring looks a good short/medium term betWith the costs savings and improved performance that vectored VDSl can deliver, incumbents have much to gain from deploying vectoring. There is increasing interest in the technology and deployments will begin in 2012 or 2013. The size of FTTH deployments from incumbents is likely to suffer as a result, however, as these operators turn to vectoring.

But regional variations are so large that it will not be for everyoneThe sheer diversity of fixed-broadband markets will mean that vectoring is not for everyone. Some of the arguments about cost and rollout time advantages of vectored VDSl over FTTH simply do not apply in some countries, including major markets such as Russia. The biggest opportunities will be in developed markets, particularly in Western Europe and North America.

Deploying vectoring with other technologies makes senseOf course, while vectored VDSl may struggle to deliver more than 100Mbps, when used in conjunction with other technologies, it could exceed this speed. For example, vectored VDSl can be used with line bonding in cases where more than one copper pair per home is available. Reducing copper loop lengths, at least up to a certain point, will also gain the maximum benefits from vectoring. The one exception to this is VDSl from the central office which will not work well with vectoring

– in fact, in some senses it is a rival technology to vectoring because it can deliver even greater savings than an FTTC rollout.

Regulatory issues are not so seriousWhile mandates for SlU could throw a spanner in the works for unbundling, there are a number of good reasons to believe that these problems are not insurmountable. Even in Western Europe, incumbents will be allowed to deploy vectored VDSl given the recent decision of the European Commission. The prime countries for vectoring deployments are the Netherlands, Belgium, Switzerland and Denmark.



kEy pOINtS

• Thetrendtowardsgreateruseofmanagedservicesandoutsourcingshowsnosignofslowingdown.

• Outsourcingofnetworkoperationsisrapidlybecomingcommonplaceandoperatorsarenowpreparedtocontemplateoutsourcingasurprisinglybroadspectrumofotheractivities,almosteverythingisnowonthetablewiththeexceptionofbusinessplanning.

• LatinAmericaandtheMiddleEastarecurrentlythetwohottestregionswithregardstooperatorsintendingtooutsource.NorthAmerica(USandCanada)remainstheonlyregionwherethoseplanningtooutsourceremainintheminority.

• Athirdofoperatorshavealreadyimplementednetworksharinginoneformoranotherandafurtherthirdareplanningto.

• Thetechnologiesandservicesrelatedtospecifictechnologiesmostlikelytobeoutsourcedincludedevicemanagement,IPTVand3Gnetworkrolloutormanagement.

• Costcontrolremainsthemostimportantdriverforoutsourcing:managingoperationalcosts;achievingamorepredictablecostofownership;andlaunchingservicesquicklyarethethreedriversmostfrequentlyquoted.

tHE RESpONDENtS

Informa Telecoms & Media’s Managed Services and Outsourcing Survey polled key industry executives from around the globe about managed services and outsourcing trends. The survey was conducted online during 2Q11. Over 200 responses were received of which 117 were from operators. It is the operator responses that are analysed here with the exception of fig. 12.

The operator respondents consisted of mobile, hybrid and fixed operators: Mobile operators accounted for around half of the responses and the remainder was split between fixed and hybrid operators.

The responses came from a good geographical spread of operators but some regions had more or less respondents than anticipated (see fig. 1). The extent of the weighting depends on whether the focus is on operator numbers, subscriptions or some other indicator to measure it, but to some extent Africa and the Middle East were overrepresented and Asia Pacific underrepresented, with the other regions more or less where they should be. Africa and the Middle East are both regions with a low starting point for managed services and outsourcing business but with an increasingly strong appetite for future adoption, so this should be taken into account when interpreting the survey results.

The respondents reflected a wide range of roles but the “Executive, professional, management” and “Business development, sales & marketing” job titles accounted for over half of those who responded (see fig. 2).

RESULtS AND ANALySIS

The trend towards greater use of outsourcing shows no sign of slowing down.

The survey results show that outsourcing of network operations has become commonplace. However, even more significant is the growing tendency for operators to outsource other operational activities as well as contemplate outsourcing a surprisingly broad spectrum of activities in the future.

Informa’s research suggests that leaner operator business models will become increasingly common given that business planning seems to be the only area of activity the overwhelming majority of operators are determined to hang on to. A cynical take on this might be to suggest that business planning is the exception because ultimately the only job senior managers are unlikely to contemplate outsourcing is their own.

Managed Services and Outsourcing Survey 2011: Transformed operator attitudes

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CURRENt SItUAtION

Some allowance needs to be made for the tendency for surveys to be colored by the fact that those willing to participate are likely to include a larger proportion of those favorably disposed to that topic. However, even when that proviso is taken into account, it is impressive that over half of operators claim to be outsourcing some aspects of maintenance, repair or construction already. Other areas of business that are also commonly outsourced include: training and education (41%); access network operations (32%); and customer service/support (30%).

If you compare these results with a similar managed services and outsourcing survey that Informa conducted at the end of 2009 (see fig. 3), the extent of the market transformation becomes clear. As recently as 18 months ago, outsourcing was still a minority activity with only 12% of respondents saying they were outsourcing maintenance, repair or construction and nearly all the other areas generating single-figure responses. Attitudes have clearly changed.

Outsourcing intentions in the next 12-18 monthsThe future plans for managed services make it clear that enthusiasm for this business model is growing.

Only 28% of the survey’s operator respondents say they do not plan to make use managed services for some aspect of their operations over the next 12-18 months. In contrast, resistance was considerably higher in 2009, with 39% of operators at that time saying they did not plan to make use of managed services over the following 12-18 months (see fig. 4).

However, there are sharp differences in attitude towards different types of managed services.

Informa Telecoms & Media divides managed services into three broad categories: • Network-led serviceswhichfocusprimarilyoncreatinggreaterefficiencyinmanagingthenetwork,whetherintermsofthird-partymaintenanceorofactuallybuildingandoperatingthenetworkonanoutsourcedbasis.

• Service-led functionswhichincludeapplicationsorcontenthosting,deliveryofnewservices,suchasVOIPorenterprise,aswellasnewenablerssuchaspaymentand

FIg 1Survey question: Which region are you based in?

FIg 2Survey question: What is your area of work?

Africa .................................................... 29%

latin America ....................................... 7%

Asia Pacific .......................................... 11%

Eastern Europe .................................. 15%

Western Europe ................................ 16%

Middle East ........................................ 15%

North America ..................................... 5%

Board member (CEO etc) ................. 2%

Executive, professional, management

................................................................. 32%

Business development, sales &

marketing ........................................... 25%

Services management (eg: network

operations) ......................................... 15%

Technical, R&D, engineering ........ 17%

Strategic research, consultancy ..... 4%

Other (please specify) ....................... 5%

Source: Informa Telecoms & Media Source: Informa Telecoms & Media



partner-managementsystems.• Consultancy-led serviceswhichareamorerecentresponsetotheneedforbusinesstransformation,andwhichincludeahigherdegreeofstrategicinvolvementonthepartoftheserviceprovider.

Operator interest in these three separate areas is not equal. • Theappetitefornetwork-ledservicesisparticularlystrong.Almostathird(32%)ofoperatorsplantooutsourcenetworkoperationsoverthenext12-18months,uponlessthanaquarter(23%)in2009.Thisisnotsurprisinggiventhatitisnowafamiliarmodel.

• Interestinconsultancy-ledserviceshasalsostrengthenedslightly,with22%expressinganinterestinmakinguseoftheseoverthenext12-18monthsincomparisonwith18%in2009.

• However,interestinservices-ledmanagedserviceshasdimmedslightly.Only17%ofoperatorsplantooutsourceoverthenext12-18monthsincomparisonwith20%in2009.

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211

15

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10

7

Respondents (%)

0 10 20 30 40 50 60

Integration including consultancyand �xed mobile convergence support

Business planning

Technical/operational planning

Technical/operational management

Other

Access network operations

Transmission network operations

Core network operations

IP network operations

BSS/OSS

Applications/content hosting

Partner management

Supply chain/logistics

Training/education

Customer servicing/support

Maintenance, repair or construction

FIg 3Survey question: What areas of your business are currently outsourced? 2011 vs. 2009


2011 2009

Resp

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(%)

0

10

20

30

40

No ConsultancyServicesNetwork operations

23

32

2017

1822

39

28

FIg 4Operators planning to outsource services/activities in next 12-18 months: 2011 vs. 2009

2009 2011


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Outsourcing intentions over a three-year period A look at outsourcing intentions of the operator respondents across the full breadth of operational areas over a three-year period reveals a different picture (see fig. 5).

Once you look far enough in the future, operators reveal an impressive willingness to outsource a broad spectrum of services:• Over70%ofoperatorsexpecttooutsourcemaintenance,repairorconstruction.

• Thereisalsoahealthylevelofinterestinoutsourcinginalmosteveryotheroperationalarea–eightofthe15areasreceivedascoreofover50%and12ascoreofover40%.

• Theonlyareawherethereisminimaloperatorappetiteforoutsourcingisbusinessplanning(12%).

This appetite for outsourcing across a broad range of operations is all the more significant when you consider what is currently outsourced by operators. Current outsourcing is heavily concentrated on a narrow range of areas: maintenance, repair or construction (53%), training/education (41%), access network operations (32%) and customer servicing/support (30%). Almost half of the areas have less than 20% of operators outsourcing them.

More detail on network outsourcing intentionsDrilling down in a bit more detail into various categories of network operations, it becomes clear that there is a very strong appetite for outsourcing in many if not most of these areas. This is no surprise given how well-established the network-led aspect of managed

71

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0 10 20 30 40 50 60 70 80

Other

Business planning

Partner management

Technical/ operational planning

Core network operations

Technical / operational management

IP network operations

BSS / OSS

Supply chain / logistics

Access network operations

Applications / content hosting

Integration including consultancyand FMC support

Customer servicing / support

Transmission network operations

Training / education

Maintenance, repair or construction

Respondents (%)

FIg 5Areas of an operator’s business likely to be outsourced in three years time compared with those currently outsourced


In three years* (2014) Now (2011)

* Respondents who replied “very likely” or “likely”



services is. Site sharing, asset/spares management, site acquisition/management and network performance/optimization are all areas where around 80% or more of operators say they are likely to outsource. These are also areas where there is considerable more enthusiasm for outsourcing than there was in the 2009 survey (see fig. 6).

The two areas where operators still show only moderate levels of enthusiasm for outsourcing are network security (47%) and revenue assurance (33%). Operators have always been wary of losing control of sensitive areas where high levels of risk could be involved but widely-reported attacks on network security and other security lapses are also likely to be influencing attitudes.

MORE DEtAIL ON tECHNOLOgy OUtSOURCINg INtENtIONS

When it comes to the technologies or services related

to specific technologies most likely to be outsourced, the respondents’ greatest level of interest was in: device management (16%), IPTV (12%) and 3G network rollout or management (12%) (see fig. 7).

There is growing industry interest in mobile device management (MDM), not just to make it easier to configure and manage multiple handsets and smartphones over the air but to also support customer experience management and targeted marketing. That is why this particular category was added to the 2011 survey (it was missing from the 2009 survey) and so it was only to be expected that it would attract operator attention.

Operator interest in outsourcing IPTV and 3G network rollout or management was also expected given the level or interest in these technologies but perhaps more surprising is the low level of interest expressed in outsourcing associated with lTE (6%) and the fact that this is also lower than in the 2009 survey. This result can

89

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43

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38

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Respondents (%)

0 20 40 60 80 100

Revenue assurance

Network security

Capacity management

Network performance/optimization

Site acquisition/ management

Asset/ spares management

Site sharing

FIg 6Survey question: In terms of network operations, how likely are the following areas to be outsourced by you? 2011 vs. 2009


2011 2009

NOTE: Respondents who replied “very likely” or “somewhat likely”

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perhaps be partly explained by the high weighting of developing market respondents in this survey but even so it suggests that it is early days when it comes to lTE outsourcing.

Another difference between the 2011 and 2009 surveys, the reduced level of operator interest in outsourcing associated with 2G networks, can be explained by the increasing maturity of the technology. Meanwhile, decreased interest in outsourcing services associated with WiMAX probably just reflects lower interest in this technology in general.

REgIONAL tRENDS

Regional differences are discussed in more detail elsewhere in the analysis of managed services forecasts and contract trends. However, it is worth highlighting here the following broad regional differences when the

respondents were questioned about their outsourcing intentions (see fig. 8):• WesternEuropeanoperatorsmayhaveledtheworldinadoptionofmanagedservicesandoutsourcingbutthesurveyresultsreflectanincreasinglymaturemarket.TheproportionofWesternEuropeanoperatorrespondentssayingtheyplantooutsourceactivitiesrelatedtotechnologiesandservices(55%)isnowbelowtheglobalrespondentaverage(58%).

• LatinAmerica(75%)andtheMiddleEast(76%)arethetwohottestregionswhenitcomestooperatorsvoicinganintentiontooutsource.

• NorthAmerica(USandCanada)remainstheonlyregionwherethoseintendingtooutsourceremainintheminority(40%).ThispercentagesplitneedstobetakenwithapinchofsaltbecauseoftherelativelysmallsampleofoperatorsfromthisregionbutitdoesneverthelessreflectthefactthatNorthAmericaremainsoneofthelastbastionsof“operatorknowsbest”.

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6

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Respondents (%)

0 5 10 15 20

2G data services

3G Voice

3G data services

WiMAX

LTE

2G network rollout or management

2G Voice

In-building e.g. homezone

Mobile TV

Other (please specify)

3G network rollout or management

IPTV

Device management

FIg 7Survey question: Which technologies or services related to technologies do you expect to outsource? 2011 vs. 2009


2011 2009

NOTE: *This particular category was added to the 2011 survey and was not part of the 2009 survey

* the transformed telco


The regional breakdown has not been applied to a wider range of questions as this cannot be justified by the number of respondents in some of the regions.

NEtWORk SHARINg

The survey included a question on network sharing.

This was not included just to compare the level of interest in a contrasting business model; there are an increasing number of examples of relationships that combine both managed services and network-sharing approaches.

A good example of a combined approach is Mobile Broadband Network ltd (MBNl), the network sharing joint venture originally between T-Mobile and 3 UK which has now been extended to include Everything Everywhere (Orange and T-Mobile). This is a 2G and 3G active RAN and backhaul network-sharing deal implemented under the umbrella of a managed-services deal.

There are, of course, different levels of network-sharing arrangements, ranging from the most basic, which simply involve the use of common sites or towers, all the way to the other extreme where full network sharing involves building a single network from which two or more operators lease capacity. Network sharing can involve a variety of network types including radio access, backhaul or core.

As network sharing was not the main focus of this survey, the question did not differentiate between different types of network sharing. It simply asked whether

network sharing was planned or already implemented by the company and two-thirds of the operator respondents say they had either already implemented network sharing or are planning to (see fig. 9):• 35%ofoperatorshavealreadyimplementednetworksharing(bycontrastwith23%in2009)

• 32%plantoimplementnetworksharing(bycontrastwith26%in2009).

DRIvERS OF MANAgED SERvICES AND OUtSOURCINg

Vendors, managed services suppliers and operators all increasingly go out of their way to emphasize that managed services is about much more than managing cost. The global economic downturn clearly concentrated operator minds on cost cutting but the argument goes that the focus has since shifted towards a broader range of drivers including not just greater network efficiencies but also business transformation, service and application enablement, speed to market and the creation of new revenue streams.

However, the survey suggests that cost control still remains the most important factor driving operator interest in outsourcing and managed services (see fig. 10).

Managing operational or other costs is quoted by 77% of respondents as extremely important, which is only slightly down on the 80% result in the 2009 survey. Achieving a more predictable cost of ownership is also quoted by 65% of respondents (up on the 59% response in 2009). That cost saving remains a key

Resp

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(%)

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North Americ

a

Middle East

Western

Europe

Eastern

Europe

Asia Paci�

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Latin Americ

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Global

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No network sharing plannedPlannedAlready implemented

2326

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FIg 8Regional differences in intentions to outsource

FIg 9Survey question: Is network sharing planned or already implemented by your company? 2011 vs. 2009

Yes No

NOTE: Survey question: “Do you plan to outsource activities related to next-generation or

legacy technologies and services?”

2009 2011


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driver is not surprising given that managed services suppliers typically quote 20-25% gains over the life of a managed-services contract.

Speed to market is also significant given that the second most important driver was being able to launch services more quickly (68%). Reducing time to market for new technologies also scored relatively high (56%). Although these results have not been broken out on a regional basis, time to market would be expected to be particularly important in the developing markets where the rapid capture of market share is still the main driver for operators.

Some of the other factors in this survey question, such as managing network capacity, have also increased in importance since 2009 but still retain a middling score.

It is also interesting to compare operator perceptions of what is significant with what it is that vendors and managed services providers think is significant. One of

the final survey questions was an open question about what respondents thought would be the main hot issues in managed services over the next three years (see fig. 11).

As the word clouds show, there is some overlap between the two around fairly neutral topics such as network or service management but there are also noticeable differences between what operators and vendors thought would be significant in future:• Operatorshadaveryclearandstrongemphasisoncostreduction.Thisdoesnotrequireanymorecommentgiventheimportancealreadyattachedtocostcontrolasadriverelsewhereinthesurvey.

• Operatorsalsohighlightedotherissues,suchasQoSandSLAs,whichvendorstendedtooverlook.QoSstrategiesarepresumablyonoperators’mindsbecauseofthepotentialformakinguseofthemasadifferentiatingmechanism.GoodSLAmanagement,meanwhile,iscriticaltothesmoothrunningofanyoutsourcingrelationshipsoitisperhapsmoresurprisingthatthisdid

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Manage multiple suppliers

Manage network complexity

Access to new / speci�cprofessional expertise

Maximise geographic coverage

To reduce headcount /employee costs

In order to focus oncore business

Manage network capacity

Reduce time to marketfor new technologies

Achieve more predictablecost of ownership

O�er new services quickly

Manage operationalor other costs

FIg 10Reasons for implementing managed services: 2011 vs. 2009


2011 2009

NOTE: Respondents who replied “extremely important”



notalsofigureheavilyinvendorresponses.• Vendors,bycontrast,hadamuchmorediffusefocus,quotingabewilderingvarietyoftopics.Clearlyifyouareavendorwhatyoubelievewillbesignificantinfutureismuchmoreafunctionofthesolutionsthatyouareoffering–hencethelowerconsensusamongstthisgroupthanamongoperators.However,thosetopicsthatwerehighlightedincludedsecurity,cloudandbusinessissues.

It could be argued that vendors, when answering this question, made more of an effort to look ahead to what are likely to be the next big issues in three years time as opposed to operators, which took a more pragmatic approach and just projected forward their current concerns. But then again, cost, QoS and SlAs are issues that are unlikely to decline in importance as far as operators are concerned.

WHO IS BESt pOSItIONED tO DELIvER DIFFERENt typES OF SERvICES

Respondents were asked to appraise which managed services providers were best-positioned to deliver different types of services (see fig. 12).

There are plenty of grey areas here. For example, the operator respondents are clearly uncertain about which category of managed service provider is best-positioned to deliver business support. The same applies to technical/operational planning.

Operators also scored every category of managed service provider low for the provision of technical strategy suggesting that this may be either an area they are not yet ready to outsource or one where they do

not trust anyone to do a good job.However, there are some clear patterns when it comes to which type of player is best-placed to offer certain types of services:• Networkequipmentvendorsarestillfirstchoicewhenitcomestooutsourcingtechnical/operationalmanagement,althoughIT/systemsintegratorsandindependentsoftwarevendorsalsoscorerelativelywell.

• Businessstrategyandbusinessmanagementoutsourcingclearlyremainsthedomainofbusinessandmanagementconsultants.Thismaybecomeaproblemfornetworkequipmentvendorsinfuturegiventhattheyhaveaspirationstooccupyapositionhigheruptheircustomers’valuechain.Theincreasingwillingnessofoperatorstooutsourcebusinessandstrategymanagementmaycreateabiggerroleforbusinessandmanagementconsultantsinthisspaceratherthanbeinganopportunityfornetworkequipmentvendorstooffermoreconsulting-ledservicesorbusinesstransformation.

INFORMA vIEWpOINt

A granular analysis of these survey results reveals much of interest, but the most important finding is probably the broadest – it is the radical sea-change that has taken place in operator attitudes to outsourcing.

Even a cursory glance at future outsourcing intentions (see fig. 5) shows that operators are now prepared to outsource a surprisingly broad spectrum of activities. This was definitely not the case even 18 months ago.

There are still considerable differences in outsourcing intentions when different areas of an operator’s business are compared. But more significant is the fact

FIg 11Survey question: What do you see as the main hot issues in managed services over the next three years?


What vendors say What operators say

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that – with the single exception of business planning – there is not an area of operations that a significant number of operators are not willing to contemplate farming out to someone else.

Operator fears of relinquishing control to third-party providers of services appear to no longer be the stumbling block it once was. That is not to say that every single type of operator in every region will be willing to outsource a sizeable proportion of their business. The radical outsourcing approach adopted by the likes of Bharti Airtel and Mobilicity is not to everyone’s taste and is not in any case uniformly suitable. But what is clear is that there is now a receptive audience for outsourcing across a wide range of operational areas.

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FIg 12Survey question: Which player do you believe is best positioned to deliver each type of service?


Network equipment vendor IT/systems integrator Business/management consultant (e.g., Accenture/Infosys) Independent software vendor (e.g., Oracle/Amdocs)



kEy pOINtS

• AnumberofsubsidiariesofmajorPan-Europeantelecomsoperatinggroups,includingHutchison,DeutscheTelekom,FranceTelecom,Vodafone,TeliaSoneraandTelenor,haveenteredintonetwork-sharingagreementssince2001tosaveopexandcapex.

• Europeantelecomsoperatinggroupshaveexperiencednumerouschallengesandcomplexitiesfromallowingtheirsubsidiariestoenterintonetwork-sharingarrangementswithotheroperators.

• Sincethecostsavingsderivedfromnetworksharingcanfaroutweighthedrawbacks,Europeantelecomsoperatinggroupswillcontinuetoencouragetheirsubsidiariestoenterintothesetypesofarrangementswithrivals.

• DeutscheTelekomandFranceTelecomsaythattheRAN(radioaccessnetwork)-sharingmodelisthebestforcostsavings.ARAN-sharingarrangement,accordingtoDTandFT,cansave50-60%onopexandcapex.

OvERvIEW

Since 2001, a number of telecoms operating groups in Europe have increased the number of network-sharing deals their subsidiaries have entered into, for a couple of reasons:• Theneedtoloweropexandcapex,givennegativeorflatrevenuegrowthspurredonbyaggressivecompetitionandregulatory-enforceddecreasesinmobileterminationrates.

• Theneedtoextendnetworkcoveragecost-effectivelyandincreasenetwork-datacapacitytomeethighconsumerdemandfordata-richapplicationsonavarietyofdevices.

COSt SAvINgS DERIvED FROM NEtWORk SHARINg

In April 2011, Pan-European telecom operating groups Deutsche Telekom and France Telecom attributed a

number of factors to the formation of their joint venture, of which network-sharing agreements between both groups’ subsidiaries was set to be a major part:• Theircoverageareasoverlap,withbothgroupsoperatinginAustria,Slovakia,RomaniaandPoland.

• Thegroups’operationshavesimilarprocurementprocesses.

• Thegroupsdevoteasimilarproportionoftheirannualinvestmenttothesameareas,suchasmarketingandRAN(radioaccessnetwork)optimization.

• Rivalsofbothgroupshaveenteredintopartnershipsandnetworkagreementssince2001.

• Thegroupseachhaveatrackrecordofsuccessfulnetworksharing.Forexample,byend-2Q11thenetwork-sharingjointventureEverythingEverywhereintheUK,launchedinApril2010,hadamarketshare,bysubscriptions,of40%,puttingitinfirstplaceintheUK,with30millionsubscriptions,aheadofO2.

Orange and T-Mobile in Poland share networksIn Poland, in July 2011, Orange and T-Mobile entered into a 15-year network-sharing agreement by forming a joint venture, equally owned between the two operators, named NetWorks. The venture’s aim was to save the operators a total of about €356 million (US$488 million) in cash through 2015. The operators will share about 10,000 sites, down from about 13,400 combined (7,000 of which belong to T-Mobile, and 6,400 to Orange) before the joint-venture formation, and expand a joint network gradually until 2014. They will also combine their RANs to attain a combined savings in RAN investments, in the long term, of 29%.

Orange has said that starting in 2015, it expects to save up to PlN200 million (US$71.5 million) annually from the network-sharing agreement with T-Mobile. Vodafone increases number of shared base stationsThe Vodafone group, meanwhile, says that over 60% of its base-station sites are shared with networks of other operators. It notes two main benefits of the arrangements: They have limited the number of sites and operational costs up to 25% and have relieved

European operating groups turning to network sharing to cut costs

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pressure on planning/regulatory authorities, because there are fewer sites for these authorities to review.

Vodafone says the most one of its subsidiaries can save is 40%, and such savings can be derived from RAN

sharing (see fig. 1).

Furthermore, the group says that since 2008 securing network-sharing deals has become more important to the group’s financial growth and long-term survival.

Fully consolidated network

Depth of sharing

Fully separated networks

No sharing

Site sharing(tower, rooftop)

Infrastructure sharing (power, aircon, antennas)

Operator equipment sharing (RF, TX)

Individual MNCs

CommonMNC

National roaming (regional split or scattered)

Full sharing (single entity NetCo/ServCo)

Three-waysharing

Cost savings (%)

Two-waysharing

Legacynetwork

green�eldnetwork

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FIg 1Vodafone Group’s global network-sharing details

Source: Vodafone

FIg 2Vodafone Group, network-sharing details, March 08 to March 11

Source: Informa Telecoms & Media, Vodafone Group

Date Details

March 08 32% of Vodafone’s 73,000 European sites were shared, and about 2% of them were shared actively. Globally, Vodafone had network-sharing agreements in 17 countries, of which two were active sharing.

March 09 In March 2009, Vodafone signed a new agreement with Telefonica O2 aimed at consolidating some of its passive network infrastructure in the UK, Germany, Spain, Ireland and the Czech Republic.

March 10 By March 2010, Vodafone secured network-sharing agreements for over 75% of the new radio sites deployed across the group.

March 11 70% of the new radio sites throughout the group are being shared with other operators.



100%

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Stand-alone model Site-infrastructure(passive)sharing

Active RAN sharing Merged RAN

More than 35% of totalgroup sites shared in 2015

Level of sharing

>

FIg 3France Telecom cost savings per network-sharing agreement, end-4Q10

>20% sites shared in Europe Orange footprint at end-2010 Spain 3G: About 4,000 sites shared in rural areas end of 2010 France 3G: About 2,500 “white zones” from 2010 to 2013

UK: 3 – Everything Everywhere RAN joint venture

Source: France Telecom

FIg 4Breakdown of costs associated with running a mobile network, 2009

FIg 5Breakdown of costs associated with running a RAN, 2009

IT and platforms ............................... 25%

Core network ..................................... 15%

Radio access network ..................... 60%

Services, maintenance and repair e.g.

of site, nodes, etc. ............................ 10%

Rental and leasing ............................ 40%

Personnel costs ................................. 15%

leased lines ....................................... 20%

Other costs ......................................... 15%

Source: Deutsche Telekom Source: Deutsche Telekom

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By end-March 2011, 70% of the group’s new radio sites were being shared with other operators (see fig. 2).

France Telecom saves 50% per site by sharing RANsFrance Telecom claims that its network-sharing agreements with other operators in a variety of European markets have helped its subsidiaries save 20-50% per site (see fig. 3). The group aims to have over 35% of its group sites shared in 2015.

Everything Everywhere is the France Telecom Group’s greatest example of saving money by sharing networks. FT says that Everything Everywhere has achieved cost savings of about 50% per site because the operators began sharing a RAN.

Olaf Swantee, head of European operations for France Telecom, has said that the group will seek additional network-sharing deals across Europe, having already entered into agreements with T-Mobile in three countries – Austria, Poland and Romania – and with Vodafone in Spain.

like France Telecom, Deutsche Telekom says RAN-sharing deals save the most money, because the radio-access element accounts for about 60% of the cost of running a subsidiary’s network (see figs. 4 and 5).

Deutsche Telekom also says that network-related costs typically make up 15-20% of one of its European mobile subsidiaries’ opex (see fig. 6) and that a RAN-sharing model can reduce both operators’ combined opex 15% or more.

FIg 6Typical structure of an operator’s opex cost

FIg 7Strong points of 3GIS’ performance

Source: Deutsche Telekom

Usage cost

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Market investment

Personnel

Technology costs (ca. 15-20% of opex)

Other cost

3GIS

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Lowest networks opex per base station

Very low networks opex per traffic unit (1 minute, 1 SMS or 1 Megabyte)

Very low networks capex (multiple KPIs)

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Very high productivity in relation to network size and total traffic (multiple KPIs)

PEER GROUP

Very high voice quality (multiple KPIs)

Max Average Min

Source: 3GIS’ presentation at Nokia Siemens Networks Efficiency

Forum 2010

*Own employees, temps, outsourced employees.



Sweden’s 3GIS results in low opex and energy consumptionIn April 2005, 3GIS, the network shared by Telenor and 3 in Sweden, contracted Finnish network supplier Nokia Siemens Networks to expand and manage the shared networks’ RAN.

From 2008 to 2010, Nokia Siemens Networks benchmarked the operational efficiency of 3GIS’ shared network. In a presentation given by 3GIS at the Nokia Siemens Networks Efficiency Forum 2010, the operator highlighted the results of the NSN benchmark study and reported that the network’s opex and energy consumption per base station were lower than those of a standard mobile operator, with headcount productivity and network quality higher (see fig. 7).

Network-sharing challenges faced by operatorsSome operators that have entered into network-sharing deals have seen some complexities and challenges result, such as the following:• Complicationsintermsofcoordinatingnetworkplanning

witheachother.• Alossofbrandnameandidentityforbothparties.• Thelossofcleardifferentiationofservicesbetweenbothoperators.

• Ariseofmistrustandlackoftransparencyinactionsbetweentheoperators.

• Regulatorsrequiringtheventuretofulfillstrictobligations.

3GIS says that despite a long-standing shared 3G network between Telenor and 3, there are still a number of challenges to overcome (see fig. 8). Among them are rising opex per network employee, because of a high outsourcing level in operations and field organizations; a high percentage of opex in energy, because of a high energy-unit price; and high network unavailability, mainly because of transmission problems in rural areas.

DT outlines difficultiesDT says that a number of uncertainties can arise when two operators decide to enter into a network-sharing arrangement (see fig. 9). Two major uncertainties

FIg 8Weak points of 3GIS’ performance

3GIS

0%

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0%

e1,000 FTE

3GIS

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e1,000 FTE

3GIS

0%

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e1,000 FTE

Highest share of networks opex in energy – driven by large network, MWh price + low total opex

High, and increasing, personnel opex per networks employee – partially driven by highoutsourcing, leaving few employees

Highest network unavailability

PEER GROUP

Max Average Min

FIg 9Breakdown of costs associated with network-sharing, 2009

Operators experiencing complexity of implementing network-sharing arrangements

and coordinating actions with one another .............................................................................. 7%

Each operator having to terminate network-infrastructure contracts with network

vendors and adhering to legal rules of network sharing ................................................... 13%

Site rental – splitting the cost of site rental equally between both operators ........... 60%

Personnel costs – Having to adhere to labor laws, losing key employees because

of outsourcing, and covering overhead costs derived from the formation of a joint

venture ................................................................................................................................................. 20%

Source: Deutsche Telekom

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Source: 3GIS’ presentation at Nokia Siemens Networks Efficiency

Forum 2010


include the establishment of trust between operators, since they are normally rivals, and the extra time and effort the operators would have to spend coordinating their actions with each other.

INFORMA vIEWpOINt

The number of network-sharing deals made between mobile operators will continue to increase across Europe, mainly because of the high opex and capex operators are faced with. Informa believes that network-sharing deals will flourish between two main operators that dominate a market or where second- and third-placed operators collaborate to compete with the incumbent, and where there is strong competition among more than three players in a market.



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While operators still harbor hopes of persuading Internet companies to contribute to the cost of carrying high-bandwidth traffic, their most realistic hope of ensuring that broadband remains a profitable business involves exploring and implementing a whole range of different approaches for reducing the costs of carrying traffic and developing a more sophisticated approach towards pricing broadband access. At the same time, there is growing interest in using femtocells and Wi-Fi to offload data traffic.

Flat-rate, “all-you-can-eat” price plans have become synonymous with the Internet and yet in 2011 most mobile operators started to move away from such an approach. Tiered pricing should be seen as the first phase of a pricing revolution which will see the emergence of a huge array of different price plans based on location, time of day, type of application and type of device. The term yield management which has been embraced, for example, by the airline industry to maximize revenues from each flight, is now being applied to broadband access.

Operators will also experiment with different approaches for bundling broadband access across different devices and networks. Rather than attaching price plans to each device, operators now believe that there is merit in offering their customers single data plans for multiple devices.

OpERAtORS HAvE LONg BEEN CONCERNED ABOUt MANAgINg tHE gROWtH OF INtERNEt tRAFFIC ON tHEIR FIxED NEtWORkS. BUt,

MORE RECENtLy, It HAS BEEN tHE BURgEONINg USAgE OF INtERNEt SERvICES (AND ESpECIALLy vIDEO) OvER MOBILE NEtWORkS DELIvERED tO SMARtpHONES AND LAptOpS tHAt HAS FORCED tHEM tO RE-EvALUAtE tHEIR pRICINg AND SERvICE StRAtEgIES.

Re-engineering the broadband business model

Re-engineering the broadband business m

odel


INtRODUCtION

The bank-breaking costs and market-changing potential of next-generation fixed and mobile networks has caused many to rethink the broadband business model, from network investment and ownership to service packaging and pricing. Our survey polled the industry on an array of outcomes from radical to conservative and found generous support for both. But what is perhaps most striking is that many operators were unsure what their future holds, with about one in four selecting “undecided” in answer to most questions.

INFRAStRUCtURE COMpEtItION StILL MAttERS

The high cost of rolling out fiber-to-the-x and lTE has led many to question whether today’s competing players will each be able to afford to build and own networks in a next-generation world. In the fixed-line market, some policymakers are already embracing models where services providers compete via a single open network, owned by the incumbent, several co-investors, an independent body or the government. In the mobile market, meanwhile, several major operators have already teamed up to share the costs of building and running their current- and next-generation networks.

Yet, our survey found strong support to the notion that both fixed and mobile markets will continue to feature several different competing infrastructures (see fig. 1). But support for single- or shared-ownership models was also considerable, especially given the radical break their adoption would mark with the telecoms industry’s history. To some extent, this reflects differences between countries. In a growing number, it is becoming increasingly apparent that the disparity between the cost of rolling out next-generation broadband versus what people are prepared to pay for it means the odds are stacked against several competing infrastructure owners making a profit.

EvEN SpLIt ON tHE FUtURE OF tHE “UN-CONvERgED” OpERAtOR

Pressure to cut costs and expectations that consumers will demand increasingly converged services has also led several operators to integrate their fixed and mobile operations or enter the fixed or mobile market for the first time. Our survey found more or less equal support for both the survival and the death of the fixed- or mobile-only operator (see fig. 2).

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FIg 1To what extent do you agree with the following statements about the future of broadband network investment in your home market?

Agree Undecided Disagree


NOTE: Base, n=573


Current trends could be used to back up either prediction. Quad-play bundles have begun to dominate net additions in France and South Korea, while the growing burden of mobile broadband use means operators around the world are working out how to offload traffic onto fixed networks. On the

other hand, bundles of “personal” mobile and “home” broadband subscriptions have proved to be an unappealing mix for many consumers, while simple dual-plays of fixed-voice and fixed-broadband have continued to drive subscriber acquisition and churn in many of the world’s most advanced markets.

NO END IN SIgHt FOR tHE ACCESS-SpEED ARMS RACE

Concerns over the cost of supporting growing mobile broadband traffic at the prices consumers are willing to pay has caused many to call for the industry to come up with more innovative tariffs. Yet most respondents thought competing on ever-greater speeds and download caps would prove the best way to compete in the mobile broadband market while support for the most radical option – pricing based on what applications the user can access – was low (see fig. 3).

In some ways, these results are not surprising. In the more advanced fixed-broadband market, consumers have proved extremely reluctant to abandon the bigger, faster promise of more speed and capacity, despite the efforts of operators to convince them otherwise. Although mobile applications-based pricing has found some success in emerging markets, the dalliances of KPN in the Netherlands have shown that applying this concept to mature markets will be less of an innovative approach than a fool’s errand. Any attempt to effectively change how people use the Internet will not be received favorably by consumers – or regulators.


Operators and regulators will cling to infrastructure-based competition where they can, though the concept of single or shared fixed-broadband networks will grow in currency in certain markets, particularly in the Middle East and Western Europe. Fixed/mobile bundling will have an impact in a minor number of countries while operators elsewhere will be better off offering products separately; any role of actual convergence will largely be behind the scenes. Similarly, the most successful attempts to make the mobile broadband business case stack up will be about changing operators’ costs – rather than changing how consumers have bought broadband for over a decade.


odel



FIg 3What will prove to be the best approach for pricing mobile data? (Choose one)

FIg 2Operators that own only fixed- or mobile-broadband infrastructure will not survive

Volume only, giving fastest available speed to all customers ....................................... 12.1%

A combination of speed and volume, higher speed combined with larger volumes ... 38.3%

Customer-based segmentation (Gold, Silver, Bronze) ...................................................... 30.4%

Application-based price differentiation ................................................................................ 12.3%

Time-based data access ................................................................................................................ 3.2%

Don’t know ......................................................................................................................................... 3.7%

Disagree ............................................................................................................................................... 35%

Undecided ........................................................................................................................................... 35%

Agree ..................................................................................................................................................... 30%

NOTE: Base, n=573

NOTE: Base, n=573



kEy pOINtS

• OperatorsarenowstartingtotalkconfidentlyaboutreachingagreementswithOTTprovidersforsharingthecostofprovidingmorebandwidthfortheirservices.

• International(transit)operatorsarelookingtoevolvetheirexistingpeering(andsettlementfee)agreementswithInternetcompaniestoincludecontentdeliverynetworks(CDNs).

• A“tax”onOTTplayerswhichdeliversasignificantrevenuestreamtotelecomsoperatorswoulddestroyOTTbusinessmodels.

• Themovetowardstiered–andapplications-based–pricingrepresentsathreattothebusinessmodelofOTTvideoprovidersforservicesthataredeliveredovermobilenetworks.

• Charginghigherpricesforheavybroadbandusers(and“heavyapplications”)isabetterstrategicoptionforoperatorsthanataxontheOTTprovidersthemselves.

Disagreements between operators and Internet companies over who should bear the cost of building the networks that carry Internet traffic seem to have moved on from exchanges of angry words to active dialog between the two parties.

France Telecom chairman Stephane Richard led a senior company delegation to the west coast of the US where, among others, he saw Google’s top brass. He told financial analysts at the company’s Investor Day two weeks after the visit that Google had moved from a position of “we will never pay” to an acceptance that “we will have to pay”.

Richard may well have been playing to the audience in making such a bold assertion. But, on the other hand, it is unlikely that he would have mentioned the visit had there been no progress at all.

If FT is on the verge of a breakthrough with Google, it is worth looking at what might have brought the two sides to the negotiating table and what sort of deal they could strike that: a) enables a company such as

Google to retain its free-to-the-consumer business model; and b) gives operators a financial incentive to continue to invest in network capacity to deliver OTT services.

IN tHE EARLy DAyS OF tHE INtERNEt

International operators have been delivering Google’s traffic to both their own and third-party access networks ever since the early days of the Internet. They initially agreed to do this for free via peering arrangements – even though it was pretty much one-way traffic from North America into Europe and other parts of the world – because they accepted the argument from the Internet companies that they were receiving content for free in exchange for transit.

For the last four years or so, these peering relationships have transitioned to settlement-fee arrangements which means that operators do receive some payments from Internet companies in return for the provision of SlAs relating to latency, availability and packet loss (in the transit network). But operators claim that the fees they receive from many of these content companies do not even cover their transit costs.

Operators have long been concerned about the growth of Internet traffic on their fixed networks but, more recently, it has been the burgeoning usage of Internet services over mobile networks delivered to smartphones and laptops that has been a cause for concern. Operators have struggled to manage this growth because of the inherent unsuitability of HSPA networks to provide Internet access and the lack of capacity in their backhaul networks. The fact that operators have been reduced to dumb (mobile broadband) pipes has merely served to reinforce their conviction that they need to do something about their relationships with Internet companies.

When Google executives are interviewed – or ambushed in a public forum such as an industry

the end of all-you-can-eat pricing is bringing Internet companies to the negotiating table

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conference – about the commercial relationship between their company and global telecoms operators, they have given the impression of being slightly resentful about what they perceive to be the one-sided nature of the argument. They are also nervous about any pricing or network prioritization approaches which threaten or undermine the principle of net neutrality.

The standard replies that come back from Google executives are that: a) they help telecoms operators to make money by providing services to end users that require a phone call or a text message (or a data session) for which they pay; b) Google spends a lot of money itself on networks and technology that moves the (Internet) content closer to the user and therefore reduces how much it costs the telecoms operators to carry it; and c) Google has invested a huge amount of money itself in creating the Android operating system that operators – and other third parties – can use for free.

Privately, executives at some of the larger Internet companies must also wonder why telecoms operators complain about the deluge of data traffic and the need for Internet companies to pay their way while, at the same time, they are pushing mobile broadband services aggressively to their customers. Furthermore, operators’ financial results demonstrate that mobile broadband is the fastest-growing part of their business and, viewed as a stand-alone business, is growing as fast as Google itself (see fig. 1).

SO, WHAt ARE tHE pOtENtIAL OptIONS FOR OpERAtORS?

A number of different ideas have been mooted by operators for addressing (or correcting, as operators would say) the current situation. Informa Telecoms & Media has identified seven options for operators (see fig. 2).

1. Make Internet companies pay for sending traffic over their networksDuring the early part of 2010, many operators threw their weight behind the idea of a “Google Tax”. They wanted the right to ask Google – and other online players – to pay them to “prioritize” their traffic based, one would assume, on how much they pay the operator.

How well they have thought through this proposal is unclear but a simple analysis of how it might work indicates that such a scheme would face major challenges.

Telecoms (fixed and mobile) operators globally generated in excess of US$1.7 trillion in 2010, according to Informa Telecoms & Media. let’s compare this with the industry that they are proposing to tax. Online and mobile advertising revenues totaled US$63 billion in 2010, according to industry estimates – although admittedly most of this is shared between Google, Microsoft, Yahoo! and now Facebook. This means that the telecoms business is worth 27 times more than global online advertising.

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FIg 1Operators’ mobile broadband businesses are growing as fast as Google, 2010


*ITM estimate


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If we just look at the mobile business – and this is where telecoms operators are coming under most pressure and need to change their business models – the difference between operator and advertising revenues is even more pronounced. Mobile operators turned over close to US$900 billion in 2010 while mobile advertising was worth just US$2.6 billion, making the mobile operator business 340 times bigger than the mobile advertising sector.

Now, let’s suppose that online companies were to enter into new commercial relationships with operators. And we will assume, for example, that these online companies pay operators a total sum equivalent to 10% of their total online revenues – US$6.3 billion. This sum would cause significant harm to online players whose only revenues are from advertising but would add just 0.37% to the bottom line of telecoms operators.

If the payments were only for traffic delivered on mobile networks, then a 10% “tax” would generate just US$230 million which represents a negligible 0.029% of total mobile operator revenues.

So, in conclusion, if operators were to charge online players for prioritizing their traffic, there would be two scenarios, neither of which would make the scheme viable. Either the fees would be so punitive that they would end up destroying the online business model

or they would be set at a level which the online players could bear but which would have a negligible benefit to operators.

At the same time, however, there is a strong likelihood of changes in the international carriage / transit of Internet players’ traffic. Players such as Google will have to either increase the payments made to international carriers or – which is more likely – carry a higher proportion of international traffic into different countries where they will use their own CDNs to then route traffic into different operators’ access networks.

Operators have already changed their approach to signing new peering / settlement fee agreements. In many of the existing relationships, European operators are receiving up to 60x more traffic than they are sending back. In future, they will only sign deals when the imbalances is 3x or less.

2. Compete with the services that Internet companies offer to their end usersOperators have historically focused on the development of network-based services. However, more recently, they have begun to accept that they need to move into the provision of IP-based services if they want to deliver services to smartphone users that compete with OTT offerings.

Operators such as Telefonica have – over the last two years – started acquiring OTT players such as Terra (a latin American provider of video and entertainment services), Tuenti (a Spanish social networking service for teenagers) and Jajah (a mobile VoIP service provider). Other operators have taken more of a partnership approach. For example, Orange is providing a music-streaming service to its ADSl and mobile customers in partnership with French company Deezer in which it has a 20% stake. It is also offering its customers a video-sharing service similar to YouTube via Dailymotion, a company in which it acquired a 25% stake earlier this year.

In most cases, these services are advertising-driven although there is also a paid-for model for premium services.

One service that is emerging as a key battleground between operators and third parties (including some OTT and device vendors) is around payments and NFC. Operators are attempting put the SIM card at the center of the NFC experience in order to prevent these third parties from providing OTT services that use NFC technology.

1Make Internet companies pay for sending traffic over their networks

2Compete with the services that Internet companies offer to their

end users

3Develop a platform strategy of their own

4Sell network technologies and solutions to Internet companies to

help reduce the traffic burden

5Deprioritize Internet companies' traffic or make certain traffic types

are available only over Wi-Fi networks

6 Introduce tiered pricing and move to a commercial model where there

is a direct correlation between the bandwidth that the end users consume and what they pay. This would effectively mean increasing the price of broadband access to heavier users

7Stick with their current strategy of optimzing the networks, increasing

capacity in the backhaul (fiber and DSL) and access (LTE) networks and introducing generous tiered pricing plans.

FIg 2Potential options for operators to counter Internet companies’ traffic growth and service strategies


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3. Develop a platform strategy of their ownOperators have tried – largely unsuccessfully – to build their own developer communities. They are now collaborating on the Wholesale Applications Community (WAC) initiative, an alliance of telecommunications companies committed to building an open applications platform.

Operators are hoping to monetize their platforms by charging for APIs. So far, there has been interest from developers in using the operators’ billing capabilities and getting access to voice and messaging services. Telefonica is incentivizing developers to make use of its SMS capabilities by introducing a revenue-share model for applications which drive SMS usage.

4. Sell network technologies and solutions to Internet companies to help reduce the traffic burdenOperators are working on a number of different approaches to reduce the traffic burden on their mobile networks. These include network and handset optimization, local caching, DPI and policy control and off-loading.

Rather than bearing the cost of all these initiatives themselves, operators are now talking to Internet companies about sharing the cost burden. For example, one of the proposals that Orange is understood to have made to Google is to evolve from a peering relationship to one that also embraces CDNs. This would involve Orange building a CDN capability for Google in France (and other markets where it is a major player). This would save on Orange’s transit costs and would also generate new revenue for the company. At the Investor Day in May, Richard specifically said that Orange was looking for a sizeable share of the US$5 billion CDN market. However, Informa Telecoms & Media questions whether operators can secure a significant share of this market and one which has a tangible impact on their revenues.

5. Deprioritize Internet companies’ traffic or make certain traffic types available only over Wi-Fi networksThe deprioritization of Internet traffic is a concept that arguably runs counter to the spirit of network neutrality. However, most operators today already prioritize some traffic to a greater or lesser degree. In recent months, mobile operators have started to introduce tiered pricing plans that explicitly state that certain types of traffic will be prioritized over others. Business users are being given the opportunity to sign up to price plans that offer different levels of QoS based on how much they pay.

Offloading traffic to Wi-Fi is an approach that many operators have started to use and one approach that

they could consider is making certain high-bandwidth video applications only available over Wi-Fi. Some operators are already offloading a third or more of their traffic although Informa Telecoms & Media is not aware of any that are offloading specific types of traffic.

6. Introduce tiered pricing and moving to a commercial model where there is a direct correlation between the bandwidth that the end users consume and what they payMost tiered price plans available today are based on total usage over a specific period. The user does not have visibility of how much data different services consume. However, there is a trend towards introducing more application-specific pricing plans.

Tiered pricing today is generating considerable interest and support among the mobile operator community. There are already signs that – if successful – integrated operators will extend it to their DSl / cable /fiber businesses. In the US, for example, AT&T has already implemented 150GB and 250GB caps on its DSl and fiber users. This is an extremely generous cap – the average subscriber to video-subscription service Netflix consumes 40GB of traffic per month – but, with the proliferation of Wi-Fi-enabled devices in the home and the introduction of HD, this usage cap could come into play for a meaningful proportion of users in the coming years.

In emerging markets where fixed (PC) broadband services are available to only a relatively small number of people, and where peoples’ first experience of the Internet will be via a mobile phone, prepaid pricing approaches are likely to dominate. Access charged by the hour or day could be one approach but Informa Telecoms & Media believes that operators will also charge by application. For example, an operator could introduce a per-minute rate for a social networking service. When taking this approach, operators are likely to charge a higher rate for high-bandwidth services than for low-bandwidth services. The relative lack of international bandwidth in these countries and the resulting high wholesale cost of such bandwidth also serve to make this approach more attractive from an operator perspective.

7. Stick with their current strategy of optimizing the network, increasing capacity in the backhaul (fiber and DSL) and access (LTE) networks and introducing generous tiered pricing plansThe existence of a relatively small number of “bandwidth hogs” (2-5% of total users) who account for a third or more of total mobile broadband traffic is a trend reported by most operators. In most cases, these are dongle /USB modem or iPad/tablet customers who


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use their connection in a fixed location (home/office) as an alternative to the fixed network. With the advent of tiered pricing, it should be relatively straightforward for operators to start charging these customers a price that is closer to the cost of providing connectivity.

In terms of getting their networks to run efficiently, operators are now fully engaged in network optimization programs and resolving some of the issues around signalling that resulted in serious congestion when the iPhone 3 first appeared on the market. They are engaging with handset vendors generally and trying to find approaches to reduce their drain on their networks.

Operators are already taking steps to address the problems caused by the rapid growth in data traffic. Will these strategies be sufficient to manage the continued growth in traffic? Furthermore, the planned rollout of lTE, which operators now believe that they can achieve with little or no increase in their capex-to-sales ratios, will provide a quantum leap in terms of network capacity.

REtAIL pRICINg By AppLICAtION WOULD BE A NIgHtMARE SCENARIO FOR ONLINE vIDEO pROvIDERS

looking at the above approaches, Informa Telecoms & Media believes that Option 1 will not generate enough revenues to provide a meaningful subsidy to operators for their network upgrades. Similarly, Option 4 may provide some light relief to international carriers but will not alleviate the burden of delivering Internet traffic in operators’ access networks.

In terms of the revenue-generating capabilities of Options 2 and 3, there is no evidence to date that either of these initiatives will generate significant revenue streams or present a competitive threat to Internet companies.

This leaves Options 5 and 6 as two approaches that could have profound effects on the availability and pricing of Internet services to mobile broadband customers. Deprioritizing certain traffic is a strategy which operators would almost certainly favor but is in direct contravention of rules around net neutrality. It is less clear how regulators would view any attempt by operators to only allow their customers to access some services when they are using Wi-Fi.

Option 7 largely represents a status quo and one which would be welcomed by OTT players whose business models would remain intact. It is also an approach which operators in highly-competitive markets may

be forced to stick with, particularly if customers do not take to more usage-based price plans.

In the UK, for example, the three leading operators, Vodafone, Telefonica O2 and Everything Everywhere, have all introduced tiered pricing approaches within the last six months leaving the smallest operator 3 with the opportunity to heavily promote its all-you-can eat data plan (see fig. 3). If 3 starts to win market share at the expense of other operators, it will severely test their resolve to stick with their tiered-pricing approach. And it will almost certainly dissuade them from introducing more heavily tiered price plans.

INFORMA vIEWpOINt

Operators are caught in a Catch-22. On the one hand, they know that they need to invest in next-generation networks to give their users a good customer experience and to allow them to access new services and technologies such as cloud computing. But, on the other hand, if they do not see any prospect of providing – and monetizing – these services then what incentive do they have in spending their own money building the networks to access them?

Operators are endeavoring to change their relationships with OTT players both to: a) improve their prospects for developing their own services to compete with them; and b) share in the cost of building these new networks.

However, operators are fast coming to the conclusion that raising the price of access to (heavy) users and re-introducing the relationship between costs and revenues is far more likely to help pay for next-generation networks than relying on OTT players whose revenues are relatively inconsequential compared with the trillion-dollar operator business.

FIg 33 UK’s “all-you-can-eat” data plans

Source: 3UK

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Such an approach from operators is likely to have the added benefit of bringing OTT players to the operating table. If, in the future, users come to view high-bandwidth applications such as video as being significantly more expensive than low-bandwidth services such as e-mail or browsing, this could well have an impact on the usage of – and revenues derived from – services such as YouTube or Netflix. They will need to do more to reduce the bandwidth that their applications require (interestingly, in Canada where fixed operators have capped broadband usage, Netflix has dropped the bitrates it uses).

This is precisely what Informa Telecoms & Media believes to be happening in the current discussions between France Telecom and Google. In return for agreeing to help share the cost (and reduce the overall cost) of delivering its services, Google may well be seeking some assurances from France Telecom that it is not about to overhaul its broadband pricing approach.


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kEy pOINtS

• ManyoperatorsareexpandingtheiruseofWi-Fihotspotstoextendcoverage,offloaddatatrafficfromtheircellularnetworksandprovidenewservices.

• StandardsworkisboostingWi-FiperformanceandincreasingdatathroughputandreachthroughmeasuressuchasgreaterbandwidthandextendedsupportforMIMO.

• Regulatorsareurgingtheuseofwhite-spacespectrumforWi-Fi.Coupledwithcognitive-radiotechnology,itcouldmakeWi-Fiameansofprovidingmass-market,wide-areawireless-broadbandservices,buttherearepracticalhurdlestoovercome,andthetechnologyhassomewaytogo.

• TheindustryisdividedastohowbesttostandardizetheseamlessintegrationofWi-Fiwithcellularnetworks,andsomeoperatorsareoptingforproprietaryapproaches.Workonstandardssupportforcore-networkfunctionality,suchasQOSandpolicymanagement,isstillinanearlystage.

The number of mobile operators incorporating Wi-Fi as part of their broadband-network strategies continues to grow. large-scale deployments by the likes of PCCW in Hong Kong and Japan’s KDDI are using dense Wi-Fi coverage to provide fast wireless data access, offload peak data traffic from cellular networks and support the delivery of new content and value-added services. KDDI is planning to expand its Wi-Fi coverage from 10,000 hot spots to 100,000 by March.

China’s operators have raised the stakes further: Both China Mobile and China Telecom intend to deploy 1 million Wi-Fi hot spots in the next two years. On a more modest scale, South Korea’s SKT opened 10,000 new hotspots in 1Q11, and O2 in the UK has embarked on a large-scale program to build more than 15,000 Wi-Fi hot spots in the next two-and-a-half years (see fig. 1).

In high-traffic areas, Wi-Fi’s potential as a means of offloading both data and signaling traffic is often

being realized, assisted by vendors’ efforts to deliver a consistent customer experience by more closely integrating Wi-Fi with cellular networks. Deployments are frequently aimed at applications beyond those geared toward notebook/dongle users, to provide an improved broadband experience for operators’ growing smartphone and tablet customer bases, since Wi-Fi is well suited to the demands of applications that use data in bursts and for functions such as video and music streaming.

Standards work in the IEEE is improving the performance of Wi-Fi, but agreeing on a common model for integrating cellular and Wi-Fi networks is proving more challenging. Mobile operators, meanwhile, are eager to extend their Wi-Fi deployments and need to closely integrate them with the cellular environment sooner rather than later.

802.11N EvOLUtION

In parallel with operators’ growing commitment to Wi-Fi, the IEEE is working to extend the technology’s capabilities by focusing on enhancements to the 802.11n standard, the preferred technology for the current generation of Wi-Fi devices and access points, which was finalized in 2009.

Standards process gives Wi-Fi a performance boost, but seamless integration with cellular is the priority

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FIg 1Global, no. of public hot-spot locations, 2009-2015


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Work on the next phase, 802.11ac, is expected to raise the speed of data throughput in the 5GHz band to 1Gbps or higher, helping ensure that Wi-Fi continues to meet the demands of users. The rise in speeds is set to be achieved through a number of measures, such as extending RF bandwidth to 160MHz, increasing the possible number of MIMO channels to eight and incorporating multiuser MIMO capability. The new standard is in development and is anticipated to be released by about 2012.

Additional variants to the 802.11 standard are at various stages of preparation (see fig. 2), covering aspects such as deployment in TV white spaces at lower frequencies (802.11af), very high throughput for short-range performance in the 60GHz band (802.11ad) and deployments at sub-1GHz frequencies (802.11ah).

SUpER WI-FI AND WHItE SpACE

The 802.11af task group was established in December 2009 to adapt 802.11 for operation in so-called TV-white-space spectrum, the unused channels below 800MHz that sit between those used by TV broadcasters. The initiative, which has attracted the label “Super Wi-Fi,” is backed by a Wi-Fi Alliance device-certification program.

The use of white-space spectrum is governed by databases that map the available channels and regulate spectrum use to prevent interference. The applications for Super Wi-Fi are primarily considered to be rural and in-building coverage. But although the lower frequencies used by Super Wi-Fi should ensure greater range, the available bandwidth and therefore link rates achievable with the technology are unclear.

The entry of Google into the white-space debate in the US and the formation of the White Spaces Coalition catapulted the technology into public attention, though the intense debate among proponents of using white space, broadcasters and the FCC about the feasibility of using the relevant bands – and of using them to deploy Wi-Fi – continues. The FCC announced a 45-day trial in September in which the public can access white-space spectrum, to test the accuracy of a white-space database system provided by Spectrum Bridge, one of the first companies to win FCC approval as an administrator of white-space databases.

The UK’s Ofcom has become the first regulator in Europe to plan for the introduction of white-space technology. Trials of the technology have already been conducted in Cambridge, and Ofcom says white-space technology could be launched in the UK as early as 2013.

802.22 AND WRANS

In a white-space initiative that predates the 802.11af standards work by five years, the IEEE’s work on the 802.22 standard was initiated in 2004 as a result of the FCC’s early efforts to incubate white-space technology. 802.22 is like 802.11af in terms of use of white-space spectrum and cognitive-radio technology but differs from evolved 802.11 by being designed to enable interoperable, multivendor networks – known as wireless regional area networks (WRANs) – that can compete with fixed broadband access.

The IEEE finally announced in July that it had published the 802.22 standard, seven years after it was proposed. According to the IEEE, 802.22 will be capable of providing wireless access over distances up to 100km,

FIg 2IEEE 802.11 Working Group projects and timelines, Jul-11 to Nov-14

Source: IEEE

Project subject task grouP status FiNal 802.11 Wg aPProval

FiNal or coNDitioNal 802 ec aPProval

FiNal revieW-coMMittee aPProval

P802.11ai Fast Initial link Setup TGai Predicted Mar-14 Mar-14 May-14

P802.11ah Sub 1GHz TGah Predicted Sep-14 Sep-14 Nov-14

P802.11ae Prioritization of Management Frames TGae Predicted Mar-12 Mar-12 Jun-12

P802.11af TV Whitespace TGaf Predicted Mar-13 Mar-13 Mar-13

P802.11ad Very High Throughput 60GHz TGad Predicted Jul-12 Jul-12 Dec-12

P802.11ac Very High Throughput 6GHz TGac Predicted Nov-13 Nov-13 Dec-13

P802.11aa Video Transport Streams TGaa Predicted Mar-12 Mar-12 Jun-12

P802.11 802.11 Accumulated Maintenance Changes TGmb Predicted Nov-11 Nov-11 Mar-12

P802.11s Mesh Networking TGs Predicted Jul-11 Jul-11 Nov-11


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and each WRAN will be capable of delivering speeds of up to 22Mbps per channel. The technology’s advanced cognitive-radio capabilities include features such as dynamic spectrum access, incumbent database access, accurate geolocation, spectrum sensing, regulatory-domain-dependent policies, spectrum etiquette and coexistence for optimal use of the available spectrum.

Both white-space technologies have potential for mass-market adoption, and operators have shown interest, particularly in Asia, where some are thought to be considering deploying Wi-Fi as an alternative to lTE. In terms of spectrum availability, Super Wi-Fi is also suitable for markets such as the UK and Western Europe. In addition, there is considerably more momentum behind 802.11af, since 802.11 is already established and backed by major chipset vendors.

WI-FI/CELLULAR INtEgRAtION AND ROAMINg

Alongside work on the technical evolution and performance of Wi-Fi, standards work and a number of related industry initiatives are addressing aspects such as network discovery, identification, connection, authentication and security, all of which are critical for the successful and seamless integration of Wi-Fi with cellular networks.

This work is primarily designed to improve and simplify previously time-consuming and – for users – often confusing processes such as hot-spot selection, manual user authentication and log-in, and roaming-partner-network selection. It is being driven in the standards domain by the IEEE and industry bodies such as the Wi-Fi Alliance and the Wireless Broadband Alliance (WBA).

But efforts to move away from proprietary technologies to a more standardized approach have failed to unite the diverse interests of cellular operators, Wi-Fi providers and vendors, with various industry bodies often appearing to pull in different directions.

One such initiative is the WBA’s Wireless Internet Service Provider Roaming (WISPr) 2.0 specification, which was released in 2010. It uses a device-based client to automatically connect the device to the service provider’s own or a roaming partner’s Wi-Fi network when in range of a hot spot, once the device has undergone an initial certification process. WISPr 2.0 uses HTTP-based authentication but has also been trialed using a SIM-based approach.

The WISPr 2.0 specification has the backing of alliance members including BT, Cisco, AT&T and Verizon,

and AT&T uses it to provide Wi-Fi connectivity for smartphone and tablet devices.

The IEEE’s 802.11u standard doesn’t require preauthentication of the device to establish a network connection. Instead, the 802.11u-enabled access point can better advertise itself to the user device by, for example, transmitting the service provider’s identifier to the device to identify the hot spot as belonging to the relevant service provider or a roaming partner, and only then connecting using the appropriate service provider’s security credentials.

Importantly for many cellular operators, the 802.11u standard includes support for SIM-based authentication in the form of the IETF’s Extensible Authorisation Protocol for GSM (EAP-SIM) and UMTS (EAP-AKA), enabling the subscriber’s profile to be carried over from the cellular network into the Wi-Fi session and providing a similar level of security to the GSM/UMTS network. Support for SIM-based authentication will be important for the likes of China Mobile, the majority of whose handsets support GSM and TD-SCDMA alongside Wi-Fi (see fig. 3).

The 802.11u standard has been adopted as the basis for work by the Wi-Fi Alliance on a standardized approach to Wi-Fi-network discovery and association for next-generation hot spots, dubbed Hotspot 2.0.

Since 802.11u is the most advanced initiative being developed for cellular/Wi-Fi integration, incorporating support for it into access points will be key. The Wi-Fi Alliance expects its Wi-Fi Certified testing program for public Wi-Fi hot spots – designed to standardize support for aspects such as network discovery and selection, network access (such as via SIM authentication), immediate account provisioning and WPA2 security – will launch in 1H12 (see figs. 4 and 5).

But operators are showing signs of impatience with the standards process. Deutsche Telekom says that although a number of bodies are pushing for cellular-to-Wi-Fi standardization, it remains a challenge, and in the meantime operators are missing out by lacking information about Wi-Fi traffic for billing purposes. The operator has teamed up with Wi-Fi-network-provider iPass, using the company’s intelligent-connection-manager software to connect tablets and smartphones to provide access to an aggregated network of 500,000 hot spots.

Deutsche Telekom says this approach provides the nearest thing available to standardization, by offering operator-driven hot-spot selection, consistency with

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FIg 3Certified Wi-Fi devices with support for EAP-SIM/AKA, 2006-2010

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FIg 4Key elements of Wi-Fi Certified hot-spot program

FIg 5Status of Wi-Fi Certified hot-spot program, Oct-11



Network discovery and selection Devices will discover and automatically choose networks based on user preferences, operator policies and network optimization.

Streamlined network access Devices will be automatically granted access to the network based on credential mechanisms – such as SIM cards – that are widely used in cellular devices. Minimal user intervention will be required.

Immediate account provisioning The process of establishing a new user account at the point of access will be streamlined, requiring fewer steps and implementing a common provisioning methodology accross vendors.

WPA2 security Over-the-air transmissions will be encrypted using the latest security technology.

Current status

Industry agrees to develop a new specification

Wi-Fi Alliance defines a technology specification

Wi-Fi Alliance develops a test plan to validate interoperability

Certification testing launch (planned for mid-2012)


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Wi-Fi/cellular-interworking standards that are under development and the means for Wi-Fi use to be billed as part of the cellular service rather via a credit card to another provider.

Meanwhile, the Wi-Fi Alliance and the WBA, whose Next Generation Hotspot program is also tackling interoperability requirements for hot spots and 3G/4G operators, have pledged to work more closely together. The two bodies have launched a trial with leading operators and vendors to address seamless, secure autoauthentication on multiple operator networks.looking farther ahead, the IEEE is working on the 802.11ai Fast link standard, which aims to drastically reduce the amount of time it takes smartphones and tablets to connect to Wi-Fi hot spots, thereby saving battery use. Chipset designer CSR recently showed off some initial designs for 802.11ai-compliant products, though the standard is not expected to be finalized until 1Q14. Ericsson and Nokia Siemens Networks also have new Wi-Fi products, though they are proprietary.

MAINtAININg A CELLULAR USER’S ExpERIENCE ON WI-FI

Work on establishing seamless quality of service (QOS) and policy across cellular and Wi-Fi networks is focused on the access-network discovery-and-selection function (ANDSF), which forms part of the evolved-packet-core system architecture and is defined in 3GPP’s Release 8 standards.

like efforts to provide better information for network selection and authentication, this function is designed to provide additional information to devices connecting to non-3GPP networks such as Wi-Fi and WiMAX, helping the user equipment select the optimal access network.

Testing of ANDSF capabilities is ongoing as part of the Future Seamless Communication initiative at Fraunhofer Fokus in Berlin, though the initiative appears to be some way short of demonstrating the promised functionality, and seamless QOS/policy across cellular and Wi-Fi networks therefore appears to be some way off. Proprietary versions of ANDSF are beginning to appear, however. WeFi, an Israel-based company that develops community-based Wi-Fi networks, has its own version of ANDSF, called WeANDSF.

INFORMA vIEWpOINt

Operator commitments to incorporating Wi-Fi into overall mobile broadband strategies are growing in

both number and scale. Meanwhile, standards work in the IEEE continues to boost the performance of Wi-Fi in terms of throughput, coverage and suitability for deployment in new bands such as white spaces, offering the possibility of large-scale adoption, potentially challenging mobile broadband technologies such as lTE in some areas.

Hotspot 2.0/802.11u is the most advanced initiative in terms of standardization when it comes to integration with cellular networks, though there is still a lack of consensus about how to tackle the problem, and some operators are showing signs of impatience. The major commitment to Wi-Fi by the likes of China Mobile will favor a solution that lets operators integrate Wi-Fi most effectively with legacy cellular networks and future lTE.

Wi-Fi implementations around the world vary significantly in terms of performance and quality. In addition, the failure to implement universal standards for aspects such as hot-spot identification, authentication and registration is causing fragmentation, and there is a clear need for a single standards-based initiative with the backing of all parties.

Meanwhile, the development of support for seamless QOS and policy-based functionality across cellular and Wi-Fi networks, which requires a greater level of integration at the core network, is at an early stage. Standards-based commercial implementations still appear to be some way off, but it is possible that operators will deploy vendor-specific technology to keep the profits in the operator rather than IT sector.

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kEy pOINtS

• BelgacomfacesdifficultmarketconditionsinthatthevastmajorityofhomesinBelgiumarepassedbycableTVnetworksthathavebeenupgradedtoDOCSIS3.0superfast-broadbandtechnology.

• ButtheBelgianincumbentmovedearlyandaggressivelyintoVDSLandhasreapedbenefits,havingalreadymadeinvestmentsthatotherincumbentsneedtomakeinthefuture.

• TheearlymovetowardVDSLandfiber-to-the-cabinet(FTTC)looksincreasinglysensible,sincetheincumbentisexploringavarietyofwaystoincreasebandwidthwithoutmovingtofiber-to-the-home(FTTH).

• Nevertheless,Belgacomislosingouttothecableplayersintermsofnetadditions,butitishardtoseehowadifferentnetworkstrategycouldhaveimprovedthesituation.

EARLy INvEStMENt IN vDSL

At the end of 2003, Belgacom decided to invest in FTTC using VDSl1 as part of its Broadway project to upgrade its fixed-broadband-access network. Most of the increase in coverage came in the years up to and including 2007, but Belgacom has continued to incrementally increase FTTC coverage. By end-2010, the company covered 76% of the population with FTTC (see fig. 1), and it plans to increase that figure to 85% by 2013. The rollout of VDSl helped Belgacom make an early entrance into the IPTV market, launching Belgacom TV in 2005. The original network was based on VDSl1, but Belgacom launched a VDSl2 network in April 2008.

Over time Belgacom has not only increased coverage but has increased the speeds delivered over the FTTC network, for example by changing the VDSl frequencies it uses. There are a number of other ways that Belgacom will be able to use its FTTC network to increase the speeds it can offer. It is likely that Belgacom will be able to increase the maximum speeds it offers over its VDSl

network to 50Mbps (excluding bandwidth used for the delivery of IPTV) in the next couple of years.

INCREASINg vDSL FREqUENCIES: ALREADy DEpLOyED

For example, in 2010 Belgacom increased the frequency of VDSl2 it was using from 12MHz to 17MHz and thus increased the maximum download speed it offered from 20Mbps to 30Mbps. The figure of 30Mbps is significant, because the European Commission aims for all households to subscribe to this download speed by 2020. The move to 17MHz does not mean that there will be interference with ADSl2+ lines, because ADSl2+ uses frequencies only up to 2MHz. Belgacom has implemented spectrum shaping, meaning there will be no interference or cross-talk between ADSl2+ and VDSl2 lines in the frequencies up to 2MHz. Although this might mean that Belgacom loses a little in terms of the highest download speeds it can offer via VDSl2, it does minimize equipment change and saves money by allowing a smoother technology migration.

Case study: Belgacom makes the best of a bad hand with copper-centric NGA strategy

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vDSL BOOSt BOxES: pOtENtIAL FOR DEpLOyMENt

Although Belgacom has yet to deploy VDSl boost boxes, the company is interested in doing so. The VDSl boost box is a way of bringing fiber closer to the customer – for example, to loop lengths of 400m or under. The installation of the boxes would require some digging up of roads, thereby increasing capex, and would entail moving the DSlAM from the remote optical platform to the VDSl boost box. The use of VDSl boost boxes would also make sense because increasing the frequencies to 17MHz works best at shorter loop lengths.

vDSL vECtORINg AND SUBLOOp UNBUNDLINg: REgULAtORy DECISIONS pAvE tHE WAy

Belgacom has announced an agreement with vendor Alcatel-lucent for a commercial deployment of VDSl vectoring. The operator says it plans to commercially launch vectoring by 2014, at the latest, because there is first a need to perform solid field tests. However, vectoring is incompatible with subloop unbundling (SlU) of VDSl, which initially looked like it would be a significant drag on the deployment of the technology in Belgium. As a result, the Belgian regulator, the BIPT, proposed to remove Belgacom’s SlU obligation on two grounds: first, that it hampers technological innovation, specifically in the form of vectoring; and second, that SlU is not an economically viable model for alternative operators to pursue. The BIPT’s proposal to remove the SlU obligation went before the European Commission in June 2011, and the body agreed with it. Vectoring would also work well with shorter loops, since at loop lengths of 1km the impact of the technology is not significant. Therefore, using vectoring with VDSl boost boxes is a strategy that makes sense.

pAIR BONDINg: LESS AttRACtIvE tHAN vECtORINg FOR NOW

Many households in Belgium are served by two copper pairs as a result of previous rules in which one line was installed for fixed-line telephony and one was installed for fax. However, not all of the pairs have been inducted into households. If the second pair has not been inducted into the household, Belgacom might need to dig up the road to locate the end of the pair and then splice in order to extend the pair and bring it to the home. In this case, sources say, Belgacom believes that pair bonding would not be viable. Furthermore, in Belgium, although a home might be served by two

pairs, one of which passes to the exchange, the other pair might not be usable because it is on a loop back to the subscriber’s home, thus disturbing the direct pair through cross-talk.

However, even taking into account such cases, Belgacom says there are significant numbers of second pairs that can be reached and therefore there is some potential for pair bonding. Belgacom will initially deploy VDSl vectoring to increase speeds but might then look at pair bonding to increase them even more. Pair bonding could even be used in conjunction with phantom mode, a technology that creates a third virtual pair from the two physical pairs, thereby increasing speeds even more. Additional developments to improve the bandwidth that can be delivered over copper, such as Omega DSl, could also potentially be used by Belgacom and might delay any rollout of FTTH. Omega DSl would involve bringing fiber even closer to the customer, to 100-200m.

RESULtS

Belgacom’s broadband market share drops, but it’s saving on costs and covering more with NGABelgacom’s broadband market share fell about 3.5 percentage points in the two years to end-March 2011. The number of subscribers on the VDSl network is about 900,000.

It is hard to see how Belgacom could have improved this position, but if it had increased its investment in FTTH it would have increased its capex and in doing so lowered the company’s margins. By end-2010 Belgacom had invested only €550 million (US$754 million) in Project Broadway. Assuming that rolling out FTTH would have cost about €500 per home (a conservative estimate), the same amount of money invested in an FTTH rollout would have covered about 1.1 million homes, or less than a quarter of homes in Belgium. This compares to Belgacom’s VDSl coverage of more than three-quarters of homes. Alternatively, to cover the same number of homes with FTTH as have been covered with FTTC, assuming a rollout cost of €500 per home for FTTH, Belgacom would have had to spend €1.7 billion.

Although Belgacom has only been able to produce modest increases in bandwidth in recent years, when compared with the cable players this position will improve thanks to technologies such as vectoring, possibly helping Belgacom improve its fixed-broadband market share again. Nevertheless, Belgacom does suffer in the sense that Telenet, its


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cable competitor in the Flanders region, has customers taking higher download speeds than Belgacom (see fig. 2). Belgacom offers a maximum download speed of 30Mbps, but at end-2010 48% of Telenet’s broadband customers were taking packages of 30Mbps or above. Thus there is the danger of customers churning from Belgacom to Telenet, because of the higher speeds they can receive over the cable network. According to figures from 2Q11, over half of Telenet’s new customers took speeds of over 30Mbps.

However, although some of the losses in Belgacom’s market share might be due to Telenet’s apparent speed advantage, other factors are likely to be equally, if not more, important. For example, a higher proportion of Telenet customers than Belgacom customers take triple-play bundles, making them less susceptible to switching to the incumbent. But Belgacom was early to recognize the importance of triple play and does have a sizable triple-play base compared with other incumbents.

tv AND vDSL WORkINg WELL tOgEtHER

Belgacom has experienced strong growth in IPTV-customer numbers (see fig. 3), while the cable operators have suffered modest declines in TV-subscriber numbers. launching VDSl has helped improve the quality of Belgacom’s IPTV service. Belgacom has a TV footprint of about 90% of Belgium, and the VDSl rollout has helped the incumbent have 73% population coverage with HDTV. In addition, the VDSl rollout enables Belgacom to offer multiroom IPTV, because the VDSl network provides enough bandwidth to deliver multiple TV streams. At end-1Q11, Belgacom had 149,000 multiroom IPTV users, or about 17% of Belgacom’s IPTV households. Belgacom also has a strategy of migrating broadband customers who ask for HDTV to VDSl automatically. In many ways, then, the demand for VDSl is really secondary to the demand for providing a quality TV service.

Belgacom has been able to significantly increase its share of the TV market. Although its IPTV offering might not be a significant stand-alone revenue generator, it has succeeded in reducing churn, because 81% of its consumer broadband customers take the IPTV product. Belgacom says that churn for all customers taking its fixed-broadband offering declined from 17% in 1Q08 to 14% in 1Q11. In addition, Belgacom says the churn rate is 8% for triple-play subscribers, compared with 12% for both single- and double-play customers.

Belgacom also says that not investing in FTTH is prudent, because advances in compression technology

are causing the bandwidths required to deliver an HDTV stream to fall, which in effect means that a 50Mbps connection can perform the same applications as a 100Mbps connection could in the past.

SUCCESS IN REDUCINg tHREAt FROM LOCAL-LOOp-UNBUNDLINg COMpEtItORS

Arguably another real success of Belgacom’s VDSl strategy has been to make it difficult for the llU players

FIg 2Telenet, fixed-broadband customers by download speed, end-2010

<10 Mbps ............................................... 5%

10-29 Mbps ........................................ 47%

30-99 Mbps ........................................ 47%

>100 Mbps ............................................ 1%

Source: Telenet

FIg 3Belgacom, IPTV households, 3Q05-1Q11

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to gain a foothold in the market. Although there was an obligation for SlU (before its recent removal), in practice no operator has used it. The Belgian market resembles the Dutch market in that cable coverage is nearly ubiquitous, but there is a noticeable difference between the two countries in the percentage of DSl customers taking an llU product, with llU having a greater share in the Netherlands (see fig. 4). Unlike Belgacom, Dutch incumbent KPN did not move aggressively and early into next-generation access with VDSl or FTTH/B, and this helps explain the greater preponderance of llU subscribers. In addition, a wholesale VDSl service only became available in mid-2008, meaning Belgacom had a number of years where it had a technological advantage over the alternative DSl players.

vDSL1 tO vDSL2 MIgRAtION: ExtRA COStS INvOLvED

Although the early move to FTTC paid dividends in terms of making it difficult for unbundlers to enter the market, there was a downside in terms of having to migrate from VDSl1 to VDSl2. Belgacom launched VDSl1 in November 2004 but didn’t start installing VDSl2 until 2008. By end-2010, Belgacom had completely migrated subscribers from VDSl1 to VDSl2. The problem is that in moving from VDSl1 to VDSl2, many costs were duplicated – for example, in terms of replacing VDSl1 customer-premises equipment (CPE) and line cards with VDSl2 ones. However, one plus for Belgacom was that VDSl2 is backward-compatible with VDSl1, so the new VDSl2 line cards worked with VDSl1 CPE, making for a smoother migration.

INFORMA vIEWpOINt

Losing market share, but network strategy is a successAlthough Belgacom is losing market share in fixed broadband, it doesn’t mean the operator made the wrong decision to focus on FTTC instead of FTTH. Its market share is declining for other reasons apart from download speeds, and the situation could well have been worse without the Broadway Project. Ultimately, Belgacom has saved a lot of money by deploying FTTC instead of FTTH/B. Without the Broadway Project ,and if the incumbent had only offered ADSl/ADSl2+, the disparity in speeds with the cable operators would have been even worse and Belgacom would most likely have lost even more market share. In addition, without VDSl Belgacom’s IPTV offering would have been weaker – for example, it would not have been able to offer multiroom – and thus broadband churn would most likely have been greater.

Good news around the corner for BelgacomThe cable players in Belgium have benefited from having the ability to upgrade to DOCSIS 3.0 cheaply and quickly. In the next couple of years, Belgacom will be able to take advantage of a number of technologies that will improve bit rates over its VDSl network. These technologies can produce a magnifier effect, meaning that many work well in conjunction with one another. Nevertheless, any moves to embrace these will most likely be defensive rather than offensive, because the cable players will move beyond the current top speeds of about 100Mbps they are offering.

Network upgrades not the only strategy in townAlthough moves to next-generation access are important, Belgacom must consider other factors if it wants to improve its market share. Correct positioning of bundles and allowing for the delivery of content across the TV, PC, mobile and other screens are two of the other important considerations. Additional improvements in Belgacom’s IPTV offer would also help reduce churn from the fixed-broadband product. In this climate, spending a sensible and not excessive amount on next-generation access appears logical, and this is what technologies such as VDSl2 and vectoring promise to deliver.

Netherlands Belgium

FIg 4Belgium and Netherlands, LLU penetration of DSL subscribers, 1Q09-1Q11

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Services, ecosystem

s and connected devices

In turn, the developers of the platforms that support these services, the device manufacturers and the content owners, have taken the opportunity to extend their influence and presence across these different devices and networks.

Device vendors have developed their own service and application strategies; online players have moved into the devices space, investing in either the software (platform) business or in hardware itself; content owners have adopted multiscreen strategies, often with little or no clarity about the viability of new business models. And TV companies are developing home gateways as their anchors to connected device superiority.

In this brave new world, the customer is king and traditional content providers, TV companies and device manufacturers are under siege from global players that started life on the Internet and who threaten their very existence.

Creating a strong ecosystem has become an essential ingredient for success in this new market paradigm.

Apple and Google are the undisputed champions of the ecosystem. Apple’s success in its hardware business – and in particular the iPhone – owes much to its iTunes and applications store services built on Apple’s own operating system. Google’s strategy for taking its services (and revenues) beyond the PC is founded on the Android operating system, which is now the market-leading platform for smartphones, and on YouTube. These two players will need to decide whether to plug the gaps in their portfolios. Should Apple start manufacturing its own televisions? Google indirectly entered the hardware business in August this year with its acquisition of Motorola’s handsets and set-topbox activities and in 2012 it will launch its first devices.

CONSUMERS HAvE DEvELOpED A tAStE FOR ACCESSINg tHEIR FAvORItE SERvICES AND AppLICAtIONS ON DIFFERENt SMALL

AND LARgE-SCREEN DEvICES.

Services, ecosystems and connected devices


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INtRODUCtION

How do you make money from digital content? It’s a challenge that is shared by telcos, mobile operators, content creators, device manufacturers, broadcasters and retailers. As new content ecosystems emerge, the value chain is evolving. For operators, their future is less about acquiring premium content and more in taking advantage of both their content partnerships and their existing relationships with consumers.

OpERAtORS’ RELAtIONSHIp WItH CONtENt WILL CHANgE

Consumers are demanding more digital content delivered across more platforms and devices than ever before. The opportunity to monetize this demand is significant, but also elusive. Acquiring the rights to attractive content is expensive, while getting consumers to pay is difficult. The most successful model is the “ecosystem” where rich media is delivered to paying consumers via a proprietary platform. While the success of Apple and Amazon has so far proven hard to replicate, what do service providers need to offer?

Perhaps surprisingly, respondents in our industry survey picked out “a billing relationship with the consumer” as the single most important asset for a service provider building a content ecosystem (see fig. 1). For all the talk of it being king, content itself scored much lower, as did “a proprietary platform optimized for specific devices,” despite this being at the heart of Apple’s success. Our respondents valued “ownership of the consumer data” more highly than either “a deep catalog of content” or “the latest premium content”, although there is little evidence so far of service providers exploiting the power of complex consumer data. While retailers such as Tesco have mined their data to great effect, for most operators this remains an ambition rather than a reality.

Perhaps operators are realizing that being in the content business is very different challenge from running a network. Operators and content companies speak a different language and having deep pockets, though a prerequisite, is not enough to ensure success in the content game. Our data hints at a new pragmatism among operators, a feeling that their strength may lie in their customer relationships after all. Getting content providers to pay for network access is a hard sell, but providing efficient billing services for them may be a safer way for operators to create revenue from digital content.

DEvICE MANUFACtURERS ARE MOSt LIkELy tO MONEtIZE

This new realism is echoed by the response to another question – what type of company will persuade

Services, ecosystems and connected devices

FIg 1Which is the single most important asset for a service provider building a content ecosystem? (Choose one)

Ownership of the consumer data ............................................................................................ 24.1%

A billing relationship with the consumer ............................................................................. 40.1%

A proprietary platform optimized for specific devices .................................................... 11.2%

The latest premium content ...................................................................................................... 11.2%

A deep catalog of content .......................................................................................................... 13.4%


NOTE: Base n=573


Services, ecosystem


audiences to pay for digital content? While 33.7% of respondents nominated device manufacturers (such as Apple), only 16.8% felt that network operators would be the best-placed to get audiences to pay for content (see fig. 2). More respondents felt that both over-the-top services (such as Netflix) and social-networking sites (such as Facebook) would be better at persuading audiences to pay for content, even though the latter has only started to experiment with paid content, using Facebook credits.

If network operators cannot persuade audiences to pay for content, it will be up to OTT providers, device manufacturers and companies like Facebook to succeed. The future role of operators, then, may be to provide not just a “dumb pipe” but also the billing via their existing relationships. Will OTT providers see a value in building a partnership with operators? Will the convenience of one monthly bill appeal to consumers? Possibly, though the rapid growth of Netflix in the US was not notably hindered by a lack of relationship with US operators.

AppS WILL BE tHE MOSt pROFItABLE CAtEgORy

For all the discussion of Netflix among operators in the last year, however, a view is emerging that a profitable content business does not have to be built around

movies (see fig. 3). Of our respondents, 36.5% felt that apps were the most potential profitable category of content, followed by TV (19.7%) then games (16.8%). Only 16.0% of respondents nominated movies (although the figure was much higher among the fixed operators who responded). We could see operators moving away from traditional premium content such as movies, if the price is too high and the demand is perhaps exaggerated. Instead, our respondents, especially mobile operators, see the future as app-shaped.


In 2012, we anticipate operators repositioning themselves within the value chain, learning to partner with – and harness the appeal of – content providers, including the OTT services they previously saw as a threat. While Netflix’s rollout will grab headlines, we expect a growing focus on how TV content and games can add value to operator services. We also see apps as the key to successful multiscreen, multiplatform content services.

FIg 2What type of company will be most successful in persuading audiences to pay for digital content? (Choose one)

FIg 3Which do you consider the most potentially profitable category of content? (Choose one)

Device manufacturers (e.g., Apple, Sony, Samsung) ........................................................ 33.7%

Network operators (e.g., Vodafone, UPC) .............................................................................. 16.8%

Social networking sites (e.g., Facebook) ............................................................................... 21.8%

Over-the-top services (e.g., Netflix) ......................................................................................... 27.7%

Movies .............................................. 16.0%

TV ........................................................ 19.7%

Music ................................................... 8.6%

Games ............................................... 16.8%

Apps .................................................. 36.5%

Other ................................................... 2.4%


Source: Informa Telecoms & Media Industry Survey 2012NOTE: Base n=573

NOTE: Base n=573



kEy pOINtS

• Progressintheconnectedhomeisslow,andtheconnectedhomeisfailingtodeliveronitspromise.Broadbandandhomenetworksarehinderingthedeliveryofconnected-homeservices,butamuchlargerproblemisthelackofaviablebusinessmodeltogeneraterevenues.

• Internetandlocal-deviceconnectivityareessentialiftheset-topboxistoremainrelevantinthefaceofchallengesfromconnecteddevices.

• Despitethehypesurroundingthecloud,respondentstoanInformaTelecoms&Mediasurveyontheconnectedhomestillfeelthatoperatorcontentservicesshouldbeimplementedinthehomeratherthanthecloud.

• Biggerplayersinthehomewouldbebetterservedpartneringwitheachotherratherthantryingtousurpeachother,accordingtosurveyrespondents.

• Respondentswerepositiveaboutthepotentialfornoncontentconnected-homeservices,butsuccessmightbehardertocomebythanmanythink.Usershavebillingrelationshipswithnonoperatorservices.Butlargeplayershavenotestablishedthemselvesinallthesetypeofservices.

The success of Wi-Fi has masked many of the problems surrounding the connected home. And despite this great leap forward, the connected home remains stuck in limbo. The connected home remains full of promise (see fig. 1) but lacks a business model to drive implementation. All players are unsure how to take advantage and are hedging their bets as best they can.

To gauge the feelings surrounding the connected home, Informa Telecoms & Media undertook its first survey on the topic. The results showed a great polarization around the connected home.

MEtHODOLOgy

Informa conducted an online survey in May and June 2011, and 98 users from around the world and the value

chain completed the survey. Informa’s sample is slightly heavy on European and North American respondents (see fig. 2), most likely because the survey was heavily promoted around Informa’s london-based Connected Home World Summit event.

Telecoms operators and telecoms-equipment manufacturers are strongly represented in Informa’s sample, while consumer-electronics and silicon-chip makers are a little underrepresented (see fig. 3). Again, this is due to the types of companies that Informa typically works with, and which companies attend Informa’s events.

RESULtS

The state of the connected homeTwenty-four percent of respondents considered the last mile to be a great hindrance in delivering connected-home services. But the home network was considered more problematic, with 29% of respondents believing it

Weak business models and networks undermine the connected home

FIg 1Connected-home word cloud


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to be a great hindrance. This agrees with Informa’s view that the home network is becoming the bottleneck for connected-home services. legacy routers – received free from broadband operators for several years – are commonplace in homes, and users are unwilling to pay for new ones. Broadband operators are only willing to provide new routers to new subscribers, not to existing customers. However, the larger drag on the connected home was considered to be the lack of business models, with 42% of respondents saying this is a great hindrance to development (see fig. 4).

Just over 22% of respondents strongly agreed that many different technologies had the potential to

significantly improve home networks. But there are too many competing technologies (see fig. 5). Several powerline technologies are already available, and the launch of competing technology G.hn will only further muddy those waters. And even the dominant powerline technology, Homeplug AV, is fragmented: The majority of installations and sales are from older, less capable versions of Homeplug AV.

By default, Wi-Fi will remain the most important home-networking technology, because it comes “free” with PCs, laptops, smartphones, tablets, games consoles and, increasingly, connected TVs (see fig. 6). To enable both a high-quality experience and mobility in the home, Wi-Fi is best used in conjunction with other technologies, such as powerline. But 53% of respondents expect that

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FIg 2Geographical spread of respondents to Informa’s connected-home survey

FIg 3Industry make-up of respondents to Informa’s connected-home survey

FIg 4Hindrances to connected-home service adoption

NOTE: Responses to the question “please select which region(s) your company operates in

(tick all appropriate boxes)”

NOTE: Responses to the question “please select the sector your company operates in (tick

all appropriate boxes)”




Home networks are unreliable

Great hindrance ............................... 29%

Slight hindrance ............................... 57%

Not a hindrance ................................ 14%

Broadband networks are unreliable

Great hindrance ............................... 24%


Not a hindrance ................................ 28%

No clear business model

Great hindrance ............................... 42%


Not a hindrance ................................ 11%

NOTE: Responses to the question, “How much of a hindrance are the following on the

rollout of connected-home services?”

Services, ecosystem



many users will remain overly reliant on Wi-Fi for their home network in the next five years.

Video is expected to be the major driver of connected-home usage as popular online-video services launch on in-home connected devices, smartphones and tablets. In-home connected devices bring online services to the TV, which despite the hype surrounding tablets will remain the No. 1 screen in the

home. It is perhaps because of this hierarchy in the home that 13% of respondents felt strongly that the TV would drive the connected home, compared with only 7% who believed secondary screens could be a driver. All this additional video is a mixed blessing: These services create a buzz around the connected home but will be an added burden that some home networks cannot take.

FIg 5Problems afflicting the home network


stroNgly Disagree (%) Disagree (%) Neither agree or Disagree (%) agree (%) stroNgly agree (%)

Users are interested in using connected-home services but do not do so because they are unwilling to pay for necessary home-network equipment

6 28 23 36 7

There is no single solution to overcoming the home-networking problem 7 10 9 52 22

The connected home will remain overly reliant on Wi-Fi in the long run 5 16 26 43 10

NOTE: Responses to the question, “How strongly do you agree or disagree with the following statements regarding the connected home?”

Both in-home and internet connectivity (37.6%)

Internet connectivity only(4.1%)

In-home connectivity only(11.5%)

All TVs

Ethernet only(5.4%)

Ethernet only(4.4%)

Ethernet and Wi-Fiadapter ready (21.1%)

Ethernet and Wi-Fi(44.9%)

Wi-Fi only(21.8%)

Wi-Fi adapter only(6.8%)

Ethernet and Wi-Fi(95.6%)

Ethernet(100%)

Unconnected(46.8%)

FIg 6Connected TVs by type and technology

NOTE: Numbers relate only to US TV models tracked by Informa Telecoms & Media


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Simply providing video does not equate to a comprehensive connected-home service, with 47% of respondents saying that operators too heavily associated IPTV with the connected home (see fig. 7).

Despite the perceived power of video, only a few services in each country have strong brands and deep content libraries (see fig. 8). Respondents were aware of this reality, with 56% agreeing that there were few services available in the connected home.

The set-top boxSet-top boxes are the second-most-installed in-home device and the bedrock of how pay-TV is watched in the home. But the emergence of connected devices has brought talk of its imminent demise. A sizable number of respondents (36%) disagreed that the STB would be obsolete in the next five years, and an additional 10% disagreed very strongly. But many people (38%) were unsure of the fate of the STB in the next five years. Few of the respondents felt that it was either the most important device in the home or that it would have a pivotal role to play (see fig. 9).

The STB is not important in the connected home now, but the situation will change as networking features are added and it is no longer hermetically sealed off from other devices but shares and receives content from them. It is how quickly this evolution occurs and in what direction it goes that are the key questions. Informa expects this evolution to occur rapidly in the next five years (see fig. 10).

Free-to-air STBs are unlikely to become home gateways

but are certain to become hybrid STBs. The number of such devices in the home is expected to decline slowly as TVs incorporate more advanced features.

The cloud encroaching on the connected homeIn one form or another the idea of the cloud – large, remote data centers – has been around for many years, but interest in cloud services has mushroomed in the past three years. What can practically be delivered from the cloud is increasingly mirroring many of those features of the advanced home gateway. The cloud has the potential to replace the home gateway as the best place to deliver a variety of services.

Survey respondents felt that noncontent services, including utility monitoring (51%) and data backup (65%), were better executed in the cloud but that content-centric services were best delivered in the home (see fig. 11). Technical limitations are probably less a concern than content-rights issues. Technically it might be as easy to transcode video and stream it to a device from the cloud as it is from a home gateway. But this would most likely require the renegotiation of content rights, and service providers might be reluctant to pay for these additional rights. However, multiscreen video services have been best achieved in the cloud rather than from within local networks. DlNA – the most likely protocol for this activity – is still some way from becoming a consumer-friendly proposition.

Informa believes that because pay-TV players already have the bandwidth to deliver multiple video streams into the home easily, content-centric services, such as transcoding, can be achieved easily in the home gateway. This is most beneficial for satellite players that can augment their linear TV stream with on-demand video services delivered over the Internet.

For OTT players, the cloud is a much better option than any in-home device. Netflix has for several years used Amazon’s Web services for both storing and transcoding its service. Apple and Google have both built their own server farms. Before pushing their own services to the cloud, operators must decide where they will sit in this market: Will they build their own data centers or use Amazon’s or Google’s cloud?

Experimentation required for business modelsAt best there are four established business models in the connected home. Although there is some overlap between the first three discussed here, they are broadly complementary.

The retail modelWith the retail model, revenues come from consumer

Users are being driven to use the connected home

because they want to view video on other screens

beyond the TV

Users are being driven to use connected devices because they want to view online

content on the TV

57%

53%

FIg 7Reasons for consumers to have a connected home

How strongly do you agree or disagree with the following statements regarding the

connected home?


Services, ecosystem



device and equipment purchases. Consumers are willing to buy devices, but they are less likely to purchase networking equipment. Although this model is generating significant revenues for those concerned, many TV manufacturers are seeing falling margins and are making either slim profits or suffering substantial losses. In the past six months, Philips has sold half of its TV-manufacturing arm and Hitachi has announced that it will cease TV production altogether. likewise, STBs are sold at retail for slim margins, and in many countries operators have to provide heavily subsidized STBs to entice new subscribers.

App stores App stores are most commonly found on connected TVs and generate revenues from paid app downloads. But whether these can replicate the leading mobile app stores is questionable. The overwhelming majority of TV apps are free. The app developer is more interested in providing access to a service on these devices than in charging the user. Netflix – and indeed many online-video services – are more interested in increasing their reach than in generating revenues from App stores.

In the longer term, it is possible that games will appear on these devices and drive revenue – SFR in France has had some success offering cloud gaming – but ultimately games alone will not sustain the app ecosystem.

Video-on-demandFinally there is video-on-demand (VOD). Manufacturers and operators are selling and renting videos to users. Apart from Sony, manufacturers have teamed up with third-party startups to have VOD service on their devices. In Europe one of the leading third-party providers, Acetrax, has built its strategy around providing its service onto connected devices. Services on connected devices are not yet generating significant revenues but are potentially encroaching on pay-TV services.

CanadaNetflix

UKiPlayer

LovefilmSky

FranceCanal+

M6 replayTF1 vision

GermanyMaxdomeVideoload

ItalyCubovision

Video Mediaset

JapanActvila

AustraliaBig Pond

ABC

USNetflixHulu

Xfinity (iPad app)DirecTV

FIg 8Major premium connected-home services, by selected country, Aug-11


NOTE: Responses to the question, “To what extent is the following true of the set-top

box?” Numbers shown are the total of those who both strongly disagree and disagree

0 5 10 15 20 25 30 35 40 45 50 55 60

It must provide some OTT content alongside linear TV

Media sharing is a key feature that should be included in all set-top boxes

Must become a home-gateway device to stay relevant

Good design is an important feature to users

It will be obsolete within �ve years

Has a pivotal role to play in the future of the connected home

Currently the most important device in the connected home

7

10

12

21

45

52

56

Response (%)

FIg 9Role and features of set-top box


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Security-device subscriptionHome security is but one noncontent service that can be delivered using the connected home. Some home-security companies offer webcams that act as surveillance cameras. These companies not only charge an upfront fee but also a monthly fee for users not only to retain the device but to keep using the service. It is possible that this model could be extended to home-automation services.

These business models are not unique to the connected home but have been appropriated from other markets.

Nor are any of them generating significant revenue. But respondents were optimistic about the number of new business models that were likely to arise.

Between 65% and 88% of respondents considered one of the five business models Informa suggested in the survey to be viable for the future (see fig. 12).

Informa does not see the proliferation of all of these business models as realistic. But each needs to be given a chance to see how users react. Operators would be best served offering premium packages that charge

PVR capability is added, enabling users to record programs

Some operators begin offering multiroom PVRs, enabling recorded video to be watched on any connected STB. Others provide hybrid STBs, which allow access to OTT content

The capabilities of both the multiroom PVR and the hybrid STB are brought together in one device, the Advanced Media Hub, which pushes content around the home to connected devices and to thin-client STBs

STB STB PVR

Mediahub Thin clientMultiroom PVR

Hybrid STB Virtual STB

FIg 10Expected evolution of the STB


FIg 11Services executed best in the cloud or on an in-home device

clouD iN-hoMe Device

Data backup 65 25

Photo sharing 56 27

Media storage 52 35

Utility monitoring 51 37

Video transcoding 47 43

Content protection 39 51

Multiscreen video services 33 51

PVR 21 59

NOTE: Responses to the question, “Which of the following features/tasks can be best

achieved in the cloud or on an in-home device such as the advanced home gateway?”

Responses for “No difference” are excluded. NOTE: Responses to the question, “Which of the following business models do you think

are likely to emerge as viable in the future for the connected home?”


Response (%)0 10 20 30 40 50 60 70 80 90 100

Operators will bundle set-top boxes, triple-play and home-networking devices

into one premium package

Home-networking devices will be bought at retail by the mass market

Third parties will generate signi�cant revenues delivering their services via

CE manufacturer devices

The set-top box can act as a platform for operator value-added services

Operators will o�er home networking as a paid-for value-added service

Operators will provide home-network devices free or will heavily subsidize them

FIg 12Connected-home business models expected to emerge as viable


Very unlikely Unlikely Neither likely Very likely

Services, ecosystem


resPoN

se (%)


an additional fee for the home networks. Ideally these packages will include multiroom, multidevice video services. By extending their networks into subscribers’ homes, operators at once make their services stickier, ensure a better user experience for their subscribers and build a platform on which other services can be developed.

Content services preferred over noncontent servicesVideo might be the star service, but plenty of other services can be delivered in the connected home too. Although most are not as glamorous, operators might be able to generate additional revenues from services such as home automation and utility monitoring. Music-subscription services might not generate much additional revenue but could be useful in reducing churn.

Respondents felt that operators either were at an advantage delivering those services suggested by Informa or at the very least were not disadvantaged (see fig. 13).

Surprisingly, operators were not considered to have a great advantage in delivering cloud-gaming services. Cloud gaming has both high bandwidth and low latency requirements and will be much more easily achieved on managed networks than unmanaged ones. Furthermore, operators would not need to provide another device in the home but could use the STB. There might also be some advantages to delivering cloud-gaming services from the headend rather than remote servers. Startup Playcast certainly believes so and has signed several operators as clients, including Israeli cable operator Hot. Several national incumbents see cloud gaming as an opportunity to establish themselves in the lucrative games market. AT&T, BT and Belgacom have all taken a stake in leading cloud-

gaming service Onlive.Of the noncontent services, Informa does not believe that operators are in as good a position to deliver utility monitoring as respondents believe. Competitors will largely be utility companies, which – like the operators – have billing relationships with users. Utility monitoring requires little bandwidth, so ownership of the network is not as advantageous as it is for bandwidth-hungry services. Also, users are likely to be more comfortable receiving monitoring services from utility providers.

INFORMA vIEWpOINt

Big players should partner with one anotherOperators and CE manufacturers that have partnered to offer video services on CE devices are more the exception than the rule. But both parties will receive benefits from such a partnership. Operators not only displace OTT rivals but also increase visibility of their own video service, potentially offering it to new users.

By partnering with operators instead of OTT startups, CE manufacturers will gain higher-profile – and probably more trusted – video services for their devices. Operators’ larger marketing budgets could generate greater awareness of services on connected devices. Operators also already have a billing relationship with users, who might spend more freely on a trusted operator service than with a startup whom they less sure of.

The STB must evolve fasterThere are three key areas that both Informa and the survey respondents think the STB must develop. The first is STB networking. STBs must no longer be isolated

FIg 13Operator advantage delivering nonvideo connected-home services

service tyPe service great DisaDvaNtage (%)

slight DisaDvaNtage (%)

NoaDvaNtage (%)

slightaDvaNtage (%)

greataDvaNtage (%)

Content Cloud gaming 10 7 42 25 16

Content sharing 4 4 40 40 12

Music streaming 7 5 38 35 15

Noncontent Water / electricity / gas monitoring 3 4 32 46 15

Smart home (home automation) 1 4 28 50 16

Home security 5 3 24 49 19

NOTE: Responses to the question, “Compared with OTT providers, how great an advantage do operators have in providing connected home services?”


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and at the very least must be capable of sharing stored content between them. Preferably, one device should act as the DVR hub accessible to all other STB devices. The difference in experience will be easy to market, and it might be possible to charge more for a media hub than for an ordinary STB. Second, STBs must offer the best of the Web, especially catch-up services. Respondents felt that adding this feature to the STB was the highest priority. Third, the STB hub must be able to share content with connected devices and also receive content, something respondents felt was just as important. Why should users not be able to watch content they have stored in the home when they are in the home but happen to be in another room, especially since users are more willing to pay extra for, and less likely to churn because of, multiroom video services?

Operators should extend their network into the homeUsers want their devices to connect to the Internet reliably. But the majority of users are unsure of home networking and ignorant of many of the options available to them. Consequently, they are unwilling to pay for such devices. Operators are in the best position to take advantage of this desire and should offer service plans based on home networking: a basic package that offers a basic Wi-Fi router, a midtier package that offers a more advanced Wi-Fi router, and a higher tier that also includes the provision of powerline plugs so that connected devices can be connected.

Users will not need to be educated on the specifics of which Wi-Fi standard they are receiving but must be assured of what tangible networking improvements an advanced router will bring, such as connecting more wireless devices or more-responsive networks for online gaming.

Services, ecosystem



kEy pOINtS

• MobileNFCisgraduallyprogressingfromthetrialstagetothecommercialrolloutofservices.ThemobileNFCvaluechainplayersareformingallianceswithotherstakeholderstoensurethesuccessfuldeploymentofservicesforalargeuserbase.

• ItislikelythatmanymobileoperatorswillcontinuetopursuetheirindividualmobileNFCplans,whileatthesametimecollaboratewithotheroperatorsandformjointventurestocompetewiththeOTTplayers.

• Bygroupingtogether,operatorscanoffernationwidecoveragetoserviceprovidersandbig-volumeorderstohandsetmakers.Butantitrustlawslimithowmuchtheoperatorscanintegrateservices;forexample,inmostjurisdictions,theycannotofferserviceprovidersacommonly-agreedrateforrentingspaceontheSIM.

• BothmobileoperatorsandhandsetvendorswilldeployNFCservicesinthecomingyearsandtheexistenceofdifferentsmartphoneOSsandcompetingmobileappstoresmeansthatthereisboundtobemuchfragmentationinthemobileNFCmarket.ThesuccessofthemobileappstoresindicatesthatmanyofthemobileNFCserviceswillbeofferedasapplicationsviathesestores.

• ThemobileNFCvaluechainplayersneedtoworktogethertoensurethatNFCsolutionsand,inparticular,handsetscanbecertifiedtoensureallpartiesaresatisfiedwithsecurityandtechnicalcompatibility.Backwards-compatibilityisalsonecessarytoensurethatfuturemobileNFCimplementationscanuseexistingNFCinfrastructureswherepossible.

• ThetusslefordominanceamongplayersforthecontroloftheSE(secureelement)hasresultedindifferentsolutionsanddeploymentapproaches:SmartphoneandOSvendorswanttobypassthemobileoperators;banksalsoseemobileoperatorsaspotentialcompetitors;whilecreditcardcompanieswantgreatercontrolforcertifyingNFCreadersanddevices.

• Operatorsinemergingmarketshaveastrongerpositionbecauseoftheirextensivedistributionnetworksandexistingrelationshipswiththemerchantsandretailers.Inmostcases,operatorsalsohaveastrongerbrandand

goodgovernmentsupport.Therefore,theotherplayersaremorelikelytopartnerwiththeoperatorsforNFCrolloutinemergingmarkets.

OvERvIEW

There are many players in the mobile NFC ecosystem, and it continues to expand further with the entry of new players in the market. As of now, the mobile NFC market is highly fragmented and it is expected that the collaboration and coordination between value-chain players will initially be complex. In order to understand the complexity of the ecosystem – and the challenges and opportunities for players involved – it is necessary to consider the role and motivations of each of the key players in the value chain.

The mobile NFC value chain (see fig. 1) comprises of many stakeholders including the mobile operators, banks and financial institutions, merchants and retailers, handset and OS vendors, payment network providers, chipset manufacturers, trusted service managers (TSMs), NFC hardware and component manufacturers, payment service providers, and NFC application service providers and software vendors.

The results from various trials over the last two to three years have indicated a positive response from consumers to the use of mobile NFC as an alternative to cash for small-value, frequent exact-change transactions such as purchasing public transport tickets, snacks and drinks. These findings have attracted more companies to become part of the mobile NFC ecosystem to get a share of its potential revenues.

In the last 12-18 months, following Google’s backing of NFC technology – and also the fear of Apple’s entry into the market – the mobile NFC market has regained the momentum it lost. This has resulted in a rush from a number of mobile operators in Europe and other parts of the world to launch their NFC services.

Mobile NFC ecosystem and value chain

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MOBILE OpERAtORS

Mobile operators see NFC as an enabler technology for payments made via the m-wallet. The place in the NFC value chain that operators are hoping to fill is managing the SE (secure element) and renting out space on the SIM card to NFC service providers. Operators are keen to keep hold of the SE which provides authentication for service access, stores customer data and provides security.

In Japan, NTT DoCoMo has been providing the Osaifu-Keitai (mobile wallet) services on mobile phones equipped with contactless smart card applications since 2003, using the proprietary NFC technology FeliCa from Sony. Following DoCoMo’s lead, other mobile operators and businesses in Japan have launched numerous related services, including DCMX, Mobile Suica, Kesaka, Edy and Nanaco, which allow FeliCa-enabled mobile phones to be used as electronic money, credit cards, electronic tickets, membership cards and airline tickets. Meanwhile, in South Korea, all

three mobile operators have offered a similar range of services using FeliCa-enabled phones.

In February 2011, NTT DoCoMo and KT, South Korea’s second-largest mobile operator, announced that they will work together to develop new cross-border mobile NFC services – including mobile payments, mass-transit ticket and promotional virtual coupons. Both operators are presently jointly determining common NFC specifications that will be built into their devices, networks and billing platforms in order to enable them to deliver a seamless service to customers travelling between Japan and South Korea. In preparation for the service launch, both companies will accelerate the development of their existing infrastructures and start conversations with NFC-based service providers in different industries to encourage their participation in the project.

However, outside Japan and South Korea, the deployment of mobile NFC services thus far has mainly been limited to market trials. The results of most of

Consumer

Merchant

Merchant acquiringbank

Payment network

Card issuing bank

Mobile handsetvendors

Mobile networkoperators

NFC chip vendor

UICC vendor

PoS terminalvendor

IC chip vendor

Sett

lem

ent

Clea

ring

Card vendor

Trusted servicemanager

FIg 1Mobile NFC value chain


Services, ecosystem



these trials have been positive with clear evidence that there is a latent demand for these types of proximity payment services.

In Poland, Orange is running an NFC payment service trial in partnership with the Polish bank Zachodni WBK, Mastercard and Gemalto. Around two million Orange mobile subscribers are expected use the pilot service, which will allow them to pay for goods and services using their mobile phones; payments of US$50 or more will require a PIN to be entered into the user’s handset to enable the transaction.

In the UK, Everything Everywhere, owned by France Telecom and Deutsche Telekom, along with O2 and Vodafone have recently formed a stand-alone JV to define m-commerce standards and accelerate uptake of services. This move closely echoes the one announced in Spain in March 2011, which, saw the country’s major network operators – Telefonica, Vodafone and Orange – coming together to jointly develop NFC payments. Similarly, in France, operators have been working closely together on a city-by-city basis to define the NFC ecosystem and lay the foundations for mass-market uptake based on operator-led common standards and approaches.

The UK mobile operators are looking towards a key target date of 2012 for mass market availability of mobile NFC services. This is driven mainly by the desire to make the london Olympics a cashless event – a laudable objective as this would give considerable visibility and credence to the mobile NFC business. It seems a reasonable assumption that by 2012 a number of NFC handset models will be available in large volumes from multiple vendors, and that contactless point-of-sale (POS) infrastructure should be widespread – at least in the heart of london.

In the US, Verizon Wireless, AT&T Mobility and T-Mobile have formed the Isis alliance, a mobile commerce joint venture that has partnered with the four major payment networks – Visa, MasterCard, Discover and American Express – to drive the mobile payments market. Isis plans to operate as a TSM for mobile NFC services. The initial Isis launches will be in Salt lake City in Utah and Austin in Texas, mobile NFC services will be rolled out in these cities in the first half of 2012. It is believed that Isis is also in talks with Google to form an agreement and establish an m-commerce solution that will allow users to keep the same mobile wallet, while switching from one operator to the other.

In Germany, T-Mobile, Vodafone and Telefonica O2 aim to extend their mPass payments service to NFC.

T-Mobile plans to introduce an NFC-enabled m-wallet service in Germany and Poland in 2011, and further rollouts are planned in Holland and Czech Republic in 2012. In Germany, 60% of retail purchases are still made in cash and T-Mobile believes there are opportunities in offering mobile NFC services as a cash replacement tool.

In addition to Western Europe and the US, operators have also started rolling out mobile NFC services in other regions.

In Turkey, Turkcell, in collaboration with SmartSoft and Plastkart, has launched a MasterCard-approved TSM solution. The operator’s subsidiary Turkcell Technology has developed an NFC gateway that can support multiple applications over one SIM card, and OTA platforms. Turkcell claims this will allow it to offer an end-to-end solution for mobile NFC transactions to service providers.

Turkcell’s NFC-enabled mobile wallet service is called “Turkcell Cep-T Cuzdan”; NFC-enabled handsets can be used to perform credit-card and toll-pass-card functions. Gemalto is supplying Turkcell with NFC-enabled SIM cards that can connect to the NFC chips in phones via the single-wire protocol. For its subscribers without NFC handsets, Turkcell is offering two antenna devices which subscribers can purchase and use to equip their handsets with NFC payment capability.

In Tanzania, Etisalat Group has launched the first commercial NFC payment service in the country through its subsidiary, Zantel. The service, called “Touch and Go”, was developed by Etisalat in partnership with Oberthur Technologies and MasterCard and will enhance Zantel’s mobile money transfer service, ZPESA. Etisalat plans to roll out mobile financial services using NFC technology across its 18 markets in the Middle East, Africa and Asia.

Key findings• MobileoperatorsarepushingtodeployNFCservicestopreventover-the-top(OTT)giantslikeAppleandGooglefromtakingtheleadinthismarket.Inadditiontotheirowninitiatives,operatorshavealsojoinedforcesinanumberofmarketstopushfortherolloutofNFChandsetsandservices.

• ToavoidlosingouttotheOTTplayers,mobileoperatorshaveformedjointventuresandalliancesinanumberofcountries,includingFrance,Germany,Netherlands,Spain,theUKandtheUS,todriveuptakeofoperator-deployedservices.

• Byworkingtogether,operatorscanoffernationwidecoveragetoserviceprovidersandbig-volumeorderstohandsetmakersbuttheyneedtofindawayofdoing

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thiswhileadheringtotheantitrustlaws.Forexample,inmostjurisdictions,operatorscannotofferserviceprovidersacommonly-agreedrateforrentingspaceontheSIM.

• MobileoperatorsarguethattheSEshouldbeembeddedintheSIMcardandclaimthatthisispreferablebecauseSIMcardscanbeswapped,changedorupgradedifthereareanysecurityissues(i.e.,operatorscandisableservicesovertheairifaphonehasbeenlostorstolen).

• However,NFChasmanyusecaseswhichareunrelatedtothemobilesubscriptionso,inthelongerterm,mobileoperatorsmaylosethebattleofhavingtheSEintheSIMcard.

• Asthe“realestate”ontheSIMislimited,ithasrealvaluethatbanksorotherPSPs(paymentserviceproviders)maybewillingtopayfor.ThiscouldbearelativelystraightforwardwayforthemobileoperatortoextractvaluefrommobileNFCservices;eachissuingbankorPSPwouldbechargedamonthlyfeeperpaymentapplication.

• Manymobileoperatorsseethebusiness-to-businesssectorastheirgreatestopportunityinNFC,realizingthattheyhaveanuphillstruggletocompetewithOTTplayersontheconsumerfront.

• OperatorshaveexistingrelationshipswithmanyenterprisesascommunicationserviceprovidersandshouldlookforopportunitiestoalsoofferNFC-basedworkplaceaccessservicetothoseorganizations.

• Formobileoperators,thebusinesscaseforNFCmaybestrongerinsomeofthedevelopingmarkets.ThelowpenetrationofthefixedInternet–aswellasbankingandcredit/debitcards–inthesemarketsmeansthatoperatorshaveanedgeoverthelikesofApple,Googleandthebanksthere.

HANDSEt AND OS vENDORS

It has been predicted that, over the coming years, mobile phones will gradually replace the physical wallet and credit/debit cards and function as a depository for virtual or eCards from different issuers for different applications (e.g., payments, loyalty and access control). This trend will be driven by the use of NFC technology in mobile phones as the means of communicating with the payment infrastructure.

NFC-enabled mobile phones can interact with the present ISO 14443 contactless cards and readers, allowing users to authorize payments, access services and information, and use on existing contactless infrastructure on public transport systems. An NFC-enabled mobile handset adds the advantage of user interaction via a display and keypad, as well as an Internet connection, which enables the use of

applications like payments, ticket services, access control and loyalty programs on mobile phones.

A fundamental barrier to mobile NFC services, however, is the lack of handset choice. Only a handful of NFC-enabled mobile phone models from Nokia, Mobiwire (Sagem) and Samsung, plus Google’s Nexus S, are on sale outside Japan and South Korea. More handsets from RIM, lG and Samsung are set to ship in the near future but initially are expected to only be introduced in selected markets. Hewlett-Packard has announced that it will add NFC to its WebOS smartphones and tablets. Motorola, Sony Ericsson and HTC also have NFC in their roadmaps but are not expected to deliver NFC mobile phones before 1Q12. Mobile operators want handset vendors to ramp up production of NFC-enabled mobile phones but vendors are still reluctant to commit to anything beyond the availability of a couple of models in 2011. Most handset vendors want to see a widely-deployed NFC POS infrastructure in place before they start shipping more NFC-enabled devices.

Another key reason why handset vendors have been slow to introduce NFC devices is the disagreement between value chain players on how the SE will be implemented in the mobile phones. Handset vendors prefer devices with embedded secure elements (eSEs) but, considering that most mobile NFC service announcements so far have been from the operators, it is likely that many handset vendors, at least initially, will come out with NFC devices with an eSE that also provides a link between the NFC chip in the handset and a secure element in the SIM card, a system referred to as “single-wire protocol” (SWP). For example, the Nexus S has an eSE managed by Google that also supports SWP.

In the longer term, Google, Apple and other handset vendors with mobile app stores would prefer to ship devices with eSEs and be the ones to provision security for developers making NFC applications for their devices and platforms. If the SE is embedded in the handset, mobile NFC services and applications can be used by any user with the device, and not be limited to specific mobile networks.

Initially, the majority of the NFC-enabled handsets launched will be high-end smartphones. However, announcements from some vendors indicate that mid-range NFC handsets will also become available soon. ZTE has reported its willingness to ship NFC devices for operators; it has signed a deal with NXP Semiconductors and will build NXP’s PN544 chip into its feature phones and smartphones. Fly Mobile has already launched an NFC-enabled touchscreen

Services, ecosystem



feature phone. Fly Mobile was established in 2003 and has offices in the UK, France, Germany, India, Russia, Ukraine and Nigeria; Eastern European markets and India account for most of its handset sales.

A concern raised about NFC-enabled mobile phones is the possibility of the screen cracking or breaking with the frequent use of the device to tap on readers and POS hardware. The possibility of this happening is greater in touch-screen devices, most of which happen to be high-end smartphones. For NFC, handset vendors may have to consider developing devices with a stronger screen and outer body. However, this will have an impact on the costs, production cycle and shipments of these devices. And, more importantly, it’s unlikely that users of devices such as the iPhone or Nexus S will be willing to switch to the specially-manufactured NFC handsets.

GoogleMany industry experts believe that Google will emerge as the strongest player in the mobile NFC ecosystem. In just over six months, Google has added NFC to the Android OS, announced its Wallet and Offers services, and announced plans to acquire Motorola Mobility. It has also launched the Nexus S NFC phone and signed agreements with MasterCard and a number of retailers including Subway, Macy’s, American Eagle and RadioShack.

Google’s approach to drive the mobile NFC market is to get the NFC hardware embedded in a large number of Android devices. The “Google Wallet” is essentially an Android app which can store virtual credit cards, coupons, vouchers, gift-cards, etc. – users can make transactions at contactless terminals simply by running the app on an NFC-enabled handset such as the Nexus S.

Google’s business is advertising and NFC provides it with an opportunity to link the ads and offers that it serves in the virtual world with purchases in the physical world. With the growing preference for CPA (cost-per-action) based pricing for Internet advertising, NFC can enable Google to prove to advertisers that the page impressions, or click-throughs, they’ve paid for have translated into the desired customer action and/or sales at shop tills.

In addition, Google has developed “Google Offers”, a service that will present users with discount coupons and offers in Google’s search results. Users will be able to get deals by e-mail and collect offers from NFC tags; NFC-enabled mobile phones can then be used to redeem the discounts and offers at NFC POS terminals.

The big challenge for Google will be to ensure the

security of transactions. The open nature of the Android OS means greater risks from hackers attempting to break into the software and misuse the wallet app. To enhance security, Google is considering putting a system of three PIN codes in place before a user is able to carry out a payment on the mobile phone: The first PIN to unlock the phone; the second PIN to access the m-wallet; and the 3rd PIN to finally pay. This will no doubt be good for security but won’t make mobile payments any faster than using plastic cards.

NokiaNokia has been talking in support of NFC for several years but currently only distributes two NFC-enabled devices – the C7 and the N9. A year ago, Nokia had plans to have NFC in all its smartphones that shipped in 2011 but none of the smartphones it announced by July 2011 included NFC.

Nokia’s C7 handset is enabled for SWP only and doesn’t have an eSE. However, considering that Nokia is working with Microsoft for its smartphone roadmap, it is likely that both companies will choose the eSE option for many, if not all, of their devices in the future.

Recently, Nokia launched NFC Hub, an online service it claims will help businesses to adopt NFC tag-reading solutions; it believes that initially there will be greater opportunities with NFC tags than mobile NFC payments. Nokia’s NFC Hub service will allow companies and businesses to buy generic NFC-tagged posters, aimed at directing people to websites or to get more information. Nokia will also provide account management service for larger businesses. NFC Hub will also allow the URls to which the tags are pointing to be changed, enabling businesses to update their campaigns without having to change the tags and posters.

RIMRIM had stated that many of its new BlackBerry handsets in 2011 would be NFC-enabled but by July 2011 had only announced two devices, the BlackBerry Bold 9900 and 9930, which are expected to start shipping in 3Q11. These devices will incorporate the BlackBerry 7 OS which supports NFC and includes an API and tag-reader tools to allow developers to build NFC applications.

In the US, RIM is at odds with the operators over the issue of which company controls the SE or the users’ mobile payment credentials. The US operators want this data stored on the SIM cards, while RIM wants it embedded in its BlackBerry devices. As a result, RIM and the operators are working separately on mobile payments. RIM has partnered with MasterCard and Bank

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of America for a mobile payments trial, while Verizon Wireless, AT&T Mobility, and T-Mobile have formed the joint venture Isis to sign deals with the merchants.

SamsungOf the top five handset vendors, Samsung has the largest number of NFC devices available in the market as of August 2011. In contrast with other vendors, Samsung seems willing to let the operators have control over the SE and is happy to provide them with NFC devices. In Europe, Orange is selling Samsung’s Wave 578 NFC handset while Samsung’s Nexus S NFC mobile phone is being offered by AT&T, T-Mobile and Sprint in the US.

Samsung has also developed an entry-level NFC smartphone, Player City, available in France and the NFC version of Samsung Galaxy S2 is also expected to start shipping in the UK in 3Q11.

AppleApple could make the biggest impact on the mobile NFC market with the launch of an NFC-enabled iPhone. It had been expected that the new iPhone in 2011 would include NFC but recent reports indicate that Apple may choose to wait until 2012 to launch the NFC version of the iPhone. It is believed that one of the factors holding Apple back from including NFC in the iPhone is concerns that repeated tapping on NFC tags and readers could cause iPhone screens to crack.

Unlike Google’s focus on advertising revenues, Apple’s business model is selling devices linked to compelling content and applications on iTunes and the App Store. It sells a broad range of devices – including desktops, laptops, tablets, smartphones, portable media players and TV sets – and the use of NFC technology will provide a way of sharing content and apps across all of its devices.

Apple’s strength in being able to offer an end-to-end ecosystem for NFC services makes it a big threat for competitors. The vendor has complete control of the software and hardware that goes into the iPhone and it has the most successful mobile app store. To have an iPhone app has become a priority for many brands, retailers, merchants and banks. Furthermore, Apple already has a well-established payment platform in the form of iTunes.

Key findings• Thetussleamongmobileoperators,handset/OSvendorsandserviceprovidersoverthecontroloftheSEcontinuestodelaytheshipmentsofNFChandsets.HandsetvendorsargueinfavorofembeddingtheSE

inthedeviceandclaimthatmostserviceproviderswillalsoprefernothavingtopaytheoperatorsforrentingspaceontheSIMcard.

• ItwilltakeacoupleofyearsbeforeNFC-enabledhandsetswillbeshippedinsignificantvolumes,andwithsufficientchoice,forthemtosatisfytheexpecteddemandfromconsumers.Consensusintheindustryisthatmarketpenetrationofhandsetsofatleast20%isnecessarybeforethemobileNFCmarketreallystartstoreachitspotential.

• Smartphonesallowuserstodownloadanyapplicationsandsoftwarewhichalsomeansthattherearerisksofvirusesandmalware.Handsetvendorswillneedtoensuresecurityfromsuchthreats,whileatthesametimecontinuingtoprovideanopenecosystemtodeveloperstoenablethemtobuildattractiveNFCapplications.

• Google’smaininterestinNFCisnotpaymentsbuttheactivityleadinguptopayments,suchassearch,advertisingandspecialoffers.ItseesNFCasanextensionofitsadvertisingbusinessmodel.

• TheacquisitionofMotorolawilltakeGoogleclosertohavinganApple-likeend-to-endecosystemformobiledevicesandservices;sofar,thishasbeenApple’skeydifferentiatingstrength.ApplehascompletecontrolofthesoftwareandhardwarethatgoesintotheiPhoneand,withtheMotorolaacquisition,GooglewillalsohavesimilarcontroloverdevicesmanufacturedbyMotorolaMobility.

• Evenifitisconsideredlikelythat40%ofhandsetsshippedwillbeNFC-enabledby2015,thepenetrationofuserswithNFCmobilephoneswon’treachmorethan20-25%.Soit’sunlikelythatmorethan15-20%ofglobalmobilesubscriberswillbeactiveusersofmobileNFCservicesby2015.

BANkS

The current economic woes caused by the “credit crunch” mean that banks and other financial institutions face significant challenges as their payment revenues decline rapidly because of initiatives like the SEPA (Single Euro Payments Area) which aims to reduce the cost of cross-border electronic money and payments transactions in Europe and increasingly more onerous regulation in the financial services sector around the world. Mobile NFC services can provide a means for the banks to stimulate greater use of their services – especially for card payments, encourage customer loyalty by taking advantage of the value-added benefits of mobility, and help in reducing fraud.

In the context of card payments, two entities are involved: the card issuing banks (CIBs) and the merchant acquiring banks (MABs):

Services, ecosystem



• CIBsmaintaincardholders’accounts;theyissuethecards,extendcredittocardholders(inthecaseofcreditcards)andbillcardholdersforpurchasesagainsttheircard.TheCIBistypicallyresponsibleforcustomercareandhandlingthecardholder’spersonaldata,althoughthismaybeprovidedbythird-partyprocessorsorcardprogrammanagers.TheCIBisresponsiblefortransferringpaymenttotherelevantmerchants’accounts(viathepaymentsnetworkandmerchantacquirer)forthecardholder’spurchases.

• MABsmaintainthemerchants’accountsthatallowthemtoacceptcreditanddebittransactions.Themerchantacquirersprovidethemeanstoauthorizevalidcardtransactionsviatheinterfacetotheappropriatepaymentnetworkandfacilitatetheclearingandsettlementofthetransactionsthroughthepaymentnetwork.Theacquiringbankreceivesfundsfromacardholderwhenacreditcardtransactioniscompleted,anddepositsthepaymentamount,lessanyfees,intothemerchant’saccountandfromthereintoitsbusinesscheckingaccount.

Historically, a single bank would have performed both functions in well-defined geographic markets but, thanks to the globalization of retailing and banking and advances in technology, the industry is now dominated by large-scale, specialist organizations and the issuing and acquiring functions are typically offered by independent entities, some of which are not banks.

Investing in mobile NFC could result in the following benefits for banks: • Reducedcostsofhandlingcashandchecks.• Reducedcostsofplasticcardissuingandmanagement.• Incrementalrevenuesfromconsumersand/ormerchantsdrivenbythegreatervolumeoftransactions,andperhapsalsohigherpaymentfeesforthegreaterconvenienceandsecurityofferedbymobileNFCpayments.

• Gainingorprotectingmarketshare–theearlyadoptionofmobileNFCcanhelpbanksdifferentiateandcouldalsoprovideopportunitiestooffermoreinteractiveservicestotheircustomers.

• Accesstonewmarketsandtoreachandservenewcustomersegmentspreviouslyinaccessibletothem(i.e.,theunbankedortheunder-bankedusersegments).

• Increasedusageofcontactlessinfrastructurethathasalreadybeendeployed,leadingtofasterpay-backandhigherROI.

In France, BNP Paribas, Credit Mutuel, CIC and Credit Agricole, together with mobile operators France Telecom, SFR, Bouygues Telecom and NRJ Mobile, have plans to deploy nationwide interoperable NFC-enabled payment services in early 2012.

The Slovakian bank UniCredit is using NFC stickers supplied by Gemalto for a commercial mobile NFC deployment. The stickers will be used in conjunction with MasterCard PayPass readers, which are deployed in about 3,000 outlets around Slovakia. UniCredit Slovakia is part of the much wider UniCredit Group, which has 9,600 branches in about 50 countries around the world.

Despite the benefits of mobile NFC, there are a number of gaps or uncertainties in the business case that is causing some banks to pause and look very hard at the mobile NFC opportunity before offering their full commitment. Mobile NFC is unlikely to reduce cash-handling costs any more than contactless cards do and the potential to increase revenues from increased transactions can also be attributed to contactless cards. In addition, the potential threat from mobile operators eventually offering competitive financial services is also a concern for the banks.

Key findings • PartnershipswithmobileoperatorstodelivermobileNFCpaymentswillallowbankstoreachandservenewcustomersegmentspreviouslyinaccessibletothem(i.e.,theunbankedorunder-banked)andgrowtheirrevenues.

• MobileNFCwillleadtoanincreaseintheuseoftheexistingcontactlessinfrastructurethatseveralbankshavedeployed,generatingadditionalpaymenttrafficonalreadydeployedorplannedcontactlessinfrastructure,whichwillacceleratethepay-backonexistingorplannedinvestments.

• Somebankshaveconcernsaboutpotentialconflictorcompetitionbetweenthestandardcontactlesscards,towhichmanybanksarealreadycommitted,andNFC-enabledmobilephones.

• ManybanksareinfavorofhavingNFCfunctionalityembeddedinmicroSDcards,ratherthanintheSIMcardorthemobilephone.Forbanks,havingNFCinmicroSDcardsmeanstheycanofferaservicewhichisbothoperator-andhandset-agnostic,allowingthemtoreachalargecustomerbasewithouthavingtopartnerwithanoperatororhandsetvendor.

pAyMENt NEtWORk pROvIDERS

The providers of the payment networks, such as Visa, MasterCard, American Express and Discover Network, are the companies behind the credit and some debit and prepaid cards. They maintain the infrastructure and provide services, such as approval and certification, to CIBs as well as defining their own brand requirements for different payment form factors. They also define payment specifications and provide transaction-

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processing services to support them (see fig. 2). Although critical to many mobile payment services, such as credit-card-linked remote payments and NFC payments, there are unlikely to be major changes in the way these payment networks operate. Mobile NFC will potentially just reduce the life-cycle management costs of existing card payment systems.

NFC POS infrastructure is being deployed in countries all over the world, driven primarily by the payment network providers Visa and MasterCard, which are aggressively promoting their respective contactless card schemes payWave and PayPass.

EMVEuropay, MasterCard and Visa formed EMV (Europay, MasterCard and Visa) in 1999 to manage, maintain and enhance the EMV integrated circuit (smart) card specifications for payment systems. MasterCard acquired Europay in 2002 and the Japanese card company (JCB) joined the organization in 2004 so EMV is currently operated by JCB, MasterCard and Visa. The company’s primary role now is to manage, maintain and enhance the EMV integrated circuit card specifications to ensure interoperability and acceptance of payment system integrated circuit cards on a worldwide basis.

Visa, MasterCard and other payment networks have adopted a visual symbol to indicate contactless payment functionality on cards and terminals. The symbol must be shown on the front of the card and on the reader at the POS.

Visa payWave Visa payWave is an EMV-compatible payment platform based on the ISO 14443 specifications. The payWave cards are issued with both the conventional chip or magnetic strip for contact transactions and the embedded chip with payWave technology.

Financial institutions offering Visa payWave cards include Amegy Bank, Arvest Bank, Barclaycard US, BB&T, Chase, First Internet Bank of Indiana, INOVA FCU, PNC Bank, SunTrust, Wells Fargo and Zions Bank.

Visa is migrating to an enhanced global contactless payment specification, Visa Contactless 2.0, which will ensure that Visa cardholders can use their contactless cards worldwide while still providing issuers with the flexibility to customize programs to meet local market needs. The specification provides additional security options and enhanced performance for faster transaction processing. Another major feature of the specification is that communications between the card and terminal have been streamlined to provide faster transaction processing. This makes Visa payWave ideal for environments where speed is of the essence, such as car parks, mass transit systems, fast food restaurants and convenience stores.

Mastercard PayPass MasterCard PayPass is also an EMV-compatible, contactless payment platform based on ISO 14443. MasterCard began trialing PayPass in 2003. Its first market trial was in the US, in Orlando, Florida, with JPMorgan Chase, Citibank and MBNA; more than 16,000 cardholders and 60 retail locations participated in the market trial. A 2007 MasterCard PayPass Benchmark Study found that about 90% of respondents that use PayPass were satisfied with their experience, and 71% of these PayPass consumers said they use PayPass as their primary card for everyday purchases.

Since 2005, MasterCard has rolled out commercial PayPass services in a number of markets outside the US including Canada, the UK, Germany, Poland, Australia, Turkey, the Philippines, Malaysia and South Korea. MasterCard has worked with Nokia, AT&T Wireless and JPMorgan Chase to incorporate MasterCard PayPass into mobile phones using NFC technology, trialing it in Dallas, Texas.

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American Express ExpressPay ExpressPay, which comes embedded in a card or in other separate forms such as a key fob, is also EMV-compatible and based on ISO 14443. In June 2005, American Express became the first card issuer in the US to launch a contactless-enabled credit card; it was called “Blue” and had the ExpressPay feature.

American Express claims that pilot tests in Phoenix and New York demonstrated the significant merchant benefits of ExpressPay in the form of time savings and increases in spend. Based on a three-day sample, customers got through the queue 53% faster with ExpressPay than with magnetic strip transactions, and 63% faster than with cash.

Discover Financial ServicesDiscover Financial Services runs the POS network that Isis is connected to; it is the fourth-largest in the US. The company operates the Discover card and its payment businesses include the Discover Network with millions of merchants and cash access locations, the PUlSE ATM/debit networks, and the Diners Club International global payments network which is accepted in over 185 countries.

Discover’s Zip contactless application is accepted in over 100,000 merchant locations in the US but there are not many users because the company only introduced contactless stickers and cards in November 2010 and issued these only to selected customers. The company is working to enable Zip payment from mobile phones and claims that Zip will be accepted at around 90% of the locations that take PayPass or payWave in the US. Key findings • ThebusinesscaseforpaymentnetworkproviderstoinvestinmobileNFCistodisplacecashpaymentsbygrowingthenumberofusersofmobileNFCpayments.AdoptionofmobileNFCcanalsoleadtostronggrowthincashlesstransactionsinemergingmarkets,whichtendtohavealowcredit/debitcardpenetration,therebyincreasingrevenuesforpaymentnetworkproviders.

• AccordingtoAmericanExpress,contactlesstransactionscanbe63%fasterthancashand53%fasterthanusingcreditcards.MasterCardfoundthatthemostsignificanttimesavingsarerealizedinadrive-throughenvironmentwhereusingcontactlesspaymentscansave12-18secondspertransactionascomparedwithcashpayments.

• ToacceleratethegrowthofmobileNFCtransactions,paymentnetworkprovidersshouldalsopromotetheuseofNFCstickerstocomplementcontactlesscardsindevelopedmarkets.NFCstickerswillalsohelpindrivingtheadoptionofmobileNFCpaymentsinemerging

marketswithouttheneedforhugeupfrontinvestment.• Paymentnetworkprovidersshouldalsoexploreopportunitiesofdevelopingafully-fledgedsecurem-commerceplatformwhichtheycancustomizeandmarkettomerchantsandbanks,aswellasInternetandmediacompanies.

• Inadditiontorevenuegrowth,investinginmobileNFCisalsoimportantforpaymentnetworkproviderstoensurethattheydon’tloseouttopaymentplatformslikePayPalandiTunes,towhichuserscandirectlylinktheirbankaccountsandbypassthepaymentnetworkproviders.

• Inthecomingyears,thepaymentnetworkprovidersarelikelytofacemorecompetitionfromGoogleandApple,whichalreadyhave–andwillcontinueto–growtheirdirectcustomerconnections.

MERCHANtS AND REtAILERS

Mobile NFC has a significant relevance for certain types of merchants. For example, transport operators are already using contactless cards for ticketing, especially in mass-transit applications, to increase throughput and increase customer satisfaction. Similar benefits will be experienced by ticket vendors for live events, museums, cinemas and theaters where purchasers can be fast-tracked into the venue.

Currently, NFC readers are most widely deployed by public transportation systems. Informa Telecoms & Media estimates that, by July 2011, about 930 cities in at least 50 countries had introduced NFC-based ticketing in public transportation systems. In Japan, around 60% of the handsets sold now are NFC-enabled and about 20% of people with such phones have reportedly activated them for use on public transportation.

Only a small minority of retailers outside Japan and South Korea have NFC-enabled POS terminals in their stores. In January 2011, Starbucks announced that all of its US stores are now accepting NFC payments via mobile phones. Retailers in the US and the UK have started deploying contactless POS terminals but currently only about 3% of POS infrastructure in the US is enabled for contactless payments.

In the UK, it has been reported that the Post Office is planning to deploy new POS terminals with contactless payment facility in 12,000 of its branches in early 2012. By October 2012, it expects to have contactless POS terminals in all of its branches, around 30,000-35,000 terminals, making it largest merchant accepting contactless payments in the UK. The london Transit Authority expects to install around 20,000 contactless POS terminals during 2012, while

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it is believed that, as of July 2011, there were around 60,000 contactless POS terminals installed at merchant locations in the UK and about 15 million contactless bank cards have been issued.

Mobile NFC payments offer merchants and retailers the opportunity to improve their customers’ experience of purchasing, through improved ease of use, convenience and transaction speed, and potentially greater security. For merchants and retailers, mobile NFC offers the following key benefits: • Increasingthroughputbyreducingtransactiontimes.• Potentiallygeneratingmoretransactions,especiallyformicro-payments.

• Exploitingimpulsepurchasingbehaviormoreeffectively.• Reducingcashhandlingcostsandrisks.• Runningmarketingcampaignsofferingcouponsandvoucherstoincreasecustomerloyalty.

Mobile NFC offers more opportunities to run loyalty programs, enabling merchants and retailers to exploit e-vouchers and advertising delivered either via the cellular network or locally via NFC (e.g., using smart posters) and stored on the handset.

Key findings• TheadoptionofmobileNFCtransactionsislikelytobefastestinthepublictransportsector,especiallyinplaceswhereagooddealofcontactlessPOSinfrastructureisalreadyinplace.Theresultingcostsavingsinticketissuingandcashhandlingwillstrengthenthebusinesscase.

• MerchantsandretailerswillbeinterestedinNFCifithelpstoreducecosts,increasesalesandprovidebetterprotectionagainstfraud.Theyaren’tlikelytomindwhetherauserpayswithacontactlessplasticcardoranNFC-enabledmobilephone;infact,insomecases,theymightpreferpaymentsviacontactlessplasticcardsifit’sfasterthanpayingbymobilephones.

• AnimportantincentiveforretailersisthepotentialofusingNFCfortheirownmobile-walletservices,suchasstore-paymentcards,loyaltycardsandcouponsandvouchers.

• Areducedcash-handlingcostiscitedasoneofthekeybenefitsformerchantsandretailerstoenableNFCpaymentsbutitalsomeansthatretailerswillhavetopaymoreforcard-paymentfeeswiththeincreaseincashlesstransactions.

• Inadditiontothepotentialcostofnewhardwareandpotentiallyhigherfees,thereisstillsomeresistancetomobileNFCfrommerchantsandretailersduetosecurityconcernsandtheneedforadditionaltrainingofstaff.

tRUStED SERvICE MANAgERS

The role of a trusted service manager (TSM) is to distribute, provision, and manage mobile payment applications on behalf of the application owners. A number of independent companies are establishing themselves as TSMs including Atos Worldwide, Cassis, SmartTrust, Giesecke & Devrient (G&D), First Data, Gemalto and Ericsson IPX. TSMs provide the link between the mobile operators and the issuing banks or other application owners such as transportation service providers. For example, First Data is playing the role of TSM, delivering and managing payment applications over the air to the embedded SE in the Nexus S, Google Wallet’s launch device.

The role of the TSM is clearly a vital one in the ecosystem and carries significant responsibility. The TSM will hold the master key to the SE and manage downloads to it; it would also be responsible for invoicing and supporting the application owners. Therefore, a TSM must be a trusted party. As the owner of the SIM, it would appear that the mobile operator would be the best candidate to act as the TSM but many in the industry argue in favor of an independent third party to be the TSM.

Key findings• IthasbeenproposedthataTSMwillberequiredtodistribute,provisionandmanagemobilepaymentapplicationsonbehalfoftheapplicationownersbutthereareuncertaintiesaboutwhethertheTSMshouldbeindependentornot.

• ItseemsthemostefficientandtransparentapproachwouldbetouseathirdpartyasTSM,whichcouldactasasinglepointofcontactforapplicationownersandmobileoperators.

• AlthoughTSMsaremeanttobefacilitators,theyneverthelessaddanextralayerofcomplexityandcountasonemorepartytakingasliceofthemobileNFCservicerevenues.

NFC HARDWARE AND COMpONENt vENDORS

Smartcard manufacturersThe term smartcard can be used to refer to a memory card, a microprocessor card, or a contactless card. Memory cards provide more data storage space than a magnetic strip but can’t process the data. In comparison, microprocessor cards (or microcontrollers) have the capacity to process data and the applications on these cards can be customized or processed via an OS. Contactless cards are based on radio-frequency communication technologies and can interact and

Services, ecosystem



exchange data with readers via an electromagnetic field, without the need for any physical or electrical connections.

Smartcard manufacturers include Gemalto, Oberthur Technologies, Sony, Morpho and Giesecke & Devrient; these four companies account for over 80% of the global smartcard market. In addition, there are a few Chinese smartcard manufactures, such as Watchdata, Datang and Eastcompeace, but these companies mostly only cater to the domestic Chinese market.

Bell ID, the smartcard and NFC software provider, ViVOtech, the NFC software developer, and PPC Card, the credit/debit-card manufacturer are working together to enable the mass-market rollout of mobile NFC services in Europe.

As NFC is compatible with Philips’ MIFARE and Sony’s FeliCa contactless smartcard platforms, NFC devices can read information from these cards. NFC devices can also operate like a contactless card, even when switched off, making them compatible with the huge installed infrastructure of MIFARE and FeliCa systems.

It is believed that Google will subsidize contactless POS terminals to accelerate their deployment by retailers and merchants. The replacement cycle for POS infrastructure is usually five to seven years for most retailers. Therefore, to accelerate the growth of NFC payments, it is important to encourage more retailers to deploy contactless POS systems and providing terminals at subsidized rates will help to drive this.

NFC POS terminal and reader manufacturersThe POS terminal and reader vendors are vital players in the mobile NFC value chain as they provide the NFC-enabled terminals and readers to the merchants and acquirers. The big vendors in this field are Ingenico, Verifone, Hypercom and Vivotech; other players, including IBM, Micros and Radiant Systems, also provide contactless POS systems. Most terminals and readers for mobile NFC transactions tend to be the same as those that can be used, or are already in use, for transactions with contactless payment cards. Contactless card readers are provided by companies such as OTI (On Track Innovations) and ROAM Data.

Some interim solutions have also been proposed to drive the NFC market. One example is the iCarte 110 NFC reader and contactless payment adaptor manufactured by Wireless Dynamics Inc. and designed for the iPhone 3G/3GS; the reader’s dimensions are 62 x 26.5 x 12.3 mm and it can be attached at the bottom of the iPhone.

The iCarte 110 NFC reader has an embedded chip which can be configured as credit/debit cards, prepaid cards and loyalty cards for contactless payments and transactions, and communicated by the attached iPhone. It can also read NFC coupons, smart-posters, etc., as well as used for enterprise applications including access control and asset tracking. The iCarte 110 NFC reader is currently only available for payment with Visa contactless protocol and the SDK is available for purchases exceeding 1,000 units.

Wireless Dynamics Inc. has also developed NFC readers such as the SDiD 1010 in SD format which can be inserted in devices with an SD card slot. Payment and transaction information can be processed via the cellular network as well as using Wi-Fi and Bluetooth.

Chipset manufacturers For chipset manufacturers, the mobile NFC market offers a new value-add by providing them with the opportunity to sell more chips, and at a higher premium. There are three types of relevant chipset vendors:• The UICC vendor:Theuniversalintegratedcircuitcard(UICC),morecommonlyknownastheSIMcard,isthekeyelementinmobileNFCpaymentsystemsastheUICCiswhereoneormoreofthesecuritydomainsareprovisioned.

• IC chip vendor: TypicallythemanufacturersofchipsusedinEMVcreditanddebitcardsarethesameasthosesupplyingtheUICCmanufacturersforthemobileindustry,providingvaluablecross-sectorexpertise.

• NFC chip vendor:Theroleofthisvaluechainmemberistosupplythestandards-conformingNFCchiptothehandsetmanufacturerforintegrationwiththehandset.

Although they are not directly involved in mobile payments, the chipset manufacturers are critical to the mobile NFC market as they provide the chipsets to handset manufacturers to enable them to produce NFC devices. Furthermore, the chipset manufacturers’ work to bring the technology improvement and innovation – which then lowers the costs of NFC chips and therefore the BOM (bill-of-material) cost of NFC handsets – will initially be only slightly more than for non-NFC phones. In a couple of years, it can be expected that handset vendors will be able to provide NFC-enabled devices that are in the same price range as non-NFC devices.

Inside Contactless and NXP are two leading NFC chipset suppliers. Broadcom and Qualcomm are also developing NFC chipsets.

Inside Contactless, in partnership with Infineon and Giesecke & Devrient, has developed the “SecuRead”

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system-in-package (SIP) NFC solution to provide handset manufacturers with a single package that includes both an NFC controller and an embedded secure element (SE). The solution comprises the MicroRead NFC controller, Inside Contactless’ open NFC protocol stack for Android, Windows Mobile, linux and Java devices and an embedded SE manufactured by Infineon Technologies; it runs a GlobalPlatform-compliant Java Card operating system supplied by Giesecke & Devrient. The solution will make it easier for device manufacturers to embed NFC technology in their products.

NXP Semiconductors has reported that its NFC chipsets have been integrated in over 60 mobile phones currently being developed by handset vendors. NXP’s NFC software is open source on the Android platform and enables the Google Wallet application. Gemalto has contracted NXP to incorporate the company’s MIFARE contactless-payment technology into its UICC cards; Gemalto has been chosen by KDDI to provide User Identity Module cards and Trusted Service Management for its NFC program.

Another company, Watchdata, provides the SIMpass SIM card-based mobile NFC solution. China Telecom has deployed the SIMpass solution in over 20 provinces and has over half a million users of the mobile NFC service. Similarly, Watchdata claims to have shipped over 100,000 SIMpass cards to the Thai mobile operator True for its True Money Service, which allows users to make mobile NFC payments at McDonalds’ and other retailers.

Memory card manufacturersMemory card manufacturers argue in favor of embedding the SE (secure element) in the memory card, rather than in the SIM or the mobile phone. They claim that having the SE in a memory card is better than having it on the SIM which has storage limitations. Having the SE on a memory card also means that users are not tied to a particular operator or mobile phone and can take out and plug the memory card in other handsets to use NFC services (see fig. 3).

In Dec 2010, In2Pay microSD, developed by DeviceFidelity, became the first NFC solution certified by Visa for commercial deployment.

Another company, Tyfone, has developed the SideTap memory-card solution to enable NFC services in a large number of mobile phones. The solution consists of a Micro SD card with integrated SE and NFC antenna and allows users to make their handsets NFC-capable by simply using the Micro SD card in their handsets. Tyfone claims that the solution will allow users to remove

their confidential information from the handset when switching to a new device. Key findings• ThemigrationofthebankingandpaymentsindustrytowardsEMVstandards,thegrowthofcontactlesspaymentsandtheopportunitiesinemergingmarketsareactingaskeydriversforrevenuegrowthforthePOSterminalandreadervendors.

• However,thesemanufacturersarefacingincreasingpricecompetition,inparticularfromChinesemanufacturers,and,asaresult,theirprofitmarginshavefallen.

• Togrowtheirrevenues,themanufacturersareevolvingtheirbusinesstoalsoofferthemanagementofpaymentsandrelatedservices.Thisincludesensuringtheproperrunningoftheterminals,providingthenecessarysoftwarefortheterminalsandreaders,managingthedifferentpaymentmethods,andensuringadequatesecurityandprotectionagainstfraudincollaborationwithbanks.

• ManyvendorsaredevelopingandlaunchingavarietyofinterimNFCsolutionssuchasstickers,andNFCfunctionalityembeddedinmicroSDandSDcardstoenableNFCservicesonexistingmobilephones.

• NFCreadersthatcanbeattachedtomobilephones,suchastheiCarte110readerfortheiPhone,aregoodinterimsolutionsbutunlikelytogetmass-marketadoption.Mostuserswon’twanttoextendthesizeoftheirmobilephoneswithadditionalhardwareandalsowon’twanttopayextraforit.

• AkeychallengeforthePOSterminalandreadermanufacturersistoensureadequateprotectionagainstthegrowingmalwareandsecurityattacksoncontactlessandmobileterminals.

SENFC

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• ToacceleratethemarketgrowthofNFCpayments,itisimportantforthevendorstoencouragenewretailerstodeploycontactlessPOSsystems.ProvidingNFCPOSterminalsatsubsidizedrateswillencouragemoreretailerstodeploycontactlessinfrastructure.

pAyMENt SERvICE pROvIDERS

Payment services that are currently largely confined to the digital and online worlds, such as e-commerce payment platforms (e.g., PayPal, Amazon), digital-content platforms (e.g., iTunes), carrier billing, and even social media and gaming virtual currencies (e.g., Facebook Credits, World of Warcraft Gold, Angry Birds’ Bad Piggy Bank), could use mobile NFC to extend their reach to physical-world purchases.

PaypalPayPal is well-established as a payment service for online purchases; it allows users the option of making payments directly from their bank account without needing to have a credit or debit card. Mobile NFC offers further growth opportunities for PayPal because retailers may prefer their customers to pay by PayPal if that means transaction fees that are lower than using the payment networks of credit card companies. Mass adoption of PayPal will therefore be a big threat to the likes of Visa, MasterCard and other credit card companies.

iTunesiTunes is now one of the world’s biggest online payment platforms with more than 200 million people registered with an iTunes account. This also makes iTunes possibly the biggest credit-card hub on the Web, since users must register their credit/debit card details to open an iTunes account and start making purchases. It remains to be seen whether Apple will introduce an NFC-enabled iPhone in 2012 and extend iTunes payments beyond the realm of digital goods into the physical world. Informa Telecoms & Media expects Apple to do that in a couple of years as adoption of NFC services starts to grow.

Key findings• MobileNFCofferstheopportunitytoonline-paymentplatformssuchasPayPal,AmazonandiTunestoextendtheirreachtolocalpaymentsinthephysicalworld.Italsoprovidesanopportunityforvirtualcurrencies,forexampleFacebookCredits,tobeusedforpurchasingphysicalgoods.

• RetailersmayprefercustomerstouseservicessuchasPayPalforNFCpaymentsifitincurslowertransactionfeesthanthosechargedbythecreditcardbrands.

• Securityconcernsmayinhibitcustomersfromusingthe

onlinepaymentserviceprovidersformakingNFC-basedlocalpayments.TogrowtheirbusinessinthemobileNFCmarket,thesecompanieswillhavetoensurethatpeopletrustthemasmuchtheytrustthecreditcardbrands.

AppLICAtION SERvICE pROvIDERS AND SOFtWARE vENDORS

The mobile NFC market represents a significant opportunity for application service providers and software vendors many of whom are relatively small, entrepreneurial technology companies. There are companies that provide solutions, such as coding, programming, hardware implementation, etc., to integrate NFC in new and existing products – companies like DeviceFidelity, Inside Secure, Monitise, Proxama, Airtag, Tyfone, Zenius, United Tectsa, Schreiner ProSecure, ISS and Near Field Solutions – a few examples include: • DeviceFidelityhasdevelopedsolutionstoenableNFCservicesonmobilephones.Recently,itwasgrantedapatentfortheimplementationofNFCinmobiledevicestoenablethemtofunctionlikemobilewalletscapableofconductingcontactlesspaymentsandtransactionsusingcredentialsissuedbymultipledifferententerprisesatPOSterminals.

• InsideSecurewillprovideZTE’sGSMandTD-SCDMAhandsetswithitsNFCsolutions,allowingusersofthedevicestoaccessNFCservicesincludingpayments,loyalty,ticketing,andaccesscontrol.

• InApril2011,Proxama,theNFCsoftwaredevelopmentcompany,announcedthelaunchofNFCservicesinSouthAfricathatenableuserstomakecontactlesspaymentsontransportnetworks.

The mobile NFC market also presents opportunities to e-commerce and m-commerce companies to extend their presence to local mobile payments. Some of these companies – for example Monetise, Fundamo, Vesta, PayBox, and Bango – have developed business-to-business (B2B) service solutions that are used by mobile operators or banks which brand and retail the mobile payment service themselves. These solutions are often provided on a managed services basis, where the technology platform and associated infrastructure is deployed outside the mobile operators’ or banks’ networks. Other mobile application service providers, such as OboPay, luup and Crandy, have built business-to-consumer (B2C) service solutions and have established their own independent consumer brands, selling services directly to the mobile consumer. Mobile NFC services will also allow these players to exploit transaction data for location-based marketing services.

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INDUStRy FORUMS AND ASSOCIAtIONS

Many industry forums and associations, including the GSMA, NFC Forum, Mobey Forum and the Contactless Payments Council, have been instrumental in driving the development of NFC standards and specifications, as well as encouraging market trials and commercial rollouts of mobile NFC services.

GSMANFC technology has the backing of the GSMA’s Pay-Buy-Mobile (PBM) initiative and 52 mobile operators were supporting the initiative as of August 2011 (see fig. 4). A number of these operators are already conducting trials of mobile NFC services as part of the PBM initiative.

In addition to the mobile operators, banks and credit card companies, a number of other important mobile NFC value-chain players are involved in the PBM initiative including: handset vendors, such as lG, Nokia, Samsung and Mobiwire (Sagem); UICC card suppliers, such as Gemalto, G&D and KEBT; and NFC reader manufacturers, such as Vivotech and Harex.

NFC ForumFormed in 2004, the NFC Forum now has over 150 members. It was formed to advance the use of NFC technology by developing specifications and ensuring interoperability among devices and services. The main goals of the NFC Forum include developing standards-based NFC specifications, encouraging products based on those specifications, and driving awareness of NFC technology among consumers and enterprises.

The NFC Forum has released 15 specifications to date, which provide a roadmap to ecosystem players for developing NFC-based products and solutions.

Mobey ForumThe Mobey Forum, established in May 2000 is a non-profit organization; its mission is to encourage the use of mobile technology in financial services. The forum has over 50 members including banks, handset manufacturers, credit card companies, technology vendors and a few mobile operators.

The Mobey Forum has published a number of white papers on best practice for mobile payments and documentation on the recommended architecture for a wide range of mobile financial services. To support its recommendations, the forum has completed demonstrations and trials based on its recommendations and principles and it is supporting members’ implementations.

INFORMA vIEWpOINt

Informa Telecoms & Media recommends that mobile operators and other value-chain players must look more carefully before investing in NFC services because the technology will require a large upfront investment and take at least three to four years to reach a critical mass of users and transactions. Mobile operators are hoping that the SIM will become the default method of securing NFC applications, but it is more likely – especially in the developed markets – that security embedded in the handset will eventually prevail.

FIg 4Mobile operators supporting the Pay-Buy-Mobile initiative, Aug-11

AT&T Kall Telecom Partner Telecom Italia

Astelit KPN Pelephone Telefonica O2

Brazil Telecom KT Rogers Wireless Telenor

Celcom Maxis SFR TeliaSonera

Chunghwa Telecom MCI SINGTEl Telstra

CMCC Meteor SingTel Optus Telus

Dialog MobiCom SK Telecom T-Mobile

Econet Mobilkom Austria SMART Turkcell

EITC Mobitel Softbank Mobile Vimpelcom

Etisalat MTN Starhub Vodafone

FarEasTone MTS Swisscom Wataniya

GlobeTel NTT DoCoMo Taiwan Mobile Wind

IMC Island Orange TDC Zain

Source: GSMA

Services, ecosystem



Without the presence of a broad network of retailers and service providers that will accept NFC payments, the opportunity for mobile NFC will be very limited. There are few markets where anyone other than the banks and payment network providers has the dominance to make this happen. It is unlikely that the pure operator-driven model that NTT DoCoMo adopted will be repeated elsewhere.

It will take a couple of years before NFC-enabled handsets will be shipped in significant volumes. The consensus in the industry is that a market penetration of handsets of at least 20% is necessary before the mobile NFC market really starts to reach its potential. Google has implemented the necessary NFC software in its Android OS Gingerbread and wants to get the NFC hardware embedded in large number of Android devices. Its acquisition of Motorola’s handset business means that Google will be in a position to drive NFC device shipments.

However, there is a high degree of fragmentation in the mobile NFC market and this will continue to restrict the rollout of commercial services for the next two to three years. Mobile NFC services can generate significant revenues for value-chain players provided all stakeholders take a pragmatic approach and recognize and accept the contribution and importance of each to the overall NFC business. The need for collaboration is clear. Revenue sharing as well as risk and investment sharing will be necessary, especially where there is no pre-existing contactless infrastructure.

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kEy pOINtS

• ThenumberofitemsintheAppleAppStoreincreasedby200%between4Q09and2Q11,toreachatotalof421,000apps.Thisequatedtotheadditionof281,000appstoApple’scatalog.

• ThenumberofitemsintheAndroidMarketincreasedbyaround1,100%between4Q09and2Q11,toreachatotalof215,000apps.Thisequatedtotheadditionofnearly200,000appstothatstore’scatalog.

• ThenumberofitemsintheBlackBerryAppWorldincreasedbyaround800%between4Q09and2Q11,toreachatotalof36,000apps.Thisequatedtotheadditionof32,000appstoRIM’scatalog.

• Thereisanalmost-ubiquitousstrengthacrossallthreestoresintheirgamescategory,ubiquitouslystronggrowthofallthreestores’bookscategory;andstronggrowthincontentandpersonalization-relateditemsinthestoresthatofferthem.

• Tablet-specificdeveloperinitiativesmayhelptodriveasecondaryparallelwaveofapplicationsstorecontentdevelopment.

• ThecontentmixforthethreebiggestOS-basedmobileapplicationsstoresnowseemtohavebecomeset;andnoneofthosestoresareshowinganysignsthatthenumberofappstheyhostmaystarttoplateau.

MOBILE AppLICAtION AvAILABILIty

Mobile application category creation is at the discretion of individual mobile application stores, while the categorization of each mobile application itself is ultimately at the discretion of its respective developer. As categorization is a subjective process, there can be great variation in the relevance of the applications that are listed within each category of a store – as end users frequently discover.

Individual applications sometimes fall between categories or sit across multiple ones, with there being no clear “correct” placement for them. So it can be easy for them to be accidentally misclassified. Furthermore,

the content categories that a store consists of can also change over time, fundamentally changing the apparent application make-up of that store going forward. As a consequence, analyzing mobile application store content both within and between any given store is not a precise science.

Each of the stores examined here offers a different list of application categories. There is a difference in the number of those categories as well as in the titles used to describe them (see fig. 1).

So, to avoid analyzing categories of apps that are only valid for a single store, Informa Telecoms & Media has normalized them: After examining each store, a shortlist of 14 common categories was chosen (see fig. 2), with each application category that the three stores contain being classified as belonging to one of them (see fig. 3).

This normalization process could also be considered a subjective process, so, for the benefit of the reader, the original category lists have been included alongside their Informa TM re-classifications.

This analysis will cover the three most popular OS-based mobile application stores today – the Apple App Store, the Android Market and the BlackBerry App World.

tOtAL MOBILE AppLICAtIONS By StORE

Apple App StoreThe number of applications in each of the three stores analyzed has grown enormously in the last 18 months (see fig. 4), but none more so than Apple’s App Store. launched in July 2008, the App Store featured 140,000 titles at the end of 4Q09 rising to 421,000 titles as of the end of 2Q11 – an increase of 280,000 apps for a total growth of 200% in the size of Apple’s apps catalog. Of the three stores featured, this is by far the largest increase in absolute terms – albeit not in terms of percentage growth.

Current trends in mobile application store content

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The Apple App Store has experienced rapid and constant growth in the size of its catalog ever since launch, growth which has been fuelled by the launch of a new model of the iPhone as well as a major revision of Apple’s iOS operating system every third calendar quarter of each year since 2007. This has provided enhanced hardware features for new/replacement iPhone users, as well as new software features for legacy device owners; in turn providing a compelling reason for developers to keep launching new apps targeted at the entire iOS user base.

However, the single greatest reason for the constant growth of the store’s mobile application catalog has

to be to the revenue-generating opportunity for app developers. The iTunes Direct-to-Consumer (D2C) payment system that powers the App Store makes it easy for developers to sell paid-for applications, encouraging an increasing number of developers to create applications and for existing developers to produce yet more. The launch of the iPad line of tablets, which are more focused on the consumption of premium content, has also helped to keep developer interest high in creating software for the App Store ecosystem.

Android MarketThe Android Market was launched in October 2008, three months after Apple’s App Store. The touchscreen-driven Android OS is the most similar in functionality to Apple’s iOS, thereby making the Android Market the most direct “competitor” to the App Store. Because of the similarity between the two operating systems, it is unlikely that an end user would own both an iOS and an Android device, but it remains possible that an iOS or Android owner would also own a BlackBerry for its e-mail and messaging-specific features. As a consequence, the App Store and the Android Market arguably form a more critical part of the total value proposition for devices running iOs and Android, respectively, than the App World does for the BlackBerry OS – as RIM’s BlackBerry OS has other core strengths.

At the end of 4Q09, the Android Market hosted 17,000 applications, just 12% as many as the Apple App Store at that time. But during 4Q09, there was just

FIg 1Application store content categories: Apple App Store, Android Market and BlackBerry App World

FIg 2Informa Telecoms & Media’s normalized content categories

aPPle aPP store aNDroiD Market blackberry aPP WorlD

Books Books & reference Business

Business Business Education

Education Comics Entertainment

Entertainment Communication Finance

Finance Education Games

Games Entertainment Health & wellness

Healthcare & fitness Finance IM & social networking

lifestyle Games Maps & navigation

Medical Health & fitness Music & audio

Music libraries & demo News

Navigation lifestyle Photo & video

News Media & video Productivity

Photography Medical Reference & eBooks

Productivity Multimedia Shopping

Reference Music & audio Sports & recreation

Social networking News & magazines Test center

Sports News & weather Themes

Travel Personalization Travel

Utilities Photography Utilities

Weather Productivity Weather

Reference

Shopping

Social

Software libraries

Sports

Themes

Tools

Transportation

Travel

Travel & local

Weather

coNteNt categories

1 Books

2 Business & productivity

3 Content & personalization

4 Education

5 Entertainment

6 Games

7 Health

8 lifestyle

9 Music

10 Personal interest & hobbies

11 Reference & information

12 Sports

13 Travel

14 Utilities



Services, ecosystem



one Android phone model available. Since then, the number of models launched has grown rapidly and there have been eight major revisions of the OS that have added new features (see fig. 5). The Android user base has expanded enormously as a result, firing developer interest and helping the Android Market’s catalog to grow to 215,000 titles as of the end of 2Q11. This is a net increase of nearly 200,000 apps, representing a huge growth rate of more than 1,100% over 18 months.

At present, the revenue-generating potential for developers is not as great with Android as it is with the App Store. But, as the popularity of Google Checkout

improves – and as more operators offer carrier billing for the Android Market, the developer incentive to produce apps will only grow. It is actually quite incredible that the Android market has grown so much without a mature mechanism by which developers can generate revenue from paid-for apps. This in itself is indicative of the expectation that developers have for the long-term potential of Android; and the possibility for them to generate far greater revenues from the Android Market in the future – be it from paid-for apps or via advertising subsidization.

BlackBerry App WorldRIM’s BlackBerry App World was launched in April 2009

FIg 3Application store content by Informa Telecoms & Media's classification: Apple App Store, Android Market and BlackBerry App World

aPPle aPP store iNForMa classiFicatioN aNDroiD Market iNForMa classiFicatioN blackberry aPP WorlD iNForMa classiFicatioN

Books Books Books & reference Books Business Business & productivity

Business Business & productivity Business Business & productivity Education Education

Education Education Comics Books Entertainment Entertainment

Entertainment Entertainment Communication lifestyle Finance Personal interest & hobbies

Finance Personal interest & hobbies Education Education Games Games

Games Games Entertainment Entertainment Health & wellness Health

Healthcare & fitness Health Finance Personal interest & hobbies IM & social networking lifestyle

lifestyle lifestyle Games Games Maps & navigation Reference & information

Medical Health Health & fitness Health Music & audio Music

Music Music libraries & demo Utilities News Reference & information

Navigation Reference & information lifestyle lifestyle Photo & video Personal interest & hobbies

News Reference & information Media & video Content & personalization Productivity Business & productivity

Photography Personal interest & hobbies Medical Health Reference & eBooks Books

Productivity Business & productivity Multimedia Content & personalization Shopping lifestyle

Reference Reference & information Music & audio Music Sports & recreation Sports

Social networking lifestyle News & magazines Books Test center Utilities

Sports Sports News & weather Reference & information Themes Content & personalization

Travel Travel Personalization Content & personalization Travel Travel

Utilities Utilities Photography Personal interest & hobbies Utilities Utilities

Weather Reference & information Productivity Business & productivity Weather Reference & information

Reference Reference & Information

Shopping lifestyle

Social lifestyle

Software libraries Utilities

Sports Sports

Themes Content & personalization

Tools Business & productivity

Transportation Reference & information

Travel Travel

Travel & local Travel

Weather Reference & information


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with an enterprise-centric mandate that was in-keeping with the traditional, corporate and e-mail/messaging-focused nature of BlackBerry handhelds.

The plan from the outset was to put less emphasis on volume in favor of the delivery of apps that had a greater “business-level” of quality; the theory being that users would be more inclined to pay money for them. This resulted in a low number of apps relative to Apple’s App Store and far lower monthly growth rate in the number of new apps launched. At the end of 4Q09, almost eight months after the launch of the store, RIM’s

BlackBerry App World contained approximately 4,000 mobile applications.

Over the next 18 months, however, this number grew by 32,000 titles, to a total of 36,000 by the end of 2Q11. Due to the low number of apps at the start of the analysis period, this represented an 800% increment in the size of RIM’s app catalog.

BlackBerry handhelds have also become increasingly popular with consumers in recent years, expanding beyond the original target market of the BlackBerry

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FIg 4Total mobile applications in store: Apple App Store, Android Market and BlackBerry App World, 4Q09-2Q11

FIg 5Android OS version history


NOTE: Figures refer to quarter-end.

BlackBerry App World Android Market Apple App Store

versioN No. lauNcheD coDe NaMe tiMe siNce lauNch Notes

1.0 23/09/08 None n/a

1.1 9/02/09 None 00 year/s 05 month/s 18 day/s

1.5 30/04/09 Cupcake 00 year/s 08 month/s 06 day/s

1.6 15/09/09 Donut 00 year/s 12 month/s 22 day/s

2.0 26/10/09 Eclair 01 year/s 02 month/s 01 day/s

2.2 20/05/10 Froyo 01 year/s 08 month/s 26 day/s

2.3 6/12/10 Gingerbread 02 year/s 03 month/s 14 day/s

3.0 22/02/11 Honeycomb 02 year/s 05 month/s 31 day/s Tablet-only

TBC TBC Ice Cream Sandwich TBC


Services, ecosystem



to an extent that has been a surprise to RIM itself: At the end of 2Q11, 60% of BlackBerry users were private consumers. This has understandably resulted in the launch of many more consumer-centric applications, which are likely to account for a significant portion of the growth in the size of the App World catalog.

The growth in the number of mobile applications offered by RIM is also likely to be boosted, from the second half of 2011 onwards, by the PlayBook which launched in April 2011 with relatively few applications available. Apps are a bonus feature for mobile phones and will always be of secondary importance to the

use of a phone for personal communications (making calls, sending texts, etc.). But for tablet computers, apps constitute the entirety of their software portfolio and, therefore, the value proposition of the device.

The PlayBook is an OS-specific device and, as demonstrated for many years by the desktop computing market, the success of any operating system is based entirely on the variety and quality of the software that is available to run on it. For the sake of the competitiveness of the device, the number of PlayBook apps in the Blackberry App World is expected to grow considerably; until the much-lauded PlayBook Android

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FIg 6Monthly net addition of apps: Apple App Store, Android Market, BlackBerry App World, Jan-10 to Jun-11

FIg 8Apple App Store, linear trend of monthly net addition of apps, Jan-10 to Jun-11

FIg 7Android Market, linear trend of monthly net addition of apps, Jan-10 to Jun-11

FIg 9BlackBerry App World, linear trend of monthly net addition of apps, Jan-10 to Jun-11





NOTE: Figures refer to month-end.




Apple App Store Android Market BlackBerry App World

linear growth trend Apple App Store

linear growth trend Android Market

linear growth trend BlackBerry App World

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Player becomes available, the store is the only source for users to acquire PlayBook software.

Monthly net additions by storeNet additions represent the difference between the total number of apps from one quarter to the next, in absolute terms – after taking into account both new apps launched and those that have been discontinued. Consequently net-addition figures can be adversely affected by the periodic clearing out of large numbers of discontinued apps. It is therefore important to note that a lower rate of net additions need not necessarily mean that the number of new apps launched each quarter is tailing off, or that a given store is losing popularity.

Of the three stores analyzed, it is the Apple App Store that is still experiencing the largest net additions, up to 20,000 new applications per month (see fig. 6). However, the variability in its number of net additions is also increasing. Throughout the 18-month period analyzed, the number of new apps added to Apple’s catalog was sometimes as low as six or seven thousand per month. This has meant that there have been times when the Android Market actually experienced greater absolute net additions than the App Store, despite the Android Market still only having a catalog that was half as big as of the end of 2Q11.

While the Android Market has also experienced notable variation in the number of new apps published each month – ranging from 4,000 to 17,000 – the general trend throughout the 18-month period analyzed has seen monthly net additions grow from an average of 8,000 at the start of the period to 14,000 by the end (see fig. 7).

Meanwhile the general trend for Apple’s App Store is that the number of monthly net additions is now gently falling, from an average of 19,000 at the start of the period to 12,000 at the end (see fig. 8).

Of the three application stores analyzed, the BlackBerry App World has experienced the lowest net additions in absolute terms, the greatest single number of apps added during the 18-month period analyzed being 4,000, which is equal to the lowest number added by either of the other stores during any given month. However, the BlackBerry App World has shown by far the most consistent positive growth trend of the three with the lowest monthly fluctuation from that trend. At the start of the analysis period, the BlackBerry App World experienced monthly net additions of 600 apps, rising to an average of 3,500 by the end – with a clear trend to show that the size of its monthly net additions will only continue to grow (see fig. 9).

Month-on-month growth by storePercentage growth rates represent the change in the total size of a store’s app catalogue relative to the previous month after all net additions have been taken into account. The larger a store’s existing catalog, the smaller this percentage tends to become over time as, even if the number of monthly net additions remains consistent, they will come to account for an increasingly small proportion of the overall total.

Consistent monthly growth percentages indicate that, despite the increasing size of the store, monthly net additions are getting larger at a rate that is sufficient to offset any such percentage decline. Meanwhile, an increasing growth rate is indicative of an especially large increase in the number of net additions and is most usually observed when a store is new and/or when the total number of apps in the store is numerically low.

As the Apple App Store has largest app catalog – double the size of closest rival the Android Market at the end of 2Q11 – it is not surprising that it has experienced a declining growth rate despite still having some of the largest monthly net additions in absolute terms. The monthly growth rate of the App Store catalogue has gone from 16% at the start of the 18-month period analyzed here to approximately 4% by the end (see fig. 10).

Because the Android Market was less mature in the size of its app catalog at the start of the analysis period and has since grown rapidly, it has actually experienced the greatest percentage decline of the three stores in month-on-month growth rates over these 18 months (see fig. 11).

Although substantial net additions resulted in a large initial percentage growth rate, and even though those net additions have continued to increase in absolute terms, the monthly growth rate of the Android Market’s apps catalog fell from 45% in 4Q09, to stabilize at around 9% in 2Q11 (see fig. 12).

lastly, the BlackBerry App World has experienced the steadiest growth over the 18-month period and is the only store with a percentage growth rate that has, on average, actually increased a little. This is indicative of an extremely healthy rate of net additions relative to the pre-existing size of the store. As the Blackberry App World is a more specialist ecosystem, with an OS that is less dependent on third-party apps, it experienced an average month-on-month growth rate of around 12% at the start of the analysis period, which by the end had risen to 13% (see fig. 13). Unlike the Android Market,

Services, ecosystem



the App World’s percentage growth dynamic has not so much due to it being a less mature ecosystem at the start of the analysis period and more about it simply being a smaller one.

CONtENt MIx tRENDS

Apple App StoreThe make-up of the App Store’s content mix was already well-established at the start of the analysis period; since then, there has been very little fluctuation in the percentage of total apps that each category accounts for (see fig. 14). The single largest category of applications is games and has been ever since the launch of the store.

Games accounted for 15.4% of the App Store’s catalog at the end of 2Q11, a percentage share that was very slightly lower than at the end of 4Q09, when they accounted for 16.5%. The next-largest application categories are books and entertainment, with a 13% and 11% share, respectively, of the store’s catalog. The top six of the 14 categories defined by Informa Telecoms & Media accounted for two-thirds of all the content in the Apple App Store as of the end of 2Q11 (see fig. 15).

The category that experienced the greatest change has been entertainment which, by the end of 2Q11, accounted for 3.6 percentage points less of the store’s catalog than at the start of the analysis period. Meanwhile, the categories to have experienced the

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FIg 10Apple App Store, monthly percentage growth of total apps, Jan-10 to Jun-11

FIg 11Monthly percentage growth of total apps: Apple App Store, Android Market and BlackBerry App World, Jan-10 to Jun-11


linear growth trend Apple App Store Android Market BlackBerry App World Apple App Store

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FIg 12Android Market, monthly percentage growth of total apps, Jan-10 to Jun-11

FIg 13BlackBerry App World, monthly percentage growth of total apps, Jan-10 to Jun-11


linear growth trend Android Market linear growth trend BlackBerry App World

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greatest increase in their share have been lifestyle, education and business & productivity, all of which increased their share of total apps by around two percentage points during the analysis period. But all changes in Apple App Store’s content mix have been minimal. The greatest change actually occurred before the analysis period in the six months from the end of 4Q08 to the end of 2Q09 the percentage share of books as a category rapidly increased from 5% to 13%. This was mainly at the expense of the games category, which fell from 23% to 18% of all App Store content.

The Apple App Store is also notable by being the only one of the three stores that does not have a content & personalization category. The proprietary iOS does not allow users to modify the look and behavior of the operating system. This is only possible if the device is “jail-broken”.

Android MarketDespite its app catalog having grown in size by more than 1,100% during the 18-month period analyzed here, the content mix of the Android Market has remained remarkably consistent. The biggest changes have been caused by the introduction of new categories and the subsequent classification of new apps into categories that would have once formed part of another. At the

end of 2Q11, games constituted the single largest application category in the Android Market with a 17% share (see fig. 16). As with the Apple App Store, a minority of the app categories account for the bulk of all store content: The top six ranking application categories – games, books, business & productivity, entertainment, content & personalization and lifestyle – represent 82% of all Android Market apps.

There is a less even distribution between the 14 categories identified by Informa Telecoms & Media in the Android Market than the Apple App Store. The apps fall into two distinct tiers: the top six that all have a share of between 17% and 12%, and the rest with shares of between 5% and 1% share.

The largest single change within the make-up of the Android Market has been the introduction and growth of the books category. At the end of 4Q09, no books were reported as being in the store, but, after the introduction of the category, it rose over the 18-month period to become the second-largest with a 14% share (see fig. 17). There has also been a marked growth in the number of music and education apps, from nothing to a 2% and 3% share, respectively. In tandem with this, the size of the reference & information category has declined greatly, from a 9% share at the end of 4Q09 to

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FIg 14Apple App Store content mix over time, 4Q09-2Q11



Games

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just 1% by the end of 2Q11, making it likely that many of these apps have since been reclassified.

BlackBerry App WorldThe content mix of the BlackBerry App World has followed a very different trend from that of the Apple App Store and the Android Market. At the end of 4Q09, games were by far the largest category with a 27% share but, by the end of 2Q11, its share was only a third (9%) of what it had been at the beginning of the analysis period. During the 18-month period, the books and the content & personalization categories grew to become the two largest with a 31% and 24% share, respectively, at the end of 2Q11. Most of the other application categories maintained a consistent share of the total number of apps (see figs. 18 and 19).

This trend could be down to the specific limitations of BlackBerry handhelds and the Blackberry OS for

supporting games. Games are the most popularly downloaded type of paid-for mobile application and it is common for the same games to be released in numerous stores. A great many games, however, have been conceived with a touchscreen interface in mind rather than a keypad. As the only BlackBerry model to feature a touchscreen is the Torch, this may have resulted in the introduction of fewer new games titles for the BlackBerry App World compared with its other content categories.

SHARE OF AppS By CAtEgORy

By taking the 14 mobile application categories identified by Informa Telecoms & Media and adding the figures for each store together, it is possible to see which categories are the largest overall – as well as what the distribution of them is between the three

FIg 15Apple App Store content mix, 2Q11

FIg 16Android Market content mix, 2Q11

Games ................................................. 16%

Books ................................................... 13%

Entertainment .................................. 11%

lifestyle ................................................. 9%

Reference & information ................. 9%

Education .............................................. 9%

Business & productivity ................... 6%

Utilities ................................................... 6%

Travel ...................................................... 6%

Health .................................................... 4%

Music ...................................................... 4%

Personal interest & hobbies ........... 4%

Sports ..................................................... 3%

Games ................................................. 17%

Books ................................................... 14%

Business & productivity ................ 13%

Entertainment .................................. 13%

Content & personalization .......... 13%

lifestyle .............................................. 12%

Travel ...................................................... 5%

Health .................................................... 3%

Education .............................................. 3%


Music ...................................................... 2%


Utilities ................................................... 1%

Sports .................................................. <1%

NOTE: Figures refer to quarter-end. NOTE: Figures refer to quarter-end.


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FIg 17Android Market content mix over time, 4Q09-2Q11

FIg 18BlackBerry App World content mix over time, 4Q09-2Q11





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Music


Utilities

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Books

Content & personalization

Games

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94 ©2011 Informa. All Rights Reserved. Industry Outlook 201294 ©2011 Informa. All Rights Reserved. Industry Outlook 2012

stores. It should be noted that such totals do not represent the number of unique applications, however, as a great many titles are likely to have variants available for download within each store.

Across the Apple App Store, Android Market and BlackBerry App World, a total of more than 670,000 mobile applications were available at the end of 2Q11 (see fig. 20). Of these, the largest category was games which accounted for 16% of the total (over 104,000 apps): 62% of these games were published through the App Store, 35% via the Android Market and 3% through the BlackBerry App World. It is unsurprising that games should constitute the largest portion as mobile phones are a constant companion to the user and re-playable entertainment is often sought to pass the time when travelling.

What might be more surprising is the commonality of books as an application category, despite the fact that the screen of a mobile phone does not seem ideal for lengthy reading sessions. The rise of the books category to a prominent position within each of the three application stores is also notable as it predates the launch of the Apple iPad, BlackBerry PlayBook and Android tablets by a considerable amount of time. But perhaps the build-up in the sizes of each store’s book categories was in deliberate anticipation of their launch.

The book category is nearly as large as that for games, accounting for 15% of applications published across the three stores (just under 98,000 apps). The Apple App Store accounts for the greatest share with 58%, followed by the Android Market at 31% and the BlackBerry App World with 12% – the second-largest share of any individual category for the BlackBerry App World.

Unsurprisingly, the far greater size of the Apple App Store catalog means that it is responsible for publishing the majority of nearly every application category. This is with the exception of content & personalization, for which no category exists within the App Store, and (more interestingly) business & productivity applications. The Android Marketplace is the dominant home of content and personalization apps, due to the customizable nature of the OS, and it also hosts the most business & productivity apps with a 50% share of the total.

INFORMA vIEWpOINt

Despite the high number of apps added to each application store over the 18-month period – in actual net additions and overall percentage increase – the

content mix of each store has remained remarkably constant. Consequently Informa Telecoms & Media has no reason to believe that this mix will change during the foreseeable future. The commonality with which apps are created for each content category appears to have become set.

Similarly, there have been no indications to date that the growth of each store in terms of apps hosted has started to plateau. Enthusiasm in the smartphone market shows no signs of abating and the developer communities for each store’s ecosystem are set to continue growing in the number of developers that are involved, the number of new apps submitted and the overall size of each store’s catalog.

As an application category, games is strong across all three stores, albeit less so for the BlackBerry App World. If there is truth in the supposition that 1) many mobile games are designed for touchscreen interfaces and

FIg 19BlackBerry App World content mix, 2Q11

Books ................................................... 31%

Content & personalization .......... 24%

Games .................................................... 9%

Utilities ................................................... 6%

Business & productivity ................... 5%


Entertainment ..................................... 3%

Music ...................................................... 3%

Travel ...................................................... 3%


Health .................................................... 2%

Education .............................................. 2%

Sport ....................................................... 2%

lifestyle ................................................. 2%



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www.informatandm.com ©2011 Informa. All Rights Reserved. 95www.informatandm.com ©2011 Informa. All Rights Reserved. 95

2) games developers are likely to produce variants of the same product across each store, then the advent of the BlackBerry PlayBook may result in an increase in representation of the games category in the App World. But, either way, games will continue to be a driving force for mobile application stores and in the attractiveness of owning a phone that is capable of accessing the catalog of a store.

During the 18-month period, there has also been a ubiquitous growth in the strength of books category across all three stores. E-books as “apps” are not so much software as content – content that is text-based and which is readily compatible and easily viewable on a wide variety of devices. This makes it easy to publish books across many application stores with minimal additional effort. The proliferation of books may not necessarily be due to their popularity for download to mobile phones, but rather on their relative ease of creation.


FIg 20Share of apps by category: Apple App Store, Android Market and BlackBerry App World, 2Q11

category total aPPs share oF total (%) share oF each category (%)

APPLE APP STORE ANDROID MARKET BLACKBERRy APP WORLD

Games 104,169 16 62 35 3

Books 97,886 15 58 31 12

Entertainment 74,336 11 61 37 2

lifestyle 66,221 10 59 40 1

Business & productivity 55,619 8 47 50 3

Education 44,709 7 83 15 2

Reference & information 41,300 6 90 5 4

Content & personalization 36,145 5 0 76 24

Travel 34,868 5 68 29 3

Utilities 29,337 4 86 7 7

Health 25,133 4 69 28 3

Personal interest & hobbies 23,873 4 68 27 4

Music 22,603 3 76 18 5

Sports 14,397 2 95 0 5

total 671,596 63 32 5


Services, ecosystem



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However, the rollout of faster fixed and mobile broadband access networks is allowing operators to offer higher speeds and a better quality of service. Many are also bundling in content such as music or video with high-end price plans. Operators are eyeing connected devices as a potential new revenue stream and the embedding of lTE in tablet computers should help to increase the share of devices that are sold with cellular price plans.

Rural broadband connectivity has become an important policy initiative for many governments and a new revenue stream for network operators rolling out lTE in lower-frequency bands.

Beyond broadband connectivity, many of the new revenue opportunities today sit in the business and enterprise sector. Enterprise mobility is starting to gain momentum, driven by mobile operators facing saturation in the consumer market. But Informa Telecoms & Media believes that a bigger opportunity lies in using new technologies and platforms, such as cloud computing, Ethernet and M2M, to serve specific needs within different small, medium and large enterprises.

Operators are now (slowly) starting to develop vertical solutions using a combination of fixed and mobile technologies and platforms that go beyond the provision of traditional telephony and data. In sectors such as healthcare, utilities and automotive, operators are looking to provide solutions and services that help to increase efficiencies and drive new revenue growth.

OpERAtORS HAvE StRUggLED IN RECENt yEARS tO DEvELOp COMpELLINg NEW SERvICES FOR tHEIR RESIDENtIAL AND

BUSINESS CUStOMERS. WItH tHE RISE IN tHE pOWER AND pOpULARIty OF OvER-tHE-tOp pLAyERS It IS NOt gOINg tO gEt ANy EASIER tO INNOvAtE IN tHE CONSUMER MARkEt. IN tHE MEANtIME tHE DOWNWARD pRESSURE ON vOICE pRICES MAkES It DIFFICULt FOR OpERAtORS jUSt tO StAND StILL.

Seizing new revenue opportunities


INtRODUCtION

Securing growth: It’s the background tinnitus that is plaguing telecom executives worldwide. But must operators pursue growth at all costs? A more mature view now prevails where profit margins receive closer scrutiny – as do the operational investments required to deliver growth efficiently. Not least, greater customer intimacy and empowerment investments are expected to win the day. Yet operators still hope that services based on unfamiliar technologies – namely lTE and cloud computing – will drive revenue growth in 2012.

gOOD, BAD AND UgLy: OpERAtORS pRIORItIZE CUStOMER typES

Consumers and medium-to-large enterprises are priority customer segments for telecom operators. Upsell and cross sell will be the principal methods used to drive growth with more stringent segmentation methods. Just under a half of the operators aim to white-label services from third parties. Nevertheless, sell-to models will dominate, although there’s a rising interest in sell-with and sell-through channel approaches. For most operators, meanwhile, joint venturing will remain a minority activity.

The SoHo and smaller enterprise are often viewed as problematic. Many operators are still wrestling with the realities of high customer acquisition costs versus perceived lower customer lifetime value in these “mass market” segments. Yet this is a contradiction in Informa’s view, since SoHos and small enterprises are highly mobilized and there is high potential to grow ICT wallet share in these capex-averse segments with bundled communications and cloud-based apps.

CUStOMER EMpOWERMENt: NOt jUSt A MANtRA, A MANDAtE

Seven out of 10 operators put customer experience management as their number-one operational investment priority. That’s logical as they seek to retain and expand wallet share in their priority customer segments. Empowering the customer through self service stands in second place: The days of dictating bundles may soon be over versus “pick ’n mix”, with more predictive understanding of what customers will ask for via business analytics.

But how will operators achieve this level of service management flexibility? legacy systems and

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processes may not be able to adapt. That’s why a third of operators highlight a move to cloud-based operations as a priority. On-demand, self-service, per-use consumption models need a back office to match: Informa believes that actors in the cloud-enablement landscape will continue to multiply, as existing billing and operational support system vendors like Amdocs recognize the threat from nimble upstarts like Zuora.

LtE AND tHE CLOUD: FAItH OR FOLLy?

lTE and cloud computing are the top two technologies expected to drive revenue growth, with fiber-to-the-X coming in third and machine to machine (M2M) a more distant fourth. But only a handful of operators have deep experience of either lTE or cloud computing: Is this faith or folly?

With tens of billions committed to buying or building lTE and cloud-computing infrastructure during 2011, few operators would dare to admit any concerns publicly. But Informa urges caution: Both lTE and cloud computing still have technical and commercial issues to

iron out; sound business models are in their infancy and many are unproven.


The customer will be king in 2012 – and operators will invest to make it so. However, operators are placing big bets for revenue growth in 2012 that involve unproven technologies. That’s a risk, but greater operational efficiency and associated systems should provide a better ability to speed service launches and track success.

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HIgHLIgHtS

• Competitivetrain-operatorcompanies(TOCs)areinvestinginonboardWi-Fitowinpassengersfromtheair,theroadandotherrailoperators.Indoingsotheyarerespondingtocustomers’growingexpectationsofubiquitousconnectivity–amongbothbusinesstravelersandconsumers.

• MNOsaremotivatedtoextendcellularcoverageonintercityroutesthathaveahighdensityofsmartphone,tabletandlaptopusers.Hot-spotInternetaccess,gaming,voiceandbackhaulcandeliverareturnoninvestmentwithintwoyears.

• ATOCcarrying100,000passengersadaycouldgenerateUS$10-15millioninannualhot-spotrevenue.

• Acombinationofcellularandsatelliteconnectivityisnecessaryforviablebroadbandservicewhentravelingathighspeeds.Specializedskillsareneededinnetworkandantennadesignandknowledgeofrailstandardsineachcountry.

• LTEwillchallengesatelliteinthehigh-speedrail(HSR)market,thoughnetworkcoveragewillbepatchyforatleastthenextfiveyears.Meanwhile,satelliteremainstheonlyfeasibleoptionfortrainspeedsinexcessof250kmph.

• Vendorshaveatoughchallengeinterfacingwithbusiness-development,marketing,operationsandengineeringbuyers.ManyTOCswere/arestate-ownedmonopoliesandareengineering-ledandconservativebynature.

• VendorscanstrengthentheirvaluepropositionbyhelpingTOCsdevelopskillsinmarketing,contentandmediaselling.Additionally,vendorsshouldemphasizetheefficiencygainsthatautomatedtrainoperationsandimprovedfreightlogisticscanbring.

• LTEwillbeintroducedinitiallyforwirelessbackhaulandthengraduallyaspartofmixedcellularaggregation.Theall-IP,converged-networkvisionfromgroundtotrainremainsfiveyearsoff.

INtRODUCtION

The “connected train” is thundering into view as evolving wireless-broadband technology presents train-operator companies (TOCs) with a reliable, cost-effective alternative to satellite. TOCs in competitive markets are seeking to lure passengers away from road and air, as well as from rival rail companies. The ability to access the Internet on the move is the most commonly requested value-added service, according to passenger surveys.

Ground-train communications based on satellite, 3G and 4G technologies provide enough capacity for Internet access, online gaming, more reliable voice service, and ancillary retail services, such as e-ticketing and security CCTV (see fig. 1). A market is therefore developing for vendors, MNOs and specialized systems integrators to overcome the technological challenges and supply whole fleets of rolling stock (see fig. 2).

RESEARCH SCOpE AND MEtHODOLOgy

In a series of analysis pieces, Informa Telecoms & Media is investigating the opportunity offered by the “connected train,” high-speed rail services that offer broadband connectivity for passengers. Connected-train opportunity review: passenger services analyzes the characteristics of the connected-train market and gives an overview of each technology option.

Analysis of market trends is provided to inform the rail strategies of cellular, satellite and private network-communications providers, communications-equipment vendors and integrators. Research is focused on business models that use ground-train communications to provide broadband passenger services. In-station services are excluded. Cost savings from operations and safety applications will be addressed in a later report.

lTE is an important consideration of this analysis as an

the connected train: opportunity review of passenger services

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enabler of cost-effective, broadband connectivity for fast (long-distance service at speeds typically greater than 160kmph for some portion of the journey) and even high-speed (service at speeds of at least 250km [155 miles] an hour for some portion of the journey) trains. This report considers the benefits of lTE, in relation to other technologies, in accelerating deployment of passenger services on trains and the potential payback as networks come online.

MEtHODOLOgy

Analysis is based on a review of 300 existing and proposed fast and high-speed rail routes in 45 countries, plus interviews with connectivity providers. This analysis is combined with Informa’s database of lTE rollouts by country and frequency band; forecasts of global mobile broadband demand; and database of backhaul pricing and base-station costs. Evidence from existing routes and early connected-train

deployments are used to develop a model of pertinent characteristics. The refined model forms the basis of a tool to help connectivity providers identify investment opportunities.

MARkEt CONtExt

Broadband passenger services will become commonplace on long-distance and commuter rail in developed markets. Train operators must add value to their travel service in order to seize market share from air and road transportation. Internet access on the move is not only for business-class passengers on the latest bullet trains. With the growing proliferation of smart consumer devices (see fig. 3), travelers of all kinds are reluctant to be offline for any prolonged period.

Investment in rail infrastructure in fast-growing economies will drive passenger services more selectively. Wi-Fi use is less developed in China, India

Satellite ground station

Aggregationpoint

Accesspoint

Base station Base station Base station Base station

Accesspoint

Internet

Train access point Train access point Train access point

FIg 1Typical connected-train architecture

Source: Informa Telecoms & Media, Fokum & Frost (2010)

Seizing new



and Brazil, though mobile operators are embarking on mass network deployments (see fig. 4). On-train Internet access will appear predominantly on flagship intercity services that carry a high proportion of business travelers and smartphone users between centers of commerce. local competition from air and road is necessary to bring external pressure to bear on dominant monopoly operators.

pASSENgER-SERvICES BUSINESS MODELS

In developed markets, consumers are accustomed to free Internet access in cafes, hotels and other commercial locations. Informa estimates that TOCs have seen only modest take-up of 3-5% for paid-for, on-train hot-spot services. However, the rate will increase as connections become faster and more reliable, more passengers carry smartphones and TOCs become sufficiently confident in the quality of the offering to promote the service more prominently.

TOCs must sustain a paid-for model in order to cover costs and give cellular operators an incentive to invest in reliable coverage. Free service can be offered for a short period after launch in order to promote the service and iron out any technical wrinkles under load. Thereafter, a per-hour or similar fee is necessary on intercity routes where most passengers are occasional. Regular commuters will require a subscription deal for daily, short-period use.

MNOs will seek exclusive hot-spot rights and seek to retain service revenue. Rather than rely solely on per-use revenue share, many TOCs offer “free” unmetered access as an inducement to upgrade to first-class travel, which Informa’s sample analysis indicates costs an average of 60% above standard. For example, since introducing free Internet access, fast-train operator SJ of Sweden reports a 4% increase in first-class ticket sales and 25% take-up of the service among these travelers.

East Coast Trains in the UK reported a 30% year-on-year rise in first-class passenger journeys in July 2011 after overhauling its service package, which includes free Wi-Fi. Standard-class passengers have 15 minutes’ free access and then pay £4.95 (US$8) an hour for the 3G/HSPA aggregated connection. However, the impact of free Wi-Fi is not isolated from the introduction of complementary food and drink and changes to East Coast’s train schedule.

Italian HSR service Frecciarossa and Amtrak’s Acela in the US are exceptions in extending free Internet access to all passengers beyond the initial trial period. Amtrak

reports that 49% of passengers have used the Wi-Fi service since launch in March 2010.

Passenger rail is relatively underdeveloped in the US. Amtrak’s immediate goal is therefore to increase ridership on its flagship route between Boston and Washington, DC, and claims a 2% increase in travel revenues as a direct result of the Wi-Fi service. One consequence of a free service is the strain on capacity, and Amtrak caps passenger download to 3.5Mbps to curb bandwidth hogging.

Passengers typically pay an additional 25% on top of the per-hour travel cost to access the Internet. The ratio of price per hour of Internet access to price per hour for travel is fairly consistent across a sample of similar-length, intercity journeys (see fig. 5). This sample of fast and HSR train journeys represents about a quarter of all TOCs worldwide that offer on-board Wi-Fi today.

A fairly consistent relationship is apparent between major European HSR operators TGV, Thalys and ICE, with hot-spot access at 22-25% of the per-hour travel rate (see fig. 6). The fast-train service of state-owned SJ is a clear outlier, with hot spot access nearly twice the

FIg 2Opportunities for connectivity providers, equipment vendors and integrators

techNical challeNges suPPlier oPPortuNity

Connectivity to train moving at high speeds

Specialized integration, equipment and network design; cellular, satellite, private and licensed backhaul

Frequency shifts because of Doppler effect; rapid and variable base-station handoff; multiple wireless interfaces; multiple spectrum bands

Multi-SIM gateway and aggregation; smart antenna design; roaming agreements and RAN sharing

Scarce spectrum; patchy coverage in rural areas; increasing bandwidth demands; variable peaks

Spectrum-efficient network and cell-site design

Safety, reliability, redundancy requirements

Certification; ruggedized equipment; backup networks

Harsh environment in terms of weather, electrical interference, vibration, heat, dirt, metal carriages and metalized glass windows

In-train lAN and antenna design; ruggedized equipment

Tunnels and bridges Repeaters, WiMAX-over-fiber; mesh networks; leaky feeders; compact antennas

legacy operations and communications systems

Professional services for migration to converged networks


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price per hour as travel. This reflects the exceptionally low price of rail travel in Sweden, whereas hot-spot access is only slightly below the sample average at the equivalent of US$4 an hour. Japan’s Shinkansen is an exception in the other direction, with the cost of travel comparably high and the price of NTT’s hot-spot access low on a per-day basis (US$5). A yearly subscription is lower still, taking into account that most passengers are commuters on the high-speed service into Tokyo.

A national TOC carrying 100,000 passengers daily could generate US$10-15 million in annual hot-spot revenue. The choice of hot-spot business model depends on the relative value of the service to the host and to the hot-spot provider. A TOC that carries hundreds of thousands of passengers a day on journeys averaging over an hour will generate tens of millions of dollars a year in hot-spot revenue. Trains, like airports, thus qualify as a “premium location” for exclusive hot-spot providers.

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FIg 3Annual smartphone data usage, 2009-2015

FIg 4US and fast-growing economies, number of public Wi-Fi hot spots



Asia Pacific Europe North America latin America

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FIg 5Price per hour of travel and on-train broadband Internet access

FIg 6Internet-access cost as % of travel cost per hour

rail coMPaNy aPProxiMate hourly Price oF travel

aPProxiMate hourly Price oF travel (US$)

aPProx. hourly Price oF travel (US$, BASED ON PURCHASING-POWER PARITY)

cost oF hot-sPot iNterNet access

hourly iNterNet-access cost as % oF hourly ticket cost

Thalys (multiple operators, Europe) € 30 42.77 37.08 €6.50 for one hour; free 1st class 22

TGV (SNCF, Europe) € 20 28.51 24.72 €4.99/hour 25

ICE (Deutsche Bahn, Germany) € 22 31.36 27.03 €4.95/hour (non-T-Mobile customers) 23

Virgin Trains (UK) £14.41 23.55 22.10 £4 for one hour; free first class 28

Japan Railways (Shinkansen) ¥5,438.71 70.52 49.00Approx. US$5/day = US$1.94/hour for 2hr 35min journey

3

National Express (UK) £4.44 7.26 6.81 £2.95 for 4 hours 16

SJ (Sweden) SEK40.71 6.38 4.50 SEK39 for 30 minutes 190

NOTE: Currency conversions as of 4-Aug 11. PPP from OECD, 2010. Tickets are one-way, one month in advance, standard class, between two major cities, similar journey times, departure

around 9am Monday, online price directly from rail operator.


Hourly price of travel (US$, based on purchasing-power parity)

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NOTE: Currency conversion from 4-Aug 11; PPP from OECD, 2010. One-way journey, one month in advance, standard class, between two major cities, similar journey times, departure

around 9am Monday, online price directly from rail operator. Some hot spots are charged per hour, others per multiple hours.


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TOCs will demand fees for exclusive rights to premium routes. In the first few years, hot-spot revenue is likely to be shared among MNOs that were willing to invest in additional network coverage. Over time, per-hour access will decline as pricing is more commonly structured as a supplement to commuters’ season tickets and as a loyalty package for repeat business on intercity routes.

For example, Korail in South Korea offers free Wi-Fi service from Korea Telecom in its stations and gives travel discounts to the operator’s subscribers.

When Wi-Fi is established across a TOC’s long-distance and commuter services, a provider may be charged a fee for exclusive rights and be expected to share access and online services revenue with the TOC. The onus is therefore on MNOs to offer additional value – for example, advanced billing and usage metrics to assist the TOC in optimizing its media strategy and advanced security. But end-to-end connectivity management will remain a challenge. Because the ground-train network relies on multiple connectivity providers, independent managed-services providers will seek to retain this role.

Hot-spot fees and a share of revenues are only part of the opportunity for the train operator. TOCs are learning to innovate in content- and advertising-led business models. locally stored pay-per-view films and TV shows are feasible if journey time allows, and travel services, such as taxi booking, are a revenue-share opportunity. On-board ticketing is another connectivity-enabled service that helps drive repeat business. Italy’s

Frecciarossa, for example, offers news, film footage, music, video games and information services from on-board media servers.

Content-led services are a new departure for large train companies whose marketing is traditionally focused on scheduling and pricing. Vendors have an important role to play in encouraging TOCs to develop their skills in buying content and selling sponsorship and media space.

Vendors’ value proposition should also highlight potential savings in operational efficiency. Rail networks have developed over many decades, and disparate operational systems proliferate. Wireless broadband offers an opportunity to improve onboard security and monitoring of train infrastructure (see fig. 7).

Demand for high-bandwidth applications drives backhaul costs for network operators. Among the main applications required on the connected train, passenger Internet services have the highest bandwidth needs, followed by surveillance CCTV (see fig. 8). Retail and operational applications have very low bandwidth usage, but the latter has high requirements of reliability, redundancy and latency. latency is also a consideration where passengers or crew are expected to use VoIP.

BACkHAUL CHOICES

TOCs are investing in a range of connectivity and backhaul options. The business case depends on a range of structural and financial factors: existing-


FIg 7Connected-train applications


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Internet access• Voiceanddata• Travelservices• E-ticketing

Passenger information• Maps,newsandweather,train-location

update, public address system

Fleet management• Crewvoice,dataandmessaging;maps;

real-time engine and rolling-stock performance, GPS location, SCADA, secure access control and CCTV; alarm monitoring, fuel and energy monitoring


network availability, length of route, prevalence of tunnels, line of sight, train speeds, expected capacity needs and value of broadband services.

Trains traveling at high speeds have just a few seconds to achieve handover between base stations. In addition, the train environment is subject to vibration, heat and cold, dirt and high-voltage sparks. A relatively small number of vendors and integrators have built up expertise in this area (see fig. 9). Nomad Digital, Icomera, Nokia Siemens Networks, 21Net, Huawei and Orange Business Services have delivered live solutions to these problems using innovative gateway technology and network design. The market has grown alongside the evolution of wireless technologies, and lTE potentially offers a route for new entrants in the future. However, vendors also need to keep abreast of rail-infrastructure and -safety compliance in each country. Requirements vary regarding the height of bridges and tunnels and whether equipment can share tower space with mission-critical infrastructure, such as GSM-R.

Satellite connectivity is relatively straightforward to deploy but costly to install and rent. Per-Gbps prices are determined ultimately by demand from larger buyers, such as the broadcast media industry, and inherent capacity limits. Mixed cellular backhaul is therefore an essential enabler of today’s connected train. Connection to MNOs’ 3G networks can be switched or aggregated to provide acceptable bandwidth for fast trains on intercity routes traveling at up to 200kmph. Early trials suggest that lTE can provide reliable connection at much higher speeds.

Reliability is improved with increasing cell size and predictive algorithms that use GPS to anticipate changes in network characteristics as the train passes through. Ultimately, performance targets are pragmatic: Unlike train operations, passenger Internet access is considered less than mission-critical, and passengers are expected to tolerate periodic service interruption.

Aggregated cellular connectivity is feasible at sub-200kmph. 3G is widely available from multiple operators and forms the core terrestrial coverage for the connected train at speeds up to 200kmph. HSPA, HSPA+ and lTE promise higher capacity, though coverage in rural areas will remain patchy in most countries at least until 2016. Mixed 3G cellular options are therefore the preferred choice for many train operators, supplemented with WiMAX/FlASH-OFDM for fill-in coverage and redundancy, plus Wi-Fi in stations (see fig. 10).

Three or four MNOs will typically be involved in covering a long-distance link, and investment is then required in cell configuration, repeaters or new sites, and multiband antennas. Connectivity between train and ground can be switched, or more often it is aggregated to provide continuous redundancy. Gateway and routing technology is therefore a competitive differentiator for system integrators.A disadvantage of the aggregated model for MNOs is that their in-train voice coverage remains marginal. The Frecciarossa HSR service of Italy’s state-owned TOC Ferrovie dello Stato (FS) uses on-train repeaters to boost the 3G signals of Telecom Italia Mobile (lead contractor for the installation), Vodafone, Wind and 3. This configuration drives voice and roaming revenue and relies on enhanced signal strength for data service.

Investment was substantial to boost UMTS and HSDPA coverage along the 1,000km route between Naples and Turin. Informa believes the MNOs contributed a total of about €25 million (US$36 million), with FS paying another €25 million to fit out 60 trains with UMTS repeaters and Wi-Fi network. Capex line items included 74 trackside nodes, some with new masts; 100km of new fiber; 600 base stations; 650 Wi-Fi modules; and boosters for 82 tunnels. The partners will seek return on investment from online services such as gaming and gambling, though free data access has been extended.

Satellite is essential for trains of speeds above 250kmph, but cost is a disincentive. Unobstructed Ku-band beams cover whole regions, avoiding costly network-switching or roaming agreements along the route. However, typical aggregate speed is relatively low, at 2Mbps upload, 4-8Mbps download.

FIg 8Data-rate requirements by application

tyPical ProFile tyPical throughPut

Internet access 8-20Mbps download 10-25Mbps

Passenger information service / e-ticketing 0.5Mbps download 1Mbps

Signaling <100Kbps (bidirectional) <100Kbps

Crew voice and data; train control and diagnostics

<1.4Mbps (bidirectional) <1.4Mbps

CCTV 3-6Mbps upload 3-6Mbps


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Regionwide beams are ideally suited for trains on long, cross-border routes at speeds in excess of 250kmph. HSR TOCs such as Thalys and SNCF use bidirectional satellite for high-speed sections and mixed cellular and fill-in options where speeds drop below 200kmph. If Internet access is the primary traffic, satellite can take the role of downlink path, with terrestrial carrying the lower speed upload. However, this configuration precludes CCTV applications, where greater upload bandwidth is required.

Companies providing satellite service to the rail industry include Eutelsat (TGV, France), Hispasat (AVE, Spain; Thalys, Europe), SES (Kazakhstan’s national railway operator) and ViaSat. Specialist integrators of satellite coverage for rail include 21Net, Icomera, Nokia Siemens Networks and Alcatel-lucent.

The disadvantages of satellite relative to mixed cellular and private alternatives are relatively low throughput, loss of coverage in tunnels and in far-north

coMPaNy

21Net

Alcatel-lucent

Alstom

BT

Capgemini

Cisco

Clearwire

Deutsche Telekom

Eutelsat

Garretcomm

Gilat Network Systems

GMV

Huawei

IBM

Icomera

Motorola Solutions

Nokia Siemens Networks

Nomad Digital

Orange Business Services

Phasor Solutions

Telecom Italia

Telent

Telestone

Thales

UDCast

ViaSat

Volo TV

XenTrans

ZTE


FIg 9Vendors and integrators in on-train wireless-broadband market


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geographies, latency and cost. Satellite prices are on a per-megabyte basis, plus supplementary charges for service-level commitments. Ku-band service allows bandwidth to be distributed among different trains, whereas the latest-generation Ka-band service is commonly priced on a fixed-bandwidth, per-terminal basis. Performance may be compromised by heavy rain or snowfall and limited space for roof-mounted dish. The need for dish installation may also extend the time for which a train is out of service.

lTE’s spectrum- and cost-efficiency and exceptionally low latency and high throughput are well suited for the connected train. lTE promises delivery of bandwidth-hungry services with QoS over limited spectrum at the lowest per-megabyte cost.

Nearly 45% of respondents to Informa’s Connected Verticals survey expect lTE to be an important enabler in the transportation industry. Its low latency and efficient use of spectrum are well suited for backhauling an onboard Wi-Fi/Ethernet network that serves hundreds of passengers with Internet access and video services.

Seamless handover between base stations is a challenge when trains pass between cells in just a few seconds. lTE’s relatively large cells, especially in the lower frequency bands (700MHz, 800MHz and 900MHz) are an advantage. In addition, packet switching occurs in milliseconds, whereas circuit-switched cellular technologies lose precious seconds re-establishing connections between one cell and the next.

FIg 10Broadband passenger-services deployments, selected routes

rail coMPaNy tyPe coNNectivity PartNers coNNectivity

Thalys (multiple operators, Europe) HSR Nokia Siemens Networks (project management, WlAN implementation and managed services); 21Net (Hispasat satellite link, customer portal and help desk); Telenet (installation)

Satellite, GPRS, UMTS, HSDPA, FlASH-OFDM, WiMAX (Wi-Fi in stations)

Ministry of Railways (China) HSR Huawei lTE ground-train, in-train GSM/EDGE, TD-SCDMA, lTE, Wi-Fi

TGV Est (SNCF, Europe) HSROrange Business Services (prime contractor, managed services, router, 3G), Eutelsat (satellite), Alstom (Wi-Fi equipment, servers, passenger information service), Capgemini (professional services), coverage Vodafone, Swisscom, T-Mobile

Satellite, 3G, Wi-Fi

AVE (Renfe, Spain) HSR Hispasat, Thales Satellite

ICE (Deutsche Bahn, Germany) HSR T-Mobile (backhaul and hot spot), T-Systems (professional services), Cisco Internet Business Solutions Group (mobile access router, security, etc.) Satellite, 3G, FlASH-OFDM

Frecciarossa (TrenItalia, Italy) HSR Telecom Italia (lead contactor and connectivity managed services), TIM, Vodafone, Wind, 3, Cisco (routers and access points), Andrew

UMTS/HSPA, 2G (on-train 3G repeaters)

Eurostar (Europe, UK-continent tunnel) HSR Not yet announced, Internet access within tunnel from 2012 Not yet announced

NTV (Italy) HSR BT Italia, 21Net Satellite, UMTS, Wi-Fi

Capital Corridor/Amtrak (US) Fast train GBS Group, Nomad Digital 3G, HSPA, EV-DO

Westbahn (Austria) Fast train Nokia Siemens Networks (prime contractor and NOC), Telekom Austria, Orange 3G

Virgin Trains (UK) Fast train T-Mobile, Nomad Digital 3G

National Express (UK) Fast train Icomera, Vodafone, Orange 3G, satellite downlink

SJ (Sweden) Fast train Icomera 3G, satellite downlink

Amtrak Acela (US) Fast train Nomad Digital, Verizon, AT&T, Sprint, T-Mobile 3G, (WiMAX planned)


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Chunghwa Telecom in Taiwan has successfully trialed the technology at high speed with Alcatel-lucent and Taiwan Railways and, separately, with Nokia Siemens Networks. In 2010, Huawei and China Telecom became the first to achieve a stable Internet connection at high speed, achieving aggregate throughput of 30Mbps (peaking at 70Mbps) on a Maglev train traveling 350kmph from Shanghai to the airport.

Huawei’s approach features onboard picocells to extend 3G coverage from the lTE access point throughout the train. This proposed “cell on wheels” provides stable on-train 2G/3G service and gives operators the option of leasing VPNs over a single lTE network rather than deploying multiple trackside cell sites.

lTE rollouts will gradually extend into rural areas and selected rail routes, bringing greater capacity and cheaper backhaul and a connectivity option that could challenge satellite’s position in HSR. Fewer trackside base stations are needed than with the mixed cellular option, and packet switching greatly simplifies handover between cells. However, most lTE rollouts around the world will be patchy for many years, and contiguous coverage will remain a challenge. Although the HSPA 3G variant is fast and IP-centric, it lacks lTE’s seamlessness between access and backhaul networks, which would compromise VoIP performance. The all-IP advantage is therefore limited, because most routes will depend on connection-based 3G for much of the journey.

FILL-IN OptIONS

FlASH-OFDM has found a niche in rail and is effective even at the highest train speeds. Fast low-latency Access with Seamless Handoff-OFDM is an IP-based, proprietary mobile broadband variant and early contender for the 4G label. As with WiMAX, FlASH-OFDM’s modulation scheme uses many narrowband subcarriers simultaneously and thus is effective at correcting for Doppler shifts as a connected train moves toward and then away from the trackside transceiver. T-Mobile has implemented FlASH-OFDM for backhaul on Deutsche Bahn’s ICE HSR, as Nokia Siemens Networks has for Thalys TGV.

WiMAX and FlASH-ODFM require dedicated deployment and are therefore appropriate as fill-in technologies. Although cost effective on a per-megabyte basis, the dense node configuration required is relatively costly, and WiMAX-network providers are becoming more scarce as more spectrum owners turn to lTE. Nomad Digital offers WiMAX as a managed service, along with in-train picocells for enhanced voice coverage.

NTT is a pioneer of WiMAX-over-fiber, whereby the TOC’s trackside fiber acts as a distributed, long-distance WlAN antenna (“leaky feeder”). The fiber carries an optical WDM signal with frequencies that uniquely address a series of access points stationed at intervals. NTT has used the technology on Shinkansen HSR in Japan and trialed it in Taiwan.

Wi-Fi comes into its own in cities and at stations. Although Wi-Fi is effective for connecting to fast-moving trains, the density and cost of trackside nodes precludes its use over long distances. Instead, Wi-Fi is used extensively while the train is in the station, for Internet access and uploading of non-real-time content, such as video clips and travel data.

Wi-Fi is also the basis of the in-train lAN, requiring antennas in each passenger car and externally to connect between cars. Ethernet is a feasible alternative for between-car connection on the latest HSR trains that incorporate coupling of cables between carriages. Trials of fiber-optic coupling are under way, though introduction would be staged, because train carriages are typically in service for 20 years or more.

Tunnels are a costly but not insurmountable challenge. Wi-Fi, wireless mesh and parallel cellular base stations are all effective options. Amtrak’s tunnels around New York Penn Station use wireless mesh equipment from Firetide. WiMAX-over-fiber and other leaky-feeder approaches are also common. For short tunnels, a simpler solution is to position an antenna at either end of the train so that at least one is always outside. Nokia Siemens Networks installed five antennas on Westbahn trains in Austria so that cellular coverage is sufficient to cover the relatively short tunnels between Vienna and Saltzburg.

Eurostar, the tunnel service from london to the European continent, has announced plans to provide Internet access in 2012. However, it has not disclosed its approach for connectivity through 50km of undersea tunnel at 160kmph.

CONCLUSIONS

Relatively few trains are Wi-Fi-equipped today, but smartphone and tablet ownership will drive demand for broadband passenger services. Both business travelers and consumers will have growing expectations of ubiquitous connectivity. Annual hot-spot revenues will be in the order of US$10-70 million for popular intercity routes.

Seizing new



Business models must give MNOs an incentive to invest in optimizing coverage. Informa estimates that high-volume usage of on-train hot spots could deliver a return on investment within two years. However, over time TOCs will insist on fees for exclusive access to passengers.

A combination of connectivity methods is necessary for viable broadband service when traveling at high speeds. Specialized skills are needed in network and antenna design, predictive routing and aggregation. Vendors also need to keep abreast of rail-infrastructure and -safety requirements in each country.

lTE will greatly improve coverage and reliability as rollouts reach more rail routes starting in about 2016. lTE promises higher capacity, faster handover and quality-of-service features. If it proves reliable for trains traveling in excess of 250kmph, it will challenge satellite as the only feasible option today. However, network coverage will be patchy for several years until rollouts are completed. lTE will be introduced initially for wireless backhaul and then gradually as part of mixed cellular offerings. The all-IP, converged-network vision remains some way off.

RECOMMENDAtIONS

• MNOsshouldconsiderextendingcellularcoverageonintercityroutesthathavetherightpassengerprofile:ahighproportionofbusinesstravelersandconsumerswithsmartphones/tablets.

• MNOsshouldaddvaluewithadvancedhot-spotbillingandusagemetricsforTOCs.

• Investmentindirectcellularcoveragemightbejustifiedonsomerouteswhereon-netvoiceserviceandroamingarelucrative.

• Vendorsshouldemphasizeefficiencygainsfromtrainoperationsandimprovedfreightlogistics.Asmorepassengerservicesgolive,convincingmetricswillbecomeavailabletodemonstratethesavingsfromautomation.

• Vendorsmustinterfacewithawideconstituencyofbuyerswithinbusinessdevelopment,marketing,operationsandengineering.TheycanstrengthentheirvaluepropositionbyhelpingTOCsdevelopskillsincontentandmediaselling.

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For more information about the product and a demonstration please contact: Dominic O�ord by email dominic.o�[email protected] or telephone +44 (0)20 3377 3524

www.informatandm.com/net

Use NET to help answer your strategic questions:

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NETWORK ECONOMICS TOOL

956 NET ADVERT-V1.indd 1 8/11/11 10:32:09 AM


kEy pOINtS

• Telefonicaisextendingitssoftware-as-a-service(SaaS)platform,Aplicateca,fromSpaintoLatinAmerica.

• Withstagnantfixed-linerevenues,SaaSprovidesanopportunityfortheoperatortoenableservicedifferentiationbeyondpureconnectivity.

• SaaSprovidesTelefonicawithanopportunitytoincreaseitsfocusonenterpriseofferingsasgrowthengines,especiallyinthefast-growingSMEmarketinLatAm.

• AsafirstmoverinSaaSinnovationandwithanextensivepresenceacrossLatAm,Telefonicaiswellplacedtoexploitthenewopportunity.

• Revenue-sharingmodelsfavoringthirdparties,andthelimitsoftheapplication-supermarketmodel,challengethelong-termsustainabilityofthebusinessmodel.

• NEC,Telefonica’sSaaSvendor,hastheambitiousgoalofincreasingcloudrevenuesinLatAmfromUS$500millionin2010toUS$5billionin2017.

OvERvIEW

Integrated fixed/mobile operator group Telefonica is launching cloud-based software-as-a-service (SaaS) across latin America, based on a platform provided by IT integrator NEC. SaaS will be available initially in the six latAm countries where the Spanish group has fixed-line operations, starting with Argentina and later extended to Colombia, Peru, Chile, Brazil and Mexico (see fig. 1).

Telefonica’s SaaS enables multiple subscribers to access a variety of application services on the same infrastructure. The platform is largely replicating Aplicateca, an SaaS offering that Telefonica launched in September 2009 in Spain and has also made available in Ireland. Applications will cover different areas, including logistics, location, collaboration, virtual PC, CRM, ERP, health, games and media. At the start, the platform will be available only to Telefonica’s fixed-broadband enterprise clients in latAm, but the operator plans to extend it.

StRAtEgIC gOALS

With 152 million mobile lines and 34.5 million fixed lines at end-1Q11, Telefonica is the second-largest latin American operator group, after America Movil. The mobile business remains the major driver of its growth, but mobile voice markets are approaching saturation. Fixed-broadband penetration in the region stands at just 25.2%, and fixed-line broadband and the fast-growing mobile broadband market represent a strategic growth area for Telefonica (see fig. 2).

Although mobile operators seek service differentiation and new revenue streams by offering a variety of value-added services, a low level of investment and low service differentiation mean that fixed-line revenues are stagnant (see fig. 3).

IT services, including cloud computing, increasingly represent an opportunity for service differentiation beyond pure connectivity for fixed-line operators. Furthermore, given the abrupt decline of the Spanish economy, for Telefonica the need for growth and service differentiation in latAm is becoming even more important. In 1Q11, over 70% of Telefonica’s group revenues were generated outside Spain. In the quarter, Telefonica latAm accounted for 45% of group revenues (€7 billion, or US$10.1 billion), with its revenues growing 26% year-on-year, while Telefonica Spain’s revenues declined 5.6%, to €4.3 billion.

Cloud computing, specifically SaaS, also represents an opportunity for Telefonica to refocus on the enterprise market – especially SMEs – as a growth engine. The Inter-American Development Bank estimates that in latin America, SMEs account for more than 95% of all companies, contributing 60-70% to employment and 20-35% to GDP. SaaS clearly represents an important opportunity to serve a growing and dynamic regional SME market.

A key strategic priority, in Europe and latAm, is to provide multidevice access to SaaS. The way this

telefonica targets SME growth in Latin America with SaaS

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strategy will be deployed will largely depend on the strategic choices of each local unit. In Spain, the Aplicateca platform already promotes mobility, and all applications are compatible with mobile Web browsers. The Spanish version of Aplicateca, for example, is offering the same location-based GPS application for fixed and mobile. In Chile, according to the operator, Telefonica should be able to offer a fully integrated fixed and mobile SaaS offering within a year of launch. The extension of SaaS to mobile follows the convergence of fixed and mobile operations, which Telefonica is integrating under the Movistar brand across the region.

Telefonica has a medium- to long-term strategy to extend services from SMEs to corporate customers and

eventually to consumers, positioning cloud services as a mass-market offering. Services such as file storage and game-hosting are examples of cloud-based mass-market services that telecoms operators could offer to consumers.

BUSINESS MODEL

like Aplicateca in Spain, Telefonica’s SaaS offering for latAm follows the supermarket model. The SaaS platform is a preselected set of applications from a trusted provider that serve the needs of specific vertical industries. Under the model, Telefonica resells to SMEs seamless access to relevant applications. The operator has not said how many applications the platform will

VenezuelaTelefonica Moviles

EcuadorOtecel

GuatemalaTelefonica Moviles

PanamaTelefonica Moviles

El SalvadorTelefonica Moviles

NicaraguaTelefonia Celular

Costa RicaAzules y Plata

UruguayTelefonica Moviles

ArgentinaFixed unit: Telefonica

Mobile unit: Telefonica Moviles

PeruFixed unit: TelefonicaMobile unit: Telefonica Moviles

MexicoFixed unit: Telefonica

Mobile unit: Telefonica Moviles (fixed-wireless)

ChileFixed unit: TelefonicaMobile unit: Telefonica Moviles

BrazilFixed unit: TelespMobile unit: Vivo

ColombiaFixed unit: Telefonica Telecom

Mobile unit: Telefonica Moviles

FIg 1Telefonica’s footprint in Latin America


NOTE: With the exception of Brazil, Telefonica is using the Movistar brand for fixed and mobile operations across its footprint. Telefonica acquired a license to operate a mobile network in

Costa Rica in early 2011. Commercial launch is expected in early 2012.

Mobile unit Fixed unit

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offer in latAm upon launch, but the goal is to have “hundreds” within the first year.

For latAm, the operator expects to see strong take-up of the same applications that were most popular in Spain, primarily location-based GPS services, accounting and financial, e-learning and training, and

online-store applications. NEC and Telefonica, however, state that in the region there is a clear requirement to offer applications that respond to the specific needs of local markets. Telefonica is giving each operating unit freedom to choose local partners to respond to local requirements. In Chile, for example, up to half of the application portfolio will be made of locally

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FIg 2Latin America, Telefonica subscriptions, 1Q10-1Q11

FIg 3Latin America, selected countries, Telefonica fixed-telephony and broadband revenues, 1Q10-1Q11

Source: Telefonica quarterly reports

Fixed-line telephony Broadband Mobile Pay TV Mobile Broadband household

Brazil Argentina Chile Peru Colombia

NOTE: Fixed-wireless revenues for Mexico were not available. €1=US$1.44

Source: Telefonica quarterly reports

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relevant applications. Therefore, a key focus for each Telefonica operating unit will be on identifying local SaaS vendors, which can provide both the “localization of applications” and the language support needed by local SMEs.

The need for local partnerships also relates to the revenue-share model that Telefonica will be able to implement with small SaaS vendors. The SaaS revenue-sharing model needs to be flexible enough to work as effectively with local players as it would with large application providers, such as Salesforce. A large part of SaaS revenues goes to application providers and technology vendors. Informa Telecoms & Media estimates that operators typically keep a third or less of contract value on many SaaS revenue-share deals.

As for pricing, SaaS will be offered to SMEs under either a pay-monthly or a pay-as-you-go model, enabling users to pay only for the tools or services they need without making any initial investment. Telefonica provides the platform but is leaving the choice of payment model to local operating units. Another distinctive aspect of the SaaS offering in latAm is that applications will be priced in local currency – a practice called “pesification” – and prices will be generally lower in latAm than in Spain.

MARkEt pOSItIONINg

Cost saving is the major advertised benefit of the SaaS platform. SaaS promises to fulfill the needs of SMEs by offering low-cost and easy-to-use applications. In this way the platform effectively becomes a value-added service for enterprises, enabling them to transform capex, the fixed cost of multiple software licensing, into opex, an operational cost associated with software on a monthly fee or as a pay-as-you-go service. Additionally, costs are lowered through energy savings, because SaaS does not require expensive and energy-hungry on-site servers. According to NEC, by investing in SaaS companies can save up to 40% in total cost of ownership, and up to 70% in energy costs compared with using a suite of traditional applications.

Another key benefit of SaaS is its potential to lower SMEs’ barrier to entry for new technologies, by offering access to applications in the cloud at a competitive price. SaaS allows even smaller enterprises to use applications that can improve productivity and processes. This aspect is especially important for less advanced markets, such as Peru, where the cost of software licensing is more likely to become a barrier to entry for SMEs.

Among the leading operator groups in latAm, Telefonica has the most aggressive and extensive road map for SaaS deployment. Telefonica’s main regional rival, America Movil, is concentrating on Mexico, where fixed-line operator Telmex recently launched the Microsoft Office 365 SaaS suite. The Telmex SaaS offering is hosted on the operator’s cloud and includes the Microsoft Office suite.

RESULtS

Telefonica has not disclosed the number of SMEs using Aplicateca in Spain, but since the operator is pioneering SaaS in that country, the service is likely to lead the market by volume of users. Given the strong take-up of

FIg 4Telefonica SaaS strategy, SWOT analysis

streNgths

•ConvergenceoffixedandmobileassetsinLatAmfavorsmultidevice strategy

•AhighdegreeofindependenceforTelefonicaoperatingunitsenables flexibility of application portfolio and pricing models

•Telefonicahasfirst-moveradvantageindevelopingaLatAm-wideSaaS strategy

WeakNesses

•TheSaaSbusinessmodelisnotproveninLatinAmericaandfaces fundamental challenges in a region where fixed-broadband infrastructure is limited

•Inthelongterm,payingamonthlyfeeratherthanbuyingalicense is not a huge saving for SMEs

•Revenue-sharingmodeltypicallyleaves70%ofrevenuestopartners (technology vendors, SaaS aggregators, application providers)

•PureSaaSresalemeansnovalueisaddedtotheappsthroughan operator’s assets, such as network integration, which would enable localization, or billing and OSS integration

oPPortuNities

•StrongSMEgrowthinLatAmprovidesavastaddressablemarket•SaaSprovidesTelefonicawithanopportunitytodifferentiateits

services by diversifying bundles away from pure connectivity•MarketdominanceinLatAmgivesTelefonicaleveragetoexpand

partnerships with global and local providers•TelefonicacanintegrateBlueVia,itsglobaldeveloperprogram,

with SaaS to create an operator-controlled application-development ecosystem

•Inthelongterm,SaaScanbeextendedtocorporationsandmassmarket

•Inthefuture,Telefonicawillbeabletoofferend-to-endSLAsintegrating application-performance-management (APM) tools on multiple devices

threats

•SaaSsaleschannelsarecrowdedandcompetitive•AmericaMovilhasthepotentialtoextenditspartnershipwith

Microsoft across its latAm footprint•SaaSvendorsarekeepingthelargestpercentageofrevenues,

making it difficult for operators to increase profitability


Seizing new



SaaS in Spain and Ireland, where the macroeconomic environment is challenging, Telefonica is confident that the platform will be even more successful in latAm, where most countries have high-growth expectations. According to the IMF, the latin American and Caribbean economies should expand 4.7% in 2011, with SMEs playing a key role in generating growth.

As for the potential for SaaS to drive revenue growth, NEC has the ambitious goal of increasing cloud revenues in latAm from US$500 million in 2010 to US$5 billion in 2017.

INFORMA vIEWpOINt

Telefonica has first-mover advantage Telefonica is the first latAm operator group to plan to deploy SaaS across its footprint. Already an SaaS pioneer in Europe, the operator is also pushing innovation in latAm. Telefonica has a first-mover advantage over its major competitor, America Movil, which for the moment is offering SaaS only in Mexico. As the enterprise sector becomes more significant for operators trying to boost revenue growth, the SaaS competitive landscape is expected to become more crowded.

Regional outlook for SaaS is positive, but correct pricing is criticalSMEs represent a fast-growing segment across all latAm economies. There is a clear opportunity for operators to respond to the increasing demand from SMEs for both global and locally relevant applications through SaaS. However, in emerging markets many SMEs are microenterprises with fewer than five employees, and generally they are more price-sensitive than in mature markets. A key challenge for operators will be to price applications correctly while maintaining a profitable business model.

Consider evolving from the supermarket modelThe supermarket model for selling SaaS applications, whereby operators only resell the apps, can work well at the initial stage of deployment. Telefonica can replicate the same platform globally while leaving application development at the edge of the platform, with local developers. The operator is not exposing its core assets, such as localization and billing, to developers to create an application-development ecosystem. To evolve from the supermarket model to a more operator-centric model, there could be an opportunity to integrate Telefonica’s BlueVia global developer platform with SaaS.

Existing revenue-sharing models challenge profitability The SaaS ecosystem is complex, and although operators play an important role, they are not at the top of the value chain. Existing revenue-sharing models favor SaaS vendors, and operators typically receive no more than 30% of revenues. Under the supermarket model, the existing revenue-sharing setup is still feasible. However, as the model evolves and operators are expected to devote more resources to SaaS, creating development ecosystems and exposing their key assets, they will also need to evolve revenue-sharing mechanisms to obtain a bigger slice of the SaaS pie.

Sei

zing

new

rev

enue

opp

ortu

niti

es


The relationship between operators and Android Market is getting closer. Not only is carrier billing featuring much more prominently on the application store, but so are operator storefronts.

In July we heard that Vodafone was launching its own content channel within Android Market in the UK, Germany, Italy, the Netherlands and Spain, with Greece, Ireland and Portugal following later. Then, in August, Vodafone announced that it would be enabling payments on Android Market across its European footprint, starting with the UK and Germany.

Vodafone is not alone. US carriers Verizon and T-Mobile and South Korean carrier SK Telecom are all offering both payments and their own storefronts on Android Market (see figs. 1 and 2). Others, including the US’ AT&T Mobility and Sprint and Japan’s KDDI and SoftBank, are offering just payments, and others, such as Australia’s Telstra, just a storefront. Japanese carrier NTT DoCoMo, meanwhile, is offering payments and has its own separate Android app store.

OpEN DOOR FOR CARRIERS

The open-source nature of Google’s Android ecosystem means that operators have always had a greater chance of playing a role in it than in Apple’s walled-garden iOS ecosystem. Operators have been able to order own-brand, custom-made Android handsets from manufacturers and launch their own Android application offerings. They either launch a separate Android app store, parallel to Google’s Android Market, the way many Android-handset makers have done (see, for example, Samsung’s launch this week of its Premium Samsung Apps Store for Android in the UK), or they launch a storefront within Android Market itself.

The latter is possible only on Android handsets distributed by operators. Usually, the way it works is that the “My Apps” tab that appears on Android Market’s user interface is replaced with the operator’s

Carriers are increasingly laying claim to Android Market through billing and ‘content channels’

FIg 1Android Market carrier-billing availability

FIg 2Known Android Market carrier channels

couNtry carrier Date

US Verizon Nov-09

US T-Mobile Dec-09

South Korea SK Telekom Aug-10

US AT&T Dec-10

Japan KDDI Mar-11

Japan NTT DoCoMo Mar-11

Japan SoftBank Mar-11

US Sprint Apr-11

UK Vodafone Aug-11

Germany Vodafone Aug-11

couNtry carrier lauNcheD

US T-Mobile Nov-09

US Verizon Nov-09

South Korea SK Telekom Aug-10

UK Vodafone Jul-11

Germany Vodafone Jul-11

Italy Vodafone Jul-11

Netherlands Vodafone Jul-11

Spain Vodafone Jul-11

Australia Telstra Jul-11

Greece Vodafone TBC

Ireland Vodafone TBC

Portugal Vodafone TBC

US Sprint TBC



Seizing new



storefront tab – or “content channel” tab, to use the Android parlance.

Operators believe that their channels add value by offering a more select set of apps, tested for quality and adapted to local needs, rather than what they would describe as the daunting and hit-and-miss choice available in the main store, which is crammed with hundreds of thousands of apps. In other words, they see themselves as offering quality over quantity.

Compared with Apple’s App Store, Android Market does relatively little to localize content according to which country the store is being accessed from. And it’s seen by many as a bit of a Wild West, with loads of poor-quality, malfunctioning apps and a growing piracy problem. One might argue, therefore, that there is a need for someone to step in with a more “curated” offering.

USER REjECtION

But judging by comments posted online, users are not that excited by the operator-branded tabs that have suddenly appeared on their screen. Many see it as patronizing and dumb of operators to narrow down choice on behalf of users, especially since operators have a terrible track record of delivering what users want on the content-and-apps front.

The views of these outspoken users might not be representative of the whole. There might be a silent majority of occasional app users who feel less strongly about these things and might welcome some handholding by operators. But there is no getting around the fact that operators do tend to mess things up when they try to take ownership of what content and apps are offered to end-users.

Still, you can’t blame operators for wanting to retain relevance in the content-and-apps market by exploiting the opportunities that the Android platform offers them to wheel out their own offerings. After all, they have seen the power of their once-mighty mobile content portals dwindle rapidly over the past three years with the phenomenal takeoff of over-the-top, native-app stores.

But where the operators are likely to make the greatest difference is with billing.

tHE CARRIER-BILLINg OppORtUNIty

I’ve been harping on for years about the huge asset that billing represents for carriers. It is the most realistic

chance operators have of securing a role in the mobile content and applications value chain – partly because a lot of people could become buyers of digital goods but have no remote means of paying for them, either because they are underage or live in the larger part of the world where credit cards and bank accounts are rare, and partly because keying in one’s credit- or debit-card details on a phone, no matter how “smart” that phone may be and how big its screen may be, is a pain and in most cases kills the moment of the “impulse buy.” Most users simply don’t bother or give up halfway through, and the piece of content or application they were about to buy does not get bought.

This is the problem that has been hampering sales on Android Market. Few Android-handset users get around to registering their credit/debit-card details with Android Market’s payments platform, Google Checkout – partly because users are not used to the idea of entering into a billing relationship with Google and partly because registering with Google Checkout is not usually part-and-parcel of the procedure that users have to go through to set up a new Android phone (unlike with the iPhone, whose users are required to register with iTunes when turning the phone on for the first time).

MONEtIZAtION pROBLEM

So, although developers love the greater creative freedom the Android ecosystem gives them – compared with Apple’s rule-ridden iOS ecosystem – as well as its pole position in smartphone sales, they deplore the small chance it offers them to make money from applications posted on Android Market.

Most other companies that launched application stores in competition with Apple’s pioneering App Store understood early on the need to embrace carrier billing to increase paid-app downloads. The likes of Microsoft, Nokia, RIM and Samsung understood that it was hard to compete with the huge head-start Apple had in the field of paid downloads. After all, iTunes, of which the App Store is an extension, has for years been the world’s leading online store for premium digital media content, especially music. There was already a precedent of people, in their hundreds of millions, entering into a direct billing relationship with Apple for the purchase of digital goods.

Google has been slower to embrace carrier billing – either because it thought that the strength of its brand would create enough momentum behind Google Checkout or because as a company whose business model is fundamentally free, ad-funded content, it wasn’t too bothered about the issue of paid downloads.

Sei

zing

new

rev

enue

opp

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But Google had apparently looked into carrier billing a few years ago, even before the advent of the app store. Contacts in the mobile-content-aggregation business tell me that four or five years ago Google was planning to launch some kind of mobile content service linked to its search engine that would be enabled with carrier billing, but it gave up on the idea after it found the task of connecting globally to carrier billing too onerous.

pROgRESS SO FAR

Also, carrier billing has been present in the Android-app ecosystem for a while – even though rather quietly and very much as the exception to the rule. In late 2009 it became available initially to customers of T-Mobile USA, the first operator to debut an Android phone, and to Verizon subscribers too, but only for the carrier’s own content channel within Android Market. Over the next two years, the US’ two other national carriers, AT&T and Sprint, joined in. And so did Japan’s three main carriers and South Korea’s top carrier. In Europe, as far as we know, Vodafone’s announcement last month is the first and only carrier-billing deal struck by Google for Android Market.

But that still adds up to only five carrier-billing-enabled countries out of a total, at last count, of 52 countries where Android Market has a paid-download presence – and most of the five (Germany, South Korea and the UK) are only partially enabled.

Contrast that with Nokia’s Ovi Store, which back in April boasted of billing connections with 112 operators in 36 countries. Or with RIM’s BlackBerry App World, which has enabled carrier billing through billing aggregator Bango across the US, Canada and Europe – the latter both in the UK and eurozone countries – and also struck a deal with Telefonica to connect to the billing systems of all of the carrier group’s mobile networks, spread around Europe and latin America.

In its press release for the Android app store it unveiled in the UK, Samsung highlights the fact that the store will soon be enabled for carrier billing – saying, almost apologetically, that it will initially offer only credit-card payments as an option.

CARRIER-BILLINg MOMENtUM

Yet, one gets the feeling that Google has other carrier-group billing deals in the pipeline that might come to light shortly (beyond the one announced with Vodafone) and that Google is now fully behind enabling carrier billing throughout its Android Market footprint.

August was a busy time for carrier-billing announcements. Beyond Vodafone’s alliance with Android Market, rival carrier group Telefonica’s BlueVia developer program added API access to the carrier-billing-aggregation service offered by online and in-app mobile payments provider Boku; Boku also struck direct-billing deals with French operators Bouygues Telecom and SFR, in addition to its existing deal with Orange France; and rival billing aggregator PaymentOne established a direct-billing relationship with German operator O2 Telefonica.

Earlier in the summer, three other major carrier-billing moves were announced: Another carrier-billing aggregator of online and in-app payments fame, Zong, was acquired by e-commerce brand eBay to integrate with online-payments platform PayPal; yet another aggregator, Bango, signed an agreement with mobile-browser maker Opera Software to enable carrier billing on the Opera App Store; and US carrier Verizon teamed up with aggregator Payfone to enable its subscribers to purchase digital goods online via their mobile bill.

There is definite momentum there and a mutual interest among carriers and iOS ecosystem competitors to keep that momentum going.

Seizing new



Survey Results

0

50

100

150

200

250

Sell-

to (d

irect

sa

les)

Sell-

thro

ugh

(sal

es v

ia in

dire

ct

chan

nel

part

ners

)

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with

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ales

via

se

para

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tabl

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ith

part

ner)

0 10 20 30 40 50 60 70 80

Response percent

Mobile device manufacturers (e.g., Apple, Nokia)

Branded consumer electronics �rms (e.g., Microsoft Xbox, Roku)

White-label CPE manufacturers (e.g., Pace,

Technicolor)

Traditional network equipment vendors (e.g.,

Alcatel-Lucent, Huawei)

Internet �rms (e.g., Google, Facebook)

Traditional content providers (e.g., HBO, Warner Brothers)

IT services, integrators (e.g., IBM, CSC, Wipro)

Other telecom operators (e.g., Orange, Vodafone)

FIg 1What is your organization’s primary area of business?

FIg 3Which sales model is most likely to drive profitable top-line growth for your organization?

FIg 4Which partnerships are most important for your organization to achieve top-line growth? (Choose top 3)

FIg 2Where are you based?

Integrated operator (fixed & mobile)

...............................................................18.0%

Mobile operator ............................ 16.9%

Fixed operator .................................. 3.8%

TV / satellite / cable broadcaster ... 3.5%

Network infrastructure vendor 24.1%

Integrator / consultancy ............... 7.9%

Handset manufacturer .................. 0.5%

Device manufacturer ..................... 3.8%

Regulator/government ................ 2.1%

Financial institution (bank, private

equity) ................................................. 1.4%

Content producer/vendor/owner .... 5.4%

Other ................................................. 12.6%

North America .................................. 6.8%

latin America ................................... 5.4%

Europe .............................................. 36.0%

Middle East .......................................... 16.2%

Africa ................................................. 14.4%

Asia Pacific ....................................... 21.2%

Strongly disagree

Somewhat agree

Somewhat disagree

Strongly agree


Tele

com

Med

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broa

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lth

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gy &

util

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Non

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Oth

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0

10

20

30

40

50

60

Resp

onse

per

cent

FIg 5What is the most important source of innovation in telecoms? (Choose one)

FIg 6Which vertical markets is your organization targeting for profitable top-line growth? (Choose top 3)

Operators’ R&D centers and ad-hoc units scouting for innovative ideas and best

practices ............................................................................................................................................ 21.2%

The established telecommunications vendor community ............................................. 17.1%

The software and Internet giants located on the west coast of the United States ....... 12.2%

The wider community of Internet and application developers .................................... 23.9%

Our customers, through the service improvements they request from us .............. 25.6%

FIg 7Which of the following best describes the current status of the telecoms sector in your home market? (Choose one)

A dynamic sector with strong opportunities for vendors and operators ................. 35.6%

A maturing industry with some limited potential for revenue growth ..................... 44.1%

A mature industry with flat or stagnating revenues ......................................................... 19.4%

Not applicable .................................................................................................................................. 0.9%

FIg 8How will prices of consumer telecoms services change in your home market over the next two years? (Choose one)

Decline by more than 5% per year .......................................................................................... 27.5%

Decline by 0-5% per year ............................................................................................................ 36.9%

Remain flat in real terms ............................................................................................................. 22.5%

Rise by 0-5% per year ................................................................................................................... 13.1%


FIg 12What is the maximum number of mobile network operators that can be profitable in the long term in a single country? (Choose one)

Two ..................................................... 12.1%

Three .................................................. 57.5%

Four .................................................... 19.5%

More than four ............................... 10.9%

FIg 9What is the most important strategy that operators should implement to combat the threat posed by OTT service providers? (Choose one)

laissez faire, IP communication should be treated as any other Internet services .... 12.6%

Bar or disrupt VoIP applications altogether ........................................................................... 0.6%

Block VoIP while introducing data tariff that allows VoIP for an additional fee ........ 6.0%

Bundle very large voice and messaging allowances in data plans, thus making OTT

services less attractive ................................................................................................................. 25.8%

Establishing revenue-sharing agreements with over-the-top communication providers

............................................................................................................................................................... 30.0%

Develop operator-branded VoIP and IP messaging applications that feel like OTT

services .............................................................................................................................................. 24.9%

0

100

200

300

400

500

600

700

800

Ther

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100

200

300

400

500

600

700

800

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FIg 10To what extent do you agree with the following statements about the future of broadband network investment in your home market?

FIg 11To what extent do you agree with the following statements about the future relationship between fixed- and mobile-broadband services in your home market?




FIg 13What will prove to be the best approach for pricing mobile data? (Choose one)

FIg 14Which is the single most important asset for a service provider building a content ecosystem? (Choose one)

Volume only, giving fastest available speed to all customers ....................................... 12.1%

A combination of speed and volume, higher speed combined with larger volumes ... 38.3%

Customer-based segmentation (Gold, Silver, Bronze) ...................................................... 30.4%

Application-based price differentiation ................................................................................ 12.3%

Time-based data access ................................................................................................................ 3.2%

Don’t know ......................................................................................................................................... 3.7%

Ownership of the consumer data ............................................................................................. 24.1%

A billing relationship with the consumer ............................................................................. 39.9%

A proprietary platform optimized for specific devices ..................................................... 11.0%

The latest premium content ...................................................................................................... 11.0%

A deep catalog of content .......................................................................................................... 14.0%

FIg 15In 2012, how will your organization view Google? (Choose one)

A partner or positive influence on your business? ............................................................ 48.9%

A competitor or negative influence on your business? ................................................... 11.5%

Neutral in terms of its impact on your business? ............................................................... 39.6%

FIg 16What type of company will be most successful in persuading audiences to pay for digital content? (Choose one)

Device manufacturers (e.g., Apple, Sony, Samsung) ........................................................ 33.7%

Network operators (e.g., Vodafone, UPC) .............................................................................. 16.8%

Social networking sites (e.g., Facebook) ............................................................................... 21.8%

Over-the-top services (e.g., Netflix) ......................................................................................... 27.7%


0

100

200

300

400

500

600

700

Cust

omer

s wan

t the

sam

e co

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than

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FIg 17Do you agree or disagree with the following statements?


FIg 18Which do you consider the single most important factor for users in a successful paid content experience? (Choose one)

FIg 19Which do you consider the most potentially profitable category of content? (Choose one)

FIg 20What will be the single most important area of focus for operators in 2012? (Choose one)

Convenience ................................... 35.1%

Security ............................................... 6.0%

Reliability ......................................... 19.6%

Affordability .................................... 29.5%

Portability .......................................... 8.8%

Other ................................................... 1.0%

Movies .............................................. 16.0%

TV ........................................................ 19.7%

Music ................................................... 8.6%

Games ............................................... 16.8%

Apps .................................................. 36.5%

Other ................................................... 2.4%

Customer experience management ....................................................................................... 36.5%

Network deployments and developments (NGN and lTE) ............................................. 28.9%

New digital service developments (digital services) ........................................................ 10.5%

Efficiencies, cost control and best practice .......................................................................... 16.3%

Partnerships with other operators and Internet players ................................................... 7.8%


0

10

20

30

40

50

60

70

Resp

onse

per

cent

Ord

er m

anag

emen

t

Cust

omer

self-

serv

ice

Busi

ness

ana

lytic

s

Cust

omer

car

e / e

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d bi

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Uni

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prod

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ope

ratio

ns

(e.g

., bill

ing,

dat

a w

areh

ousi

ng, S

DP)

0

10

20

30

40

50

60

70

Resp

onse

per

cent

Ethe

rnet

Hig

h-de

�niti

on v

ideo

4G /

LTE

Conv

erge

d bi

lling

Clou

d co

mpu

ting

Mac

hine

to m

achi

ne (M

2M)

Fibe

r to

the

X

SMS

Oth

er

FIg 21Which operational investments should operators prioritize to pursue new revenue streams successfully? (Choose top 3)

FIg 22Which technologies will underpin profitable top-line growth in your organization? (Choose top 3)

FIg 23Please provide three key topics, companies or people in the telecoms and media sector that you feel will be important in 2012:

NOtEIn October 2011 we surveyed decision makers from across the global telecoms and media markets. In total 573 individuals completed the survey. Some of the survey results presented in previous sections of the report have been filtered to include only communications service providers – fixed, mobile and integrated operators. There were 222 responses from people in this category.

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