European Telco Merger Momentum Gains Strength As Hong Kong’s Hutchison Buys O2 UK

Dan Bieler

Telefónica entered into an exclusivity agreement with Hutchison Whampoa regarding Hutchison's potential acquisition of the Telefónica subsidiary O2 UK for £10.25 billion in cash, valuing the deal at an estimated 7.5 times 2014 EV/EBITDA. The Hutchison-O2 UK deal — should it complete — will entirely redraw the telco landscape in the UK in terms of market shares. The acquisition of O2 UK will transform Hutchison from the smallest mobile operator with 7.5 million customers to the largest with 31.5 million customers and reduce the number of mobile operators in the UK from four to three.

This development follows on the heels of the announcement by Orange and Deutsche Telekom that they have entered into exclusive negotiations with BT Group regarding a potential divestment of 100% of their shares in EE, their joint venture in the UK. The increased merger activity is not surprising, and we predicted as much in our report Predictions 2015: Telecoms Will Struggle To Align To The CIO's BT Agenda. Still, these deals raise important questions for the European telecoms markets:

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Telcos Prepare For A Roller Coaster Ride In 2015 And Beyond

Dan Bieler
We predict that the telecom business model will undergo dramatic transformation in 2015: a minority of telecoms will manage to reinvent their business model and will enter new market segments and get stronger. Meanwhile a majority of telcos will be bought or go out of business, thus driving consolidation.
At the same time, for business leaders, having access to quality network infrastructure represents a vital underpinning for their digital business and their long-term competitive advantage. We predict that by 2015 and beyond:
 
  • The telco business model will shift from sustaining to enabling critical infrastructure. Traditionally, the telco business model focused on sustaining operational efficiency of network infrastructure. In the years ahead, we predict a shift toward enabling solutions that support telco clients to engage with their customers more effectively. This mirrors not only the CIO’s shift from IT towards business technology but will also be the overarching theme during the transformation of the telco business model.
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Telcos Badly Need Shock Therapy -- But Politicians And Regulators Are Unlikely To Support This Treatment

Dan Bieler

The other day, I met with the strategy director of a European telco. Let’s call him Art. We shared an informal discussion about the future of telcos. Personally, I am fairly skeptical about the prospects of telcos to recover ground – in particular in Europe.

Consumers are more concerned about the apps they use and the devices that they have than what connectivity they use, as I outline in the report The Future Of Over-The-Top Services. Forrester’s Customer Experience Index, which measures consumer perceptions of telco services, shows telcos near the bottom of all sector readings.

On the business side, data from Forrester’s Business Technographics® Global Networks And Telecommunications Survey, 2014 shows that business users trust systems integrators and independent solution specialists more than telcos with almost all voice and data service, because they feel that telcos don’t understand their specific business requirements as well.

Add an unfavorable regulatory environment — which, under the umbrella of the net neutrality debate, is about to close the door on commercial relationships regarding quality connectivity between content and network providers — and it becomes difficult to be wildly optimistic about the future of telcos. Yet, this is not where our discussion ended. Art pointed to three major issues where telcos will need shock therapy:

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The Facebook/WhatsApp Deal Is Bad News For Telcos

Dan Bieler

Facebook’s purchase of WhatsApp shows that the market for messaging is far from dead. But it’s just gotten worse for the telcos. We’ve already discussed the underlying reasons in a report — but the fact that Facebook put $19 billion on the table, of which $4 billion is in cash, for a global messaging service with 55 staff should scare telcos, with their millions of employees and high-cost structures. Over-the-top communications tools like WhatsApp, Line, KakaoTalk, WeChat, and Viber (which itself was bought a few days ago by Rakuten) have pushed telcos further and further away from any meaningful customer engagement.

To be sure, WhatsApp is about much more than instant messaging; it’s about content sharing — which is an emotional activity. Such emotional activities are critical to closer customer engagement. As the online giants use ever more granular user analytics to cement their position as marketing powerhouses, telcos’ hopes of developing new revenue streams from analyzing user behavior are slipping away faster and faster. This is what makes the deal so dangerous.

Of course, it’s tough to justify the deal simply on the basis of WhatsApp’s revenue model of $1 annual subscriptions. In my view, the deal is really about:

  • Bringing a major competitor into your family. Otherwise, someone else could have lured WhatsApp into theirs. The deal, which accounts for about 10% of Facebook’s market capitalization, could be seen therefore as an insurance cover.
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Mobile World Congress 2014 Will Push The Mobile Mind Shift

Dan Bieler

Mobility is becoming pervasive in the enterprise. Smart devices, including wearables, are appearing in all sectors, both in developed and emerging markets. Businesses that fail to prepare for the mobile mind shift risk losing their competitive edge. I hope this year’s Mobile World Congress, which kicks off on February 24, will emphasize the interaction between business processes and mobility — in addition to the traditional gadgets.

I focus primarily on themes relating to the connected business and social collaboration, and I will travel to the world’s leading mobile event in Barcelona to gain new insights into several questions in these areas:

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Cyber Breach Crisis For Mobile Operator Vodafone Has Implications For The Broader Telco Industry

Dan Bieler

by Dan Bieler and Ed Ferrara

Mobile Operator Vodafone Is In The Midst Of A Security Breach Crisis

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Amdocs Gains Momentum As A Leading Customer Experience Provider

Dan Bieler

Dan Bieler, Katyayan Gupta, Clement Teo

We recently attended Amdocs' customer event in Singapore. Amdocs is gradually adjusting its strategy to reflect one of the most fundamental changes in the ICT industry today: Increasingly, business line managers, think the marketing or sales officer, are the ones influencing sourcing decisions. Traditional decision-makers, CTOs and CIOs, are no longer the sole ICT decision-makers. Amdocs is addressing this shift by:

  • Strengthening its customer experience portfolio.Successful telcos will try to regain lost relevance through improved customer experience. Marketing, portfolio product development, and sales are therefore growing in importance for telcos. Amdocs’ integrated customer experience offering, CES 9, provides telcos with a multichannel experience; proactive care; and self-service tools.
  • Betting big on big data/analytics.Amdocs is leveraging big data/analytics to provide real-time, predictive, and prescriptive insights to telcos about their customers’ behaviour. Communications-industry-specific converged charging and billing solutions as well as other catalogue solutions give Amdocs the opportunity to provide more value to telcos than some of the other players.
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Google Pays Orange To Carry Video Traffic

Dan Bieler

Orange’s CEO mentioned during a business show on French TV that Orange is receiving money from Google for transmitting Google’s traffic (most of which stems from YouTube). No details about the financial arrangement of the year-old deal were disclosed.

Given the well-known explosion in data traffic, carriers must invest a significant amount in their network infrastructure to support this traffic. See the Forrester report, “The Future Of Telecom: Strategies To Move Off The Endangered Species List,” for more information. For years, carriers have argued that online service providers (OSPs) like Google should pay for using the carrier network infrastructure.

So, does the Orange-Google deal mean that Orange has won a true victory and that the balance of power between carriers and OSPs is restored? Does the deal really address the challenges of the carrier world? Hardly.

  • Carriers rely on video content that drives demand for high broadband connectivity. Moreover, consumers already pay the carriers for their broadband connectivity. In my opinion, there is a valid argument that those end users who want high-quality video should be able to have it at extra cost. But this extra fee could be paid directly to the carrier in the form of a high-end broadband connection fee. Alternatively, the carrier could offer wholesale connectivity to OSPs, allowing the OSPs to offer content that comes with embedded high-quality connectivity.
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Changing end user behaviour undermines traditional carrier business model and forces radical change

Dan Bieler

 

Carriers have lost a great deal of their relevance for end users. People of all shades, individuals, employees, information workers, etc, are looking for solutions that meet their demand, not connectivity per se.

In our view, four trends matter significantly for carriers since they strike at the heart of their customer facing relationships in the shape of changing end-user behaviour:

  • Applications have become the focal point for end-users. Phone or connectivity features are less interesting. The carrier brand is not seen as the destination to turn to for app-demand. Merely 18% of business users would turn to a carrier for apps compared to 49% who go directly to the classic app stores. Carriers ought to get closely involved in HTML5 development as it paves the way for OS-independent Web-based apps, thus potentially limiting the influence of operating systems like iOS or Android over the ecosystem. Carries must strive to accommodate where possible app developers to remain somewhat influential ecosystems players.
  • Users buy devices directly. There is an increasing push by device manufactures (traditional like Samsung and Apple and emerging such as Google, Amazon etc) to sell devices directly to the customer, both business and consumer, and outside the carrier channel. This robs carriers of their main service distribution channel and undermines their potential to monetise value added services.
  • Carrier-selection is becoming more ad-hoc and temporary. The emergence of embedded software SIMs “interrupts” the relationship between user and carrier. End-users will increasingly be able to select carriers after they purchase a device and for certain circumstances like content consumption or for international roaming. As a result price wars for basic connectivity will increase once again.
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Orange Business Services Underlines Its Global Capabilities At Its 2012 Analyst Event

Dan Bieler

Dan Bieler, Bryan Wang, Pascal Matzke, Jennifer Belissent

ORANGE held its annual analyst day in Paris recently. There were no major announcements, but we made several observations:

  • ORANGE is one of the few carriers with true delivery capabilities. Its global footprint is a real advantage vis-a-vis carrier competitors, in particular in Africa and Asia. Vale, the Brazilian metals and mining corporation, presented a customer case study in which Vale emphasized the importance of ORANGE’s global network infrastructure for its decision to go with ORANGE as UCC and network provider. Its global reach positions ORANGE well to address the opportunity in emerging markets, both for Western MNCs going into emerging markets and also to address intra-regional business in Africa and Asia. Another customer case study with the Chinese online retailer 360buy, focusing on a contact center solution, demonstrated ORANGE’s ability to win against local competitors in Asia.
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