1

The battle for telcos in the digital

home can still be won if … June 5th 2012

Presentation to Telco-Forum/

Moscow

Arthur D. Little

Contact Person:

Dr. Karim Taga

Managing Partner

2

1 Crowded eco-system

2 Market and segment perspective

3 Strategic and opportunities for telcos

4 Conclusion

Agenda

3

For years, giants of electronics and software have developed “Smart Home” systems and

appliances but so far with poor success – the question is why is it a hot topic again?

Hype index1)

Source: Companies, Arthur D. Little analysis; Note: 1) The hype index is an indicative measurement of how much the “Smart Home” & “Domotic” topics have been

talked about; 2) Over-The-Top: Google, Amazon, Facebook

Societal trends

(more activities at home:

entertainment, work …)

Broadband everywhere

(fixed and mobile)

Technological convergence

(IP & smart-systems

everywhere)

Over-The-Top2) initiatives

(new devices and personal

data to manage)

1985 1988 1996 1992 1995 2000’s 2010’s

Screenfridge

Home Lab

Bill Gates’ full ICT house

1st centralized lighting system

control

Security remote control

1st full media integrated system

1st home system control

“Domotic” phase “Smart Home” phase Why is it a hot topic again?

1 Crowded eco-system – A hot topic again

4

In the past ten years, Homes and the way we live and behave in them have changed

dramatically

2000’s 2010’s

More and new devices

New families

Old devices and supports

New Homes

Old families

Old Homes

Size1:

105 m²

Price2:

112 k€

Size1:

111 m²

Price2:

270 k€

Family with

2 parents Collective usage

(eg. in front of TV)

Hybrid families /

Ageing society Individual usage

(3,6 screens / person3)

Source: Various industry sources, Arthur D. Little analysis

Note: 1) Size of individual houses in France: 2006 vs 1996; 2) Price for an apartment in Bagneux (92, France) with 4 rooms, in 1996 vs 2009; 3) Western Europe

1 Crowded eco-system – Homes have changed

5

Source: Arthur D. Little analysis

Four fundamental trends will drive the take-up of the future Smart Home

Fundamental societal

and consumption trends

Time allocation

and activities @home Digital addiction

Value capture

by large players

Societal trends

Ageing society

Hybrid families

Aspiration to well-being

Job & House nomadism

Consumption trends

Energy scarcity

Green consciousness

Increasing role of end

consumer

Instantaneism (make

the most of every

minute)

Current trends

More free time

Entertainment at home

Increasing confidence

in e-Commerce

More intense and

shared digital life

New trends

e-Education

e-Health

New e-Commerce

experience

Connectivity

Broadband for all

More bandwidth (fixed

and mobile)

Convergence

Needs for content

everywhere

Devices

More screen per person

More usage per screen

Multi-tasking

Smart systems

RFID / NFC / sensors

Over-The-Top

Players such as Google

and Microsoft through

applications and OS

Service providers

Players such as

Telefonica and E.ON

through the customer

relationship

Appliances

manufacturers

Players such LG,

Philips and Bosch

through their devices

1 Crowded eco-system – Fundamental trends

6

Smart Home trend example (1/2)

“Societal”: Ageing society

Elderly adapted house example

“Time allocation”: More free time

Life time share by activity

Stair lift

Easy route from

bedroom to bathroom

Sockets,

controls… at a

convenient height

Adapted

WC, shower…

Width of doors

allow wheelchair

Bedroom at the

entrance level

Source: Various public sources, Arthur D. Little analysis

11

3010

1124

2013

2842

11

1900 2009

Work

Physiologicaltime

Childhood,scolarship

Transports

Free time

(15h/day) (16,5h/day)

Selected examples

Awaken time per day

1 Crowded eco-system – Trend example

7

Smart Home trend example (2/2)

“Digital addiction”: More screen

Screen devices installed base in WE

“Market evangelization”:

Appliances manufacturers ecosystems – LG

Source: Euromonitor, Strategy analytics, Nielsen, LG, Arthur D. Little analysis

Note: 1) Tablet, eReader, PND

1,7 3,6

0,7 Bn

1,0 Bn

1,3 Bn

1,5 Bn

3,3 2,6 Screens per person

Selected examples

LG THINQ System

Appliances, energy, food

management

Remote/local user interface

Only supports LG appliances

1 Crowded eco-system – Trend example

8

Smart Home has become a hot topic again and players from various industries are now

placing their bets

2 1 3

4 6

IT equipment players Service

providers

Assistance specialists

Devices /

appliances

manufacturers

Over-The-Top

5 Smart Home pure players

Selected examples

Source: ADL

1 Crowded eco-system – New bets

9

Some pure-players are positioning themselves as gateways to the Smart Home and growing

fast Example

Source: Control4, Arthur D. Little analysis

Control revenues

M$

Product

portfolio Key Success factors

23

41

57

68

2006 2007 2008 2009

CAGR:

+44% /

year

Devices inter-

operability

Market

evangelization

Distribution 1,600 dealers in the US and

Canada + international distribution

in 70 countries

6,500 consumer electronics devices

(+1000 in 2 years)

“Intel inside”

partnerships

Partners such as Sony, Pioneer,

and Panasonic embedding

Control4 technology

Leader of the Smart Grid

Consumer Collaborative involving

players such as GE, Best Buy, IBM

“keyboard” + software for

Home control:

1 Crowded eco-system – Pure players

10

Many topics can be covered by telcos in the Digital Home, most often through partnerships

with firms form other industries

Source: DT, Arthur D. Little analysis

DT example

e-Health / Well-being Access

Media & entertainment

Home Automation e-Education

Private data

management

Smart cities

Partnership with device

makers (connectivity)

“Eduxnet” learning

platform

Smart metering,

Appliances control

Health, Education, e-

Government, Transport…

“Mediacenter”

T-Home Entertain (IPTV)

Stores: music, videos, apps…

Digital Home Services

“Instant IT Service”

1 Crowded eco-system – Telco examples

11

Ecosystem

Example: Home automation

Comment

Fully-integrated home automation is in a nascent

stage

– only costly premium offers

– Customers show low interest in fully integrated

services

Only little involvement in Home automation

services next to specialized manufacturers

– telecoms mostly involved in security an

entertainment solutions

– utilities focusing on energy management

Security

Energy

management

Motorization

Lighting

Entertainment

management

Manufacturers Automation

specialist

Utilities /

telecoms Home

systems

How can a dominant home automation standard emerge and what will be the level of integration

between the various systems?

As an example, the Home Automation market is still highly fragmented lacking common

standards and “the one” market leader (or partnership)...

Source: Arthur D. Little; company information

1 Crowded eco-system – Telco examples

12

Telcos such as DTAG are developing partnership based Eco-Systems with numerous players

to develop into full service providers...

Text

Competence center for

development of intelligent energy

networks

Establishing transparency on

energy consumption and intelligent

management

Platform for data collection,

transmission and management

Smart Metering & Home Management

Development of networked home

automation

Intelligent home (energy consumption)

Innovative smart grid

developments

Energy surveillance and

management of

decentralized power

generation

Smart Grid / Network

technology Smart Grid / Load management

Data management

White goods

Source: Arthur D. Little; company information

1 Crowded eco-system – Telco examples

13

Verizon and AT&T have recently made significant moves towards Home System

Management

Energy management: energy

reader, smart appliance switches

and thermostats,

Security : smart door and

window locks

Video-camera : in-door, out-

door

Anytime/anywhere value

proposition

Remote control via:

– Smartphone

– PC

– FiOS TV product

Launched a pilot to develop a Verizon home

systems management solution

(Jan 2011)

Acquisition of Xanboo, home system

management solution specialist

(Dec 2010)

+

Security / video

Energy Healthcare

Lighting

In Jan 2010, Verizon Wireless and 4Home* announced

partnership to develop Home control applications

Source: Public information, Verizon, AT&T, Arthur D. Little analysis Home Automation specialist

1 Crowded eco-system – Telco examples

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Example of move around alliance

Telefonica alliance “Beywatch”

Telecom operators are also active in the Smart Home field with initiatives around CPE or large

alliances, mainly to response to OTT closed and integrated ecosystem

Example of move around CPE

Freebox Revolution

NAS storage server DLNA media server

Gaming

Gyro remote control

Internet on TV

Apps store

Other players involved

Source: Arthur D. Little analysis

1 Crowded eco-system – Telco examples

15

FreeBox Revolution key features

Free in France launched the FreeBox Revolution to attack the Digital Home market – it

includes many disruptive features

Source: Operators, Arthur D. Little analysis New

Internet

access

(up to 100 Mb)

Phone

(DECT1

technology)

TV

(Catch-up TV,

VOD developed

by Hubee)

Blue ray

player and 3D

capabilities

Gaming

Platform

(appstore)

Network

attached storage

(250 Mb hard

disk)

Connected TV

(Web browser,

apps…)

Designed by P. Starck

Gyroscopic

remote

AirPlay and

AirSync

compatibility

Linux distribution

(BusyBox)

1.2 GHz Intel

processor

400 MHz graphics

card

“With the Freebox Revolution, you

are going to get rid of everything

that is connected to your TV”

X. Niel (Free Founder)

Case study

1 Crowded eco-system – Telco examples

16

PCCW introduced a compelling offer of digital home services

Source: Arthur D. Little analysis, PCCW *HKD/EUR exchange rates as of 09/02/12

Key company facts Systems for- and actual product-provisioning

Established in 2000, subsequent acquisition of cable and

wireless operator Hong Kong Telephone Company

Business fields and key services

– Integrated communication, fixed line, broadband internet,

access, mobile, integrated global communications,

infrastructure, contact centers, IPTV, advertising and

interactive services, IT solutions, data centers

Innovation driven by strong customer orientation

– Digital living, multi screen viewing, high speed access

Basic financial data for the year ended 2010*

– Revenues €2.2bn

– EBITA €0.7bn

– EBITDA margin 32%

Access (Broadband, fiber, city wide Wi-Fi, HSDPA, 3G,

home wireless, etc.)

All IP-NGN infrastructure

Services (Content aggregation, interactive services, news

and sports production, entertainment production, key

segment partnerships)

PCCW expands its content value proposition to enable future growth

Case study

1 Crowded eco-system – Telco examples

17

PCCW addresses many of the outlined growth opportunities and its device strategy is highly

compelling

Source: Arthur D. Little analysis, PCCW

Broadband

telephone

Multi Screen, full IP-based NGN deployment (eye x broadband telephone – , superior user experience, android platform, market access, access to youtube, google maps, google search, Gmail, online banking, cinema ticketing etc.)

PCCW ubiquitous consumer side broadband offerings

Expansive horizontal and vertical integration enable provision of superior customer experience that

leads to customer “wowing” and retention

Cloud

e-Health

U-hub cloud storage service

maximum flexibility through fixed and mobile access (multi platform and device support and synchronization, automatic video format adjustment)

Health and fitness tracking, prerequisite affordability to general public, targeting various market segments, automatic data capturing (heart rate, blood pressure, activity monitor, weight scale, etc.)

Quad play Quad play fosters in-home digital convergence. To be leveraged in combination with

complementary digital home products and services

Wide range of own productions (etc. Sports, entertainment)

Case study

1 Crowded eco-system – Telco examples

18

1 Crowded eco-system

2 Market and segment perspective

3 Strategic and opportunities for telcos

4 Conclusion

Agenda

19

Telcos are hoping to generate and benefit from new sources of revenue

Smart Home market growth in 3 large European Countries

0

50

100

150

200

250

300

350

400

450

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Other

Assistance

Automation

Remotestorage

Health

£m

Source: Arthur D. Little analysis

Index

100 = Market revenues in 2010

2 Market and segment perspective – Market growth

20

Digital Home market could contribute significantly in 2020 to Telco’s topline (not including

access and content revenues)

Source: Arthur D. Little estimates 1) High-level assessment only 2) Total population equals 266m

34

5

Best case

23

2

4

8

Worst Case

9

2

1 1

2

Private Data Management

DH Services

Home Automation WC

e-Education WC

e-Health

Digital home market forecast 2020 (8 countries2)

Addressable market

(bn EUR 2020)

Potential revenue share

telco footprint

(best case – bnEUR)

Digital Home

Integrator

11.4

2.1

4.3

1.2

1.4

2.4

All in Telco &

Entertainment

2.6

1.7

0.7 0.0 0.1

0.1

Potential revenue

share telco footprint

(best case – mEUR)

38

0

34

2

45

All in Telco &

Entertainment

35

25 6 2

Digital Home

Integrator

178

38

24

Based on project example

2 Market and segment perspective – Market potential

21

New activities,

in evolving houses

More,

of the same

Concentrated giant

ecosystems

Fragmented patchwork of alliances

“iHome”

“Entertainment

@Home, the

battlefield of Giants”

“My World @Home”

“Chaos

in the Living Room”

We have identified four Strategic Scenarios for the Digital Home of the future

Axis 2: Ecosystem

Axis 1: Usages

1

2

3

4

Source: Arthur D. Little analysis

2 Market and segment perspective – Market Scenarios

22

New activities,

in evolving houses

More,

of the same

Concentrated giant

ecosystems

Fragmented patchwork of alliances

Based on these future Digital Home scenarios, we have identified 4 possible Business

Designs for Telco according to each configuration

Axis 2: Ecosystem

Axis 1: Usages

1

2

3

4

My Digital

Home

Integrator

My Digital

Home Life

Simplifier

The

Connectivity

Partner in My

Home Service

alliances

The All

Inclusive

Telecom &

Media

Provider

Source: Arthur D. Little analysis

2 Market and segment perspective – Operator response

23

1 Crowded eco-system

2 Market and segment perspective

3 Strategic and opportunities for telcos

4 Conclusion

Agenda

24 Arthur D. Little - Exane BNP Paribas 2012 Report – Findings

On the way to 2020, telcos have a need to rethink drastically their business models

as business as usual won’t work

Source: ADL

3 Strategic and opportunities for telcos

5

1

2

3

Best practice network operators

Network developer (network as a

service...)

Description

On-line distribution & customer care

Web based services and processes

High customer experience & agility

• Digital Home: service and content

aggregator

• Customer and service interface

Universal service provider- from IT to

telecom to energy to entertainment...

American tower

GTL

Ericsson

Alcatel Lucent

Economies of scale

Technology mgmt

Finance/ capital

Comparable

business

models

Operational

features

Amazon Online retail portf.

Self-service process

/agile

Process automation

Google

Apple

Geek Squad

Apps/ services

innovation

Partnership / 3rd party

brand mgmt.

Utilities

Best-buy

Limit complexity

Scale single service

Partnership

Recruitment in

adjacent markets

BTGS

OBS

T-systems

20-25 %

EBITDA

35-45 %

40-45 %

10-20 %

5-15 %

Lean Telco

Network mgmt

Focus

B2C/B2B2C

Platform

Portfolio

B2C/B2B2C

Broad portfolio

Customer

interface

“Me too”

Cost

effectiveness

B2B (2C)

Vertical enabler

Home assistance

M2M/ Internet of Things

Vertical champion - the engine and

backbone for other industries

Infrastructure as

a Service

The ”On-line”

company

Service

excellence

One-stop-shop

Mastering IoT

4

M2M: Machine to Machine OBS: Orange Business Services BTGS: BT Global Services

IoT: Internet of Things B2C: Business to Customer

IT: Information Technology B2B: Business to Business

25

Telcos should select from four different flavors for entering the Digital Home market

The All Inclusive Telecom & Enter-tainment Provider

The Connectivity Partner in My Home

Service alliances

My Digital Home Life Simplifier

My Digital Home Integrator

The integrated solution provider for your Home

Telecom & Entertainment needs

Key technical player within large alliance serving new Digital

Home needs

The service expert for your Digital Home needs

related to IT & Media / Entertainment

The all-in-one solution for all your Digital Home

needs

Offer connectivity and

access to content

Protect existing content

revenues by bundling

(customer lock-in)

Offer connectivity and

data management

infrastructure

Offer advice,

installation, integration,

maintenance and

support solutions

Focus on media &

entertainment

Provide end-to-end

offers incl. advice /

installation / support

Address entire DH1

market (including new

usages)

Source: Arthur D. Little analysis 1) Digital Home 2) Players do not fully follow flavor, but are considered as closest to outlined business model flavor

Flavors

Value

Proposition

Description

Access and content

distribution revenues

Access and content

distribution revenues

3rd party revenues (B2B)

Access and content

distribution revenues

Address all DH IT and

media/ entertainment

revenues

Access and content

distribution revenues

Address new revenue

pools beyond classical

telco revenues

Revenue

pools

addressed

n.a. Closest

benchmark2

3 Strategic and opportunities for telcos

26

1 Crowded eco-system

2 Market and segment perspective

3 Strategic and opportunities for telcos

4 Conclusion

Agenda

27

There is a unique opportunity for telcos to capture value in the digital home and use this

opportunity as growth engine provided smart partnerships are built

Key take aways

There is a significant potential revenue growth in the considered footprint

addressable by Telcos

Multiple players are entering the game

There are few levers and insurances to control and eventually capture the value

generated in digital home for telcos

Best go-to-market strategies balancing partnership vs stand-alone shall be

considered

4 Conclusion

28

Interesting future …

…high impact …

high uncertainty