Mitigating threats to operators - EY Japan...In Top 10 risks in telecommunications revisited:...

Top 10 risks in telecommunications revisited Mitigating threats to operators

Introduction 1

Mitigating business risks | How are operators faring? 2

Our assessment of operator responses to risks 3

Operator mitigation strategies per risk | Summary 4

The top 10 risks in telecommunications: mitigating threats to operators 6

1. Failure to shift the business model from minutes to bytes 7

2. Disengagement from the changing customer mindset 8

3. Lackofconfidenceinreturnoninvestment 9

4. Insufficientinformationtoturndemandintovalue 10

5. Lack of regulatory certainty on new market structures 11

6. Failuretocapitalizeonnewformsofconnectivity 12

7. Poorly formulated M&A and partnership strategy 13

8. Failuretodefinenewbusinessmetrics 14

9. Lackofprivacy,securityandresilience 15

10.Lackoforganizationalflexibility 16

Contacts 17

Contents

3Mitigating threats to operators

Top 10 business risks for telecommunications in 2012

A more pressing greenagenda

Concentration of equipmentvendors

Difficulties in managing debtand cash

Evolving service cannibalizationscenarios

Below the radar

Disengagementfrom the changingcustomer mindset

Lack ofconfidence in return on investment

Lack of regulatorycertainty on newmarket structures

Privacy,security andresilience

Poorlyformulated M&Aand strategicpartnerships

Failure to definenew businessmetrics

Failure tocapitalize on newtypes of connectivity

Insufficient information toturn demand into value

Failure to shift thebusiness modelfrom minutes to bytes

Lack of organizationalflexibility

ComplianceFin

ancia

l

Strategic Operatio

ns

Top 10 risks in telecommunications 2012 was part of our ongoing series ofstudiesdesignedtopinpointthemostcriticalriskissues,analyzethesector’sevolvingresponsesandhighlightelementsofemergingleadingpractice.

Inlastyear’sriskreport,weoutlinedobstaclesthatoperatorsmustavoidiftheyaretocapitalizeonnewopportunities.Inanindustryenvironmentwherestakeholdersaremoredemandingthaneverandwherecustomerexpectationscontinuetorise,itisimperativethatoperatorsdevelopspecificresponsestoarangeofthreats.

Telecommunicationscontinuestofaceaseriesofchallenges,whethermacroeconomic in nature or allied to long-term structural pressures. Evenso,theprognosisfortheindustryisbetterthanithasbeenforsometime.Greaterregulatorybackingforinfrastructureinvestmentcoupled with new demands from customers and enterprises means that operatorsareinastrongpositiontoextendtheirservicepropositionsinto new areas.

In Top 10 risks in telecommunications revisited: mitigating threats to operators,wedelveintothemeasureswebelieveoperatorscanadopt,notonlytofendoffthemanypressuresfacingtheirorganizations,butalsotomakethemostofanexpandinghorizonofservicepossibilities.

Introduction

Mitigating business risks

How are operators faring?Inourconversationswithseniormanagement,wehavefoundthat operators are already taking steps to meet sector risks. Concernsaroundbusinessmodeloverhaul,disengagementfromthecustomermindsetandreturnoninvestmentare,andwillremain,leadershippriorities.

Yet this is not to suggest that such risks are diminishing. The challenge in these instances now becomes how best to accelerate existingmovesandpursuebolderresponses.Inthecaseof“lackofconfidenceonreturnoninvestment,”forexample,networksharingiswell-established,andoperatorscanlooktomoredynamic forms of infrastructure rationalization such as Radio Access Network (RAN) sharing.

Meanwhile,risksthathaverecentlyenteredthetop10risksfortelecommunications,suchas“Insufficientinformationtoturndemandintovalue”and“Failuretodefinenewbusinessmetrics,”remain areas where mitigation strategies are only just emerging. Here,thechallengeistoformulateresponsesandmakethemleadership priorities. Only then can management attention turn to executionissues.

Top10risksintelecommunicationsrevisited2

Mitigating threats to operators 3

InFigure1,wehighlighthowoperatorsarecopingwitheachoftherisksinthetop10.Thisisderivedfromourinteractionswithleadingoperatorsthemselves,aswellas from our understanding of the risks themselvesandhowtheyarelikelytoevolveoverthenext12months.

Reading across the three categories of operatormitigationstrategyassessment, a number of conclusions can be drawn:

• Leadingsectorrisks(No.1,No.2andNo. 3) are already being dealt with as a leadership priority through well-established strategies.

• Otherrisksrepresentmorerecentpainpoints. While responses in these areas areoftennascent,managementfocusvariesinintensity(No.6andNo.8).

Figure 1: Operator mitigation strategy assessment

Our assessment of operator responses to risksAssuch,wehaveevaluatedriskmitigationstrategiesbyassessing the maturity of current responses as well as how high they rank as leadership priorities. We also consider whether theserisksarelikelytobecomemorepronouncedin2013inviewofthesuccessofexistingmitigationstrategiesandexternalfactorssuchasregulatorydemands,customerneedsandcompetitor actions.

• Theprospectforrisksincreasingordecreasinginmagnitudeoverthenext12monthsvariessubstantially.Weseeregulatorythreats(No.5)decreasing,whilerisksemanatingfromalackofbusiness intelligence (No.4) are seen increasing.

Evenforriskswhereoperatorsareprioritizingresponses—notablyfor“Failuretoshiftthebusinessmodelfromminutestobytes”and“Disengagementfromthechangingcustomermindset”—factorsinformingtherisks,particularcompetitoractions,arechangingcontinuously.Assuch,operatorsmustmaintainhighlevelsoffocusastheyexecutetheirstrategies.

Disengagement from the changing customer mindset

Lack of confidence on return on investment

Insufficient Information to turn demand into value

Lack of regulatory certainity on new market structures

Failure to capitalize on new forms of connectivity

Poorly managed M&A and strategic partnerships

Failure to define new business metrics

Lack of privacy, security and resilience

Lack of organizational flexibility

High Low

Mitigating strategy maturity

Mitigating strategy as leadership priority

Likelihood of risk increasing in 2013

10987654321 Failure to shift the business

model from minutes to bytes

Key

Top 10 risks in telecommunications revisited

1

2

3

4

5

Failure to shift the business model from minutes to bytessee page 7

see page 8

see page 9

see page 10

see page 11

Disengagement from the changing customer mindset

Lack of confidence in return on investment

Insufficient information to turn demand into value

Lack of regulatory certainty on new market structures

• Revisitingpricingapproaches

• Adapting the business model to support newrolesinthevaluechain

• Improvingcustomercommunicationsandmaximizingbrandtrust

• AdoptingtheOTTmindsetinnewserviceareas

• Improvingsegmentationtoisolatenewcustomer demands

• Extractingmorevaluefromsuppliers

• Reducing network duplication

• Educating the market on a shifting network landscape

• Taking a holistic approach to business intelligenceimprovements

• Takingaleadonpredictiveanalytics

• Turningbigdataintoanewrevenuestream

• Engaging better with policymakers in core serviceareas

• Managing compliance demands in new serviceareas

• Maintaining workable stances on net neutrality

SummaryOperator mitigation strategies per risk

4 Top10risksintelecommunicationsrevisited

Mitigating threats to operators

6

7

8

9

10

see page 12

see page 13

see page 14

see page 15

see page 16


Poorly formulated M&A and partnership strategy

Failure to define new business metrics

Lack of privacy, security and resilience


• Building capability and credibility in M2M

• Balancing unique selling points and partnering needs in the cloud

• Reviewingcorecompetenciesasaprecursortoacquisitionsanddivestments

• Providingclarityonthebenefitsofconsolidation

• Strikingmoreproductivepartnershipswithother industry players

• Overhaulingcustomer-relatedmetrics

• Looking beyond EBITDA to describe new revenuestreams

• Focusingonnewtypesofcoverageandpenetration metrics

• Outliningspecificareasofresponsibilityindata retention and piracy

• Prioritizing robust network infrastructure

• Leveragingtrustedbrandstolaunchnewsecurity-centricservices

• Bringing together new competencies in digital business units

• Creatingacultureofinnovation

• Transforminggo-to-markettoservecustomers better

5Mitigating threats to operators

Top 10 risks in telecommunications revisited6

Top 10 risks in telecommunications: mitigating threats to operators


Operator responses Revisiting pricing approaches

Chargingmodelsneedtobeoverhauled.Voiceisjustasubsetofdata,particularlyasVoLTEdevicesstarttopenetratethemarket.Asdataspeedsincrease,operatorsmustrevisittheirmonthlypackages,balancingunlimitedtariffs,tieredpricingandrelatedoveragerates,whilealsoconsideringtheroletobeplayedbyWi-Fiorfixed-lineserviceelementsintheirservicepropositions.

Operatorsalsocanrealizenewtypesofaddedvalue,bylaunchingfamilyandmulti-device,multi-accessoffers—importantmoveshavealreadybeenmadebyoperatorsintheUnitedStatesinthisregard,forexample.

Ashistoricdistinctionsfadebetweenmobilespendlevels,servicedemandandpaymentplanpreference—ourmobileconsumersurveyshowsprepaidusershaveastrongappetiteformobiledataservices,forexample—operatorsmustreconsidertheircustomers’ needs.1Althoughconsumersdemandgreatertransparencyoftariffs,flexiblepricingstructuresremainanimportantfeatureofservicepackages.

Inthislight,operatorsshouldreassesshowtheycreateandcommunicatevalue,andhowthistranslatesintoeffectivepricestructures.Thechallengeforserviceprovidersistocreatevaluecosteffectivelybeforeconvincingbuyerstopayproportionatelywiththatvalue.Forexample,operatorsshouldpositionLTEpackagesasmuchmorethananopportunitytoremoveunlimiteddataratesorlaunchunlimitedvoiceandtextbundles—suchmovesmayneglectlonger-termroutestodifferentiationbasedoncoverage,datathroughput or enabling APIs.

Ourconsumersurveydemonstratesahighcorrelationbetweentariffunderstandinganduserreceptivitytonewservicepropositions,placinganevengreaterimportanceoneffectivecommunicationofpricingandtariffs.Increasingsalesforceeffectivenessincross-andup-sellingnewpackagesshouldbeapriority,whiledevicesubsidymodelscanberevisited.AlreadyoperatorsinFrance,SpainandUnitedStateshaveremovedorplantoremovesmartphonesubsidies,exploringcustomerwillingnesstoaccepthigherupfrontfeesinreturnforlowerpricepointsforserviceplans.

Altering the business model to support new roles in the value chainInanerawhenpricingpressureisendemicandcustomersofallservicetypeswantmoreforthesameamountorthesameforless;itisimperativethatoperatorsoutlineareaswheretheycanbecometrustedprovidersofnewservices.

Withawidersetofentitiesinvolvedinthecustomerexperience,operatorscanexploitroleselsewhereinthevaluechain.Disruptiveserviceproviderscanbenefitfromtelcos’legacyexpertiseinmanyareas—providingbillingservicesforthird-partyappstoresisoneareawhereoperatorsarealreadymakingheadway,forexample.Inordertomaximizetheseopportunities,operatorsshouldreflectonhowvaluechainsarechanging—andhowtheirowndefinitionsofenterpriseandwholesaleoperationsneedtoadapttochangingindustryecosystems.Forexample,somecustomerssuchasmediadistributorsandothercarriershaveagrowingdemandformanagedservicesfromoperators.Inthislight,existingcustomerrelationshipswithenterprisedivisionsmayneedtoberevisitedtoadapttoincreasinglywholesaleservice-orientedcustomerneeds.

Asvalueshiftsfromminutesofusagetovolumesofdata,operatorsneedtomoveawayfrom their legacy strategies focused on customer retention,whichhavehadthe effect of commoditizing thevalueofminutesandbandwidth in customers’ eyes. Instead of concentrating on fightingchurn,operatorsneedtotargetrevenuesfromnewservicesthattapintorisingdemand and master a wider array of charging models to monetizetheirservices.

Failure to shift the business model from minutes to bytes

1


Mitigating strategy as leadership

priority

Likelihood of risk

increasing in 2013

High Low Key

1. The Mobile Maze,Ernst&Young,October2012.


Operator responses Improving customer communications and maximizing

brand trust Operatorsneedtoclearlycommunicatethevaluetheyprovide.Networkqualityremainsimportant,andmorecanbedonetoadviseandreassurecustomersaboutcoveragelevelsandsignalstrength.Meanwhile,operatorshavehighlytrustedbrandscomparedtodisruptivestart-ups.Theopportunitiesarisingfromthesecustomeraffinitiesneedtobeseizedasoperatorswidentheirservicepropositionsinanageofever-fastertechnology cycles.

Atamoregranularlevel,oneofthemajorfindingsofourrecentmobileconsumersurveyis that end users struggle to understand mobile data tariffs. Only 56% of global mobile users understand the mobile data plans that are the bedrock of operators’ mobile data businessmodels.Whatismore,customersconfusedbydatatariffsarealsofarmorelikelytofeelthattheirserviceprovidersdonotcommunicatenewservicestothem.

Inthislight,operatorsshouldoverhaultheirtariffexplanationswhileprovidingfurthereducationtocustomersarounddataconsumption.Consumersneedmoreadviceonhowtheirusagetranslatesintocosts—failuretosupportendusersherewillundermineattempts to monetize demand for mobile data.

Adopting the OTT mindset in new service areasMuchismadeofthethreatposedbydisruptivecompetitorsinareassuchassmartphoneoperatingsystems,mobileapplicationsandinstantmessaging.However,today’sexplosivelevelsofdatademandowemuchtoinnovationfromthesenewcomers.

Goingforward,operatorscanthemselvesreplicateOTTapplicationsaspartofservicesbundledwithnetworkaccess.TheconvergenceofTVandinternetservicesrepresentsastilllargelyuntappedareainthisregard.CombinationsofdigitalterrestrialtelevisionandOTTapplicationsrepresentasubstantialaddressablemarketforoperatorwhohavetheabilitytoactaslow-costprovidersinanincreasinglycompetitivespace.

Atthesametime,creatingOTT-stylemobileapplicationsisanareawhereearlyadoptingoperatorsaremakingheadway.Suchdevelopmentscanonlyhelpoperatorsmovefurtherbeyondthe“walledgarden”mentalityofthepast,therebycreatingmoreopportunitiesinan open ecosystem.

Whilemonetizingsuchserviceswillremainchallenging,opportunitiestoretainexistingcustomersandboltonpremiumserviceelementsshouldmotivatenewwaysofthinkingaboutserviceprovision.Innovationshouldplaceapremiumonboostingtime-to-market,whileofferingcustomeragreaterrangeof“fremium”servicepropositions.

Improving segmentation to isolate specific customer demandsCustomer segmentation needs to be deployed across consumer and enterprise segments.Mobileconsumerneedsvarysignificantlybetweenurbanandruralareasandaccordingtoage.Whileoperatorshavealreadycreatedyouth-orientedbrands,long-standing assumptions about the difference between pre- and post-paid users should be overhauled.

Intheenterprisemarket,customerneedsdiffermoremarkedlythaneverbetweenindustryverticalsassmartindustrysolutionscometothefore.Meanwhile,enduserneedsinthesmalloffice,homeofficeandsmalltomediumsegmentshavebeenhistoricallyunderserved.OperatorscandomuchtoleveragetherelativelyhigherspendontelecommunicationscomparedtoITinthispartofthemarketbyofferingunique,tailored packages.

2

Disengagement from the changing customer mindsetWith global technology brands now top of mind for consumers and technology cycles quickening,operatorsneedto understand and respond to fast-changing customer expectationsandbehaviorsiftheyaretofightoffthecompetitivethreatfromOTTproviders.Thiswillrequireoperators to communicate theunderlyingvalueofthenetwork and the sources of addedvaluetodifferentiatetheirofferingsinnewserviceareas.Innovationintheservicemodel could also be used to build brand loyalty in the same waytechnologyplayershavedone.



priority

Likelihood of risk

increasing in 2013

Key High Low


Operator responses Extracting more value from suppliers

Vendorsareinastrongpositiontohelpoperatorscopewitharisingcapitalexpenditureburden.Foroperatorsinemergingmarkets,thevendorfinancingmodelismakingacomeback,whilesingleRANsolutionsareallowingoperatorstomodernizenetworksinawaythatcreatesnewefficienciesasnewtechnologiesoverlaylegacystandards.

Very-high-bit-rateDigitalSubscriberLine(VDSL)bondingandvectoringtechniquesofferedbyvendorscanhelpoperatorsimprovenetworkperformancelevels.Thisconferscompetitiveandcostadvantagesgivenhighfiberrolloutcostsandthetraditionalspeedadvantageenjoyedbycablecompetitors.

Othervendorofferingsshouldnotbeoverlooked:networkoutsourcingcanhelpoperatorsreducecostsby20%ormore.Lookingahead,operatorsshouldconsiderthetimingofoutsourcingarrangementswhiledevelopingrelevantkeyperformanceindicators.Inaddition,operatorsshoulddiscriminateclearlybetweenthebenefitsofsingleandmulti-vendorapproaches.

Reducing network duplicationNetwork sharing has been a feature of the telecommunications sector for some years. However,itsstatushasmovedfrom“nicetohave”’to“missioncritical”—particularlyinanenvironmentwheremacroeconomicchallengescompoundthestructuralconcernssurrounding pricing and regulatory pressure.

Lookingahead,thereareopportunitiesforoperatorstomovewellbeyondthebilateralsharingagreementsthathavehistoricallycharacterizedsharednetworkapproaches.Movingfrompassivetoactiveinfrastructuresharingrepresentsabolderstrategythatcanoptimizecapexandopexsavings.

Atthesametime,wholesaleLTEnetworkapproachesareattractinginterestinmarketsasdiverseasKenyaandtheUS,suggestingthatmarketstructuresaremoreflexiblethanindustrywatchershavepreviouslyconsidered.Suchopportunitiesneedtobecarefullyevaluatedbyoperatorssothattheycanfuture-prooftheirnetworkrationalizationagendas while also understanding new routes to market entry.

Educating the market on a shifting network landscapeFearsofacapacitycrunchmaywellrequireadditionalqualifications.Eveninmaturemobilemarkets,datausagevariesconsiderablyfromcountrytocountry—forexample,SwedishmobilecustomersusefourtimesmoredatapermonthcomparedtoUKusers.2 Meanwhile,capacityconcernsaremakingtheirpresencefeltinurbanareas;mobileinfrastructureinvestmentpercapitaishigherinruralareas.Asoperatorsmigrateto4G,theyneedtomakecleartheincrementalnatureofLTEexpendituresothatindustryfearsofacapexspikeareassuaged.

Inaddition,smallcellstrategies—whichhelpmeetrisingdemandinurbanareas—needtobeclearlyarticulatedsothatinvestorsunderstandhowheterogeneousnetworksarebecoming an essential part of the network landscape.

3

Lack of confidence in return on investmentWhileoperatorshaveprovedadept at managing capital investmentandbalancingitflexiblywithfreecashflowanddividends,itisincreasinglyclearthattightcapexcontrolcan limit their ability to grow newservicesquickly.Sothey need to maintain their commitmenttoinvestingingrowthopportunities,whiletracking technology and consumerdevelopmentsclosely to ensure they target theirfinancialinvestmentsin the right areas at the right time.



priority

Likelihood of risk

increasing in 2013

High Low Key

2.“Threatof‘capacitycrunch’inmobiledata”,Financial Times,16November2012.


4Operator responses

Taking a holistic approach to business intelligence improvementsAsoperatorsmovetowardamoresophisticatedanalyticsenvironment,improvementsneed to be made on a number of fronts before business intelligence capabilities can be overhauled.

Forone,dataiscurrentlyfragmented,withamixtureofcustomer,productandassetdataresiding in multiple systems. This means that operators must employ sophisticated data miningtoolsaheadofattemptstoconvertthiswealthofdataintocustomerinsights.

Meanwhile,thecostsassociatedwithtranslatingdatafromlegacyframeworksintouseableformatsaresubstantial.Closeengagementwithvendorsisneededgoingforward,andcloud-basedsolutionsmayhelpoperatorsreducecostsastheoveralldatastorage burden increases.

Taking a lead on predictive analyticsPredictiveanalyticshasavitalroletoplayforoperatorstransformingtheirbusinessintelligencecapabilities.Cutting-edgeanalyticscandeliveranumberofbenefits—fromdeliveringcustomerinsightsthatcanimprovemarketingpropositionsandreducechurnto aiding network capacity planning.

Operatorsindevelopedmarketsarealreadymovingforwardwithsuchinitiatives,andemergingmarketplayerswillalsobenefitfromnewinsightsinthisarea.

Telecommunicationslagsotherindustriessuchasretail,whereuseofpredictiveanalyticsisinamaturephase.Operatorsneedtodevotemoretime,investmentandresourcestothisareasotheycanmakethemostoftheirlegacyadvantagesinareassuchaslocation-sensitivedata.

Turning big data into a new revenue streamImprovedreuseofinformationassetscanimprovetimetomarketandimproveexistingcustomerrelationships.However,thelong-termchallengeforoperatorsistoprovidenewtypesofservicesthatleveragetheircustomerinsights.

Inthisscenario,operatorscanprovidenewtypesofmanagedservicesforwholesaleandenterpriseclientsinadditiontonetworkconnectivity.However,thisrequiresoperatorstoworkmuchmorecloselywithcustomers,giventhatbigdataisanemergingarea,wherevalueperceptionsandservicepropositionsareonlyjustemerging.

Bythesametoken,operatorsmustdevelopclearstancesoftheprivacyandsecurityofcustomerdata—toreassureendusersandsatisfycompliancedemands.

Insufficient information to turn demand into valueTodriveprofitablecustomerpropositionsandimprovetheir time to market for newservices,operatorsneedaccurate,timelyandcomprehensivebusinessintelligence and customer analytics,underpinnedby aligned and integrated operational support and billing systems.Theseelementspavethewayforefficientgrowthbyenablingoperatorstoimprovedecision-making,helpingthem understand customer changes before competitors and allowing them to reuse networkdataincollaborativepartnerships.



priority

Likelihood of risk

increasing in 2013

Key High Low


5Operator responses

Engaging more productively with policymakers in core service areasOperatorsmustengagemorecloselywithgovernments,whicharenowmoreimportantstakeholders in the telecommunications industry. Although regulatory policies are nowstartingtocultivateapro-investmentenvironment,governmentsareincreasinglydrivingnationalagendasastheyconcentrateonthesocioeconomicbenefitsofnewinfrastructure.

Bycommunicatingstandpointsinareassuchasstateinfrastructurefunding,equivalenceofaccessandlong-termspectrumrelease,operatorswillbeinastrongerpositiontoachievenegotiatedoutcomeswithregulators.

Areas such as network sharing and spectrum refarming and trading remain areas whereregulatorystandpointsarestillevolving.Theonusisonoperatorstoengageeffectivelywithlawmakersintheseareas.Bytakingawiderviewoftheadvantagesofnewinfrastructureintermsofbenefitstothepublicandprivatesector—andsharingknowledgewithpolicymakers—regulatorylandscapescanprovidemorecertaintyforgovernments,citizensandoperatorsalike.

Managing compliance demands in new service areasAsoperatorslooktowardadjacentmarketsegmentsfornewgrowthopportunities,theyneedtoconsiderthecomplianceburdensinvolved.

Mobilemoneyisanareawheretelcosarealreadytransformingfinancialinclusion.However,theneedforproportionateregulationispronounced.Legacybankingregulationcanprovetooonerousfornewentrants,andoperatorsmustengagewithrelevantregulatorstoensuresufficientincentivesexistforthemtobecomepaymentproviders.

Maintaining workable stances on net neutralityNet neutrality remains an ongoing debate in the telecommunications industry. Regulatory attitudesareinflux—anddifferbetweenregionssuchasNorthAmericaandEurope—whilecontentprovidersandoperatorstraditionallyshareopposingviews.

Lookingahead,operatorsshouldensurethattheybuildflexibilityintotheirstances,especiallysinceregulatorypositionsvaryfrommarkettomarket.Operatorsshouldbeabletolinktheirnetneutralityviewswiththeirapproachesinrelatedareassuchastrafficmanagementandqualityofservice.

Inthisway,theywillbeinastrongpositiontoengagepositivelywithregulators.Moreover,theyshouldcommunicatemoreeffectivelywithotherindustrystakeholders,suchascontentproviders,socommongroundcanbediscoveredwherepossible.

Lack of regulatory certainty on new market structures

Uncertaintyoverregulators’approaches to new market structures is undermining operators’ willingness to invest.Itisincreasinglycrucialforgovernmentsand regulators to adopt pro-investmentpoliciestosustainthe sector’s momentum and for operators to form workable stancesonarangeofissues,including the increasing interrelationshipbetweenfixedand mobile policies. At the sametime,allthesegroupsmustworktogethertoachievegreaterclarityoverregulatoryapproaches.



priority

Likelihood of risk

increasing in 2013

KeyHigh Low


Operator responses Building capability and credibility in the M2M market

Operatorsareextremelywell-positionedtogrownewrevenuestreamsinM2Macrossarangeofindustryverticals.

However,anumberofchallengesneedtobemethead-oniftheyaretomaximizetherevenueopportunity.Forone,corecompetenciesneedtobeclearlydelineated.Operators need to decide whether to build internal capabilities or partner in areas such asapplicationdevelopmentandmanagementplatforms.

Atthesametime,newformsofcustomercentricityareneeded.ManyenterprisecustomersmaynotbeawarethattheirbusinesschallengescanbesolvedbyM2M,duetostill-lowlevelsofawarenessinthemarket.

Operatorsshouldalsoconsidermajoringinkeyindustryverticals.Forexample,utilitiesandautomotiveM2Msolutionsthattendtobenationalinscopemayalignbetterwithexistingoperatorfootprints.Inthelongerterm,connectedconsumerdeviceopportunities may require new cross-border strategies enabled by partnerships with otheroperatorsanddevicemanufacturers.

Balancing unique selling points and partnering needs in cloud computingCloudcomputingrepresentsanotherlong-termgrowthopportunityfortelcos.However,technology players are leading new solutions in this area.

Goingforward,operatorsshouldfocustheirenergiesoncertainsolutionssuchasinfrastructureasaservice,wheretheyarewell-placedtocompetewiththeirtechnology company peers. Areas where operators can differentiate their offerings includeservice-levelagreement(SLA)provision,networkingreliabilityandqualityofservice.Nevertheless,therealsoareopportunitiesinotherareassuchasplatformasaserviceandbusinessprocessesasaservice—partsofthemarketthattelcosmayhavesomewhatoverlookedinthepast.

Whiletimetomarketincloudservicesisvital,particularlyasenterpriseconcernsaroundsecurityandcompliancestarttorecede,operatorsmustensurethattheycanrealigntheirexistingcapabilitiestosupportacloud-basedservicedeliverymodel.ThismeansensuringthatinternalnetworkandITteamscollaborateeffectivelywhileoverhaulingsalesteams’incentivessotheyfitwithapay-as-you-gobusinessmodel.

PartnershipswithITservicesplayerswillneedtoberevisitedsojointgo-to-marketstrategiescanbeformulated.Technologypartnerswillhaveakeyroletoplayinofferingcomplementaryservicessuchassalestrainingandintegrationservices.

6


New types of communication suchasM2Mareredefiningtheconceptofconnectivity,requiring operators to adopt new strategies. Instead of continuing to think of connections in human terms,operatorsneedtodevelopnewunderstandingsofconnectivityandtargetnew growth areas. This will mean identifying core competencies for use in compositevaluechainsanddelineating clearly between the need to build capability and the need to partner or outsource.



priority

Likelihood of risk

increasing in 2013

Key High Low

Mitigating threats to operators

7Operator responses

Reviewing core competencies as a precursor to acquisitions and divestmentsAsbusinessmodelsintelecommunicationsundergoaperiodofdynamictransformation,itisvitalthatoperatorsreassesstheircoreandnon-corecompetencies.Acquisitionsanddivestmentscanthenplayavitalroleinhelpingoperatorsstrategicallyrepositionthemselves,whilealsoprovidinggreatertransparencyforinvestors,therebygeneratinghighervaluations.

Forexample,thenumberoftower-relatedtransactionsisrising,fromAfricatotheAmericas.Whilethisservesthenear-termpurposeoffreeingupcash,italsosignifiesthatoperatorsdonotviewtowerownershipasacorecompetency.Specialistsarebetterplacedtomaintainthiskindofinfrastructure—andbyengaginginsale-and-leasebackdeals,operatorsareabletofocusmoreonmarketingservicestotheircustomers.

Ontheotherhand,operatorsalsoshouldconsiderhowacquisitionscanbringimmediatebenefitsintermsofcredibilityinnewmarketsegments.Playerswithsizeableambitionsinareassuchasdatacenters,M2Mcommunicationsanddigitalmediamayfindthattargeted acquisitions bring new capabilities in a way that can boost time to market.

However,suchdealscanonlyprovidelong-termbenefitsiftheyareharnessedeffectivelywithinexistingglobalfootprintsandorganizationalcultures—meaningleadershipbuy-inisvitalandintegrationconsiderationshavetofigureprominentlyintherationaleforacquisition.

Providing clarity on the benefits of consolidationConsolidationremainsverymuchattheheartofthetelecommunicationstransactionlandscape,aswitnessedbyrecentdealsintheUS,forexample.Scalebenefitsinsuchscenariosareundeniable,yetregulatorsarehighlyconsciousofthepotentialdetrimentaleffectsoncompetitionlevels.Nevertheless,fewercompetinginfrastructurescanspeedtherolloutofnewservices,crucialatatimewhenthecapexburdenoftheindustryremains considerable.

Assuch,operatorsneedtotakeextrastepstooutlinethebenefitsofconsolidationscenarios—intermsofimprovedcustomerexperienceandmorerationalmarketstructures.Atthesametime,operatorsshouldconsiderarangeofalternatives,fromnetwork-sharingjointventurestosynergy-centricpartnershipswiththeirpeersinotherareas such as procurement.

Striking more productive partnerships with players from other industry sectorsPartnerships are of rising importance in an industry where M&A risks remain high and whererisk-sharinginnewmarketsegmentsisattractive.

However,manytie-upsremainhighlydefensiveinnature—agreementsbetweenbanks,operatorsandretailersinmobilepaymentsareagoodexampleofthis.Goingforward,operatorsshouldviewsuchpartnershipsasmoreaggressivevehiclestosupportnewgrowthopportunities.Thisinvolveshighlightingthebenefitstoeachpartnerup-front,whileregularlyrevisitingstrategicaims,medium-termtargetsandgovernancestructures.InAsia,wearealreadyseeingbolderjointventuresstruckbetweenoperatorsandtechnologyprovidersastheytargetgainsinthesemiconductormarket,forexample.

Evenso,partnershipsmaynotalwaysprovidethebestroutetoinnovation.Asrecentoperatormovesdemonstrate,nurturinginnovationthroughventurefundscanalsohelpincubatenewskillsandexpertise—particularlygiventhatquickeningtechnologycyclesmeanitisevermoredifficulttoselecttherightcompetenciesforfutureservicescenarios.

Poorly formulated M&A and partnership strategy

AlthoughM&Aactivityhasacceleratedrecently,itsnatureandriskshavechanged. Footprint control increasingly takes precedence overfootprintgrowth,whilepolitical,macroeconomicand regulatory risks are increasing. But acquisitions and partnerships are essential for success in emerging market segments such as mobileadvertisingandcloud computing. Operators need to discriminate clearly between when they need to acquire and when they should partner. The ability to sustain partnerships will emerge as a strategic differentiator. Effectivemanagementandimplementation of M&A and partnershipsofferssignificantoperational upside to telecommunications players.



priority

Likelihood of risk

increasing in 2013

KeyHigh Low

13


Operator responses Overhauling customer metrics

Customer-relatedmetricsshouldbeapriorityasoperatorsoverhaultheirkeyperformancemetricstoreflectanenvironmentwhererevenuegrowthistrendingtowarddata,consumersareaggregatingdevicesandoperatorsarelookingtoM2Mfornewrevenuestreams.Inthislight,itisclearthathistoricindicatorssuchasminutesofuse(MoU) and ARPU are lacking in insight.

Metricsinvolvingrevenuegeneratingunits(RGU)havebeenleveragedsuccessfullybycableoperators,helpingtocommunicatesuccessinup-sellingnewservices,whileUSmobileoperatorsareusingaveragerevenueperaccount(ARPA)toreflectthetake-upofshareddataplans.Meanwhile,revenuepermegabyteandM2M-relatedmetricscangiveinvestorsabettersenseofthequalityofgrowthinthemobiledatamarket.

Operatorsshouldlooktoleveragemorenuancedmetricssuchasthese,whichwillhelpinvestorsunderstandthenatureofgrowthacrossanumberofcustomersegments.

Looking beyond EBITDA to describe new revenue streamsEBITDAremainsamainstayoffinancialmetricsusedintelecommunications.However,itsrelevancewasmoremarkedadecadeago,whenoperatorswererecoveringfromtheTMTbubble.

Forone,coreearningsmetricsfailtoreflectthesector’shighcapexneeds,whicharecrucialastheindustryshiftstowardfiberinfrastructureandLTEnetworks.Justasimportantly,EBITDAmarginsalsofailtoreflectnewgrowthareas,wherecoreearningsmarginstypicallyunderperformlevelsapparentincorebutdecliningserviceareassuchasmobilevoice.

Goingforward,furtherdetailisneededatthelevelofoperatingcashflow—ametricthatEuropeanoperatorsandothersarealreadyrelyingonmoreandmore.Meanwhile,metricssuchascashreturnoninvestedcapital(CROIC)canhelpcommunicateprogressinareassuchascloud/ITservicesandM2Mservices.

Focusing on new types of coverage and penetration metricsAsinfrastructurerolloutbecomesavitalenablerforproductivitygainsandcustomersaggregatenewtypesofdevices,itisvitalthatindustryplayersstarttocommunicatecoverageandpenetrationmetricsinnewways.

Revealingmoredetailsontablet,smartphoneandTVtake-upcangiveinvestorsabettersenseofgrowthopportunitiesavailabletooperatorspursuingmulti-screenstrategies.Atthesametime,existingnetwork-basedmetricscanberefined—in-buildingcoveragetargets are likely to be more important than more basic measures going forward.

8

Failure to define new business metricsThe metrics and key performance indicators that operators use to manage their operations internally and communicate their performance and prospectsexternallyhavenot kept pace with the shift in business models from minutes to bytes. Many internal metrics are stillservice-andnetwork-orientedanddonotprovideenough granularity to improvethecustomerexperience.Also,commonlyusedexternalmetricssuchasARPUfailtogiveinvestorsthe full picture. Operators urgentlyneedtodefinea new set of metrics that putsthecustomerfirstandenhances communication of financialperformance.



priority

Likelihood of risk

increasing in 2013

Key High Low


9Operator responses

Outlining specific areas of responsibility to regulatorsAlthoughoperators’privacyandsecuritycredentialsareseenasastrength,theroleof data guardian has its drawbacks. Compliance demands are set to rise not fall: recent policyinitiativessuchastheUKCommunicationsDataBillsuggestarisingburdenonoperators as communications monitoring is tightened.

Asnewlawsareproposedorintroduced,operatorsshouldmakecleartheirpositions—buildingconsensuswiththeirpeersandpartnersisavitalcomponentofthis.Manysuchdataretentioninitiativesarecontentious,andoperatorswillbeleftexposedtoarangeofrisks,fromincreasedcompliancecoststoreputationaldamage,iftheydonotarticulateclear and workable stances.

Content piracy is another area where demands on operators are rising. Copyright holdersareseekingtougherpenaltiesonthosewhopiratecontent.Cooperationisvitalinthisregard,withthepotentialtodevelopnewpaymentmodelsfordigitalcontentrepresentingoneareawheresharedinitiativescouldbearfruit.

Prioritizing robust network infrastructureWhilenetworkupgradestrategiesareattheforefrontofoperatorthinking,ensuringacceptableservicelevelsonlegacyinfrastructureisnolessimportant.

Inthelastyear,networkoutageshavebeenreportedinmanypartsoftheworld,affectingmobileoperatorsfromtheUKtoSingapore.Thesehaveledtosignificantcustomerdissatisfaction,whichisallthemoredamaginggiventhatoperatorsarehopingtodifferentiateonlevelsofmobiledatacoverage.

Lookingahead,operatorshavetoensurethattheirfocusonnetworkupgradesdoesnotcomeattheexpenseofguaranteeingacceptablelevelsofcustomerserviceacrosscorevoiceandmessagingservices.Thismeansworkingmorecloselywithsuppliers,bothtoidentifyproblemswhentheyoccurandtotakestepstoavoidcostlynetworkdowntimescenarios in the future.

Leveraging trusted brands to launch new security-centric servicesOperators typically outscore their counterparts in the technology industry when it comes totrustlevelsregardingsecurityandprivacyofdata.Thesehighlevelsofcustomertrustneedtobetranslatedintonewservicepropositionsthatcandifferentiatetheirservicepropositions in a crowded market.

Security-orientedservicescancomeinavarietyofguises.Fortelcosthatservemultinationalcorporations,thismeansofferingmanagedsecurityservicesthatformpartoflarger,cloud-basedpropositions.Capabilitiesinvulnerabilityassessmentneedtobeextendedwhilecustomerneedswillvaryconsiderablyaccordingtoindustryverticalandgeographic footprint.

Meanwhile,consumersrequiregreaterlevelsofreassurancefromtheirserviceproviders.SecurityoptionscanbeaddedtohomenetworkingsolutionswhileourcustomersurveyThe mobile mazehasshownthatimprovedprivacyandsecurityfeaturesarevitalifconsumersaretotakeupnewmobilepaymentservices.

Lack of privacy, security and resilienceCustomers place more trust in operators than in social networks,regardingoperatorsas security guarantors acrossarangeofservices.Yet they still hold operators responsible for threats from thirdparties,evenformobilemalware attacks and rogue apps. Operators should work closelywithgovernmentstoclarify their responsibilities in areas such as anti-terrorism andcontentforchildren,andcollaborate with suppliers and partnerstotackleprivacyandsecurityissuesinnewserviceareas such as cloud security and mobile apps.



priority

Likelihood of risk

increasing in 2013

KeyHigh Low


Operator responses Bringing together new competencies in digital

business unitsEstablishedoperatorshavealreadytakenstepstocreatenewbusinessunitsaimedsquarelyatharnessinginnovationindigitalandICTdomains.However,thisisbecomingmission-criticalforawiderrangeofplayers,andthechallengesaccompanyingsuchmovesareconsiderable.

Leadershipwillbeavitalenablerforsuchnewunits,whichmustcoexisteffectivelywithmoreestablishednetwork-andcustomer-centricpartsofthebusiness.Existingcompetenciesatoperatorsstraddledifferentpartsofthebusiness:formanyincumbents,historicexpertiseisconcentratedindomesticmarketswhileinnovationcapabilitiesmayhavebeenacquiredthroughacquisitions.

Inthislight,operatorswillneedtoconsiderhowglobalstrengthsinnewserviceareasarecreatedthroughhistoricallydecentralizedorganizationswherecountry-levelleadershipoften plays a key role in decision-making.

Creating a culture of innovationOperatorshavehistoricallylaggedbehindtheircounterpartsinthetechnologyandmediasectorswhenitcomestoencouraginginnovation.Asaresult,timetomarkethassuffered,ashasthesheerrangeofproductandservicedevelopment.

Lookingahead,operatorsshouldconsiderembracinginnovationaspartoftheirorganizationalstructures,ensuringthatideasfromallcornersofthecompanycanreachseniordecision-makers.Aspartofthis,operatorsshouldconsiderspecializedinnovationdivisions,evenwithinrecentlycreatedbusinessunits,sothatthebestideasstandthegreatestchanceofbeingdeliveredintoimpactfulnewservices.

Aspartofthis,apolicyofexternalhiresinkeyareascanmaintainhighlevelsofideageneration,whichiscrucialifoperatorsaretocompeteeffectivelyinmorediversevaluechains.Inaddition,partneringapproachesneedtoevolveconsiderablysothatknowledgeissharedmoreeffectivelybetweendifferentorganizations,withtherecognitionthatnosingle entity owns the customer.

Transforming go-to-market to serve customers betterMany forward-looking industry scenarios offer an increasing focus on wholesale opportunitiesasthesourceofnewrevenuestreams.Asenterprisecustomersbecomeincreasinglydemandinginareassuchasmanagedservices,operatorsneedtoservetheirdemands in new ways.

Crucially,thismeansthatoperatorsshouldtreatcertainenterprisecustomersmoreliketraditionalwholesalecustomers,giventheirgrowingneedforend-to-endsolutions.Aspartofthis,operatorsmustoverhaultheirgo-to-market,whetherbyensuringtighterfusionbetweenretailandwholesalesalesteamsorofferinggreaterlevelsofpre-salessupport and customer education.

10

With their organizational structures subject to forces such as the shift to dataservices,theriseofpartneringandtheimperativeforspeedtomarket,operatorshavealreadymadesignificantchangestotheirorganizations. But more are needed. Operators now need to align their business units tomaximizetheeconomiesof scale and scope in their geographic footprints while reconciling the competing forces of geographic sensitivityandglobalstrength.




priority

Likelihood of risk

increasing in 2013

Key High Low

Global Telecommunications Center contacts

Jonathan Dharmapalan Global Telecommunications [email protected]

Holger Forst Global Telecommunications Markets Leader [email protected]

Prashant Singhal Global Telecommunications Markets Leader [email protected]

Olivier Lemaire TelecommunicationsLeader—[email protected]

Luis Monti TelecommunicationsLeader—[email protected]

David McGregor TelecommunicationsLeader—[email protected]

Rhys Phillip TransactionAdvisoryServicesLeader—Telecommunications [email protected]

Adrian Baschnonga SeniorAnalyst—Global Telecommunications Center [email protected]

Bart van Droogenbroek TaxLeader—Telecommunications [email protected]

TelecommunicationsLeader—[email protected]

Masahiko Tsukahara


Ernst & Young

Assurance |Tax| Transactions |Advisory

About Ernst & YoungErnst & Young is a global leader in assurance,tax,transactionandadvisoryservices.Worldwide,our167,000peopleareunitedbyoursharedvaluesandanunwaveringcommitment to quality. We make a difference byhelpingourpeople,ourclientsandourwidercommunitiesachievetheirpotential.Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited,eachofwhichisaseparatelegalentity.Ernst&YoungGlobalLimited,aUKcompanylimitedbyguarantee,doesnotprovideservicesto clients. For more information about our organization,pleasevisitwww.ey.com.

How Ernst & Young’s Global Telecommunications Center can help your businessTelecommunications operators are facing a rapidly transforming business model. Competition from technology companies is creatingfiercechallengesovertheownershipofcustomersandserviceinnovation,andpricing pressures and network capacity are intensifyingscrutinyonreturnoninvestment.Additionally,regulatorypressuresandshareholderexpectationsrequireagilityand cost efficiency. If you are facing these challenges,wecanprovideasector-basedperspectivetoaddressingyourassurance,advisory,transactionandtaxneeds.OurGlobalTelecommunicationsCenterisavirtualhubthatbringstogetherpeople,culturesandleadingideasfromacrosstheworld,tohelpyouaddressyourglobal,regionalandlocalchallenges.Thesemayincludenext-generationservicesandproductprofitability,customerlifecyclesandrevenueassurance,workingcapitalmanagement,risk,regulatorystrategiesandcompliance,potentialcostreductions,mergersandacquisitions,financialandoperationalimprovements,accountingandtaxstrategies.Whateveryourneed,wecanhelpyouimprovethe performance of your business.

©2013EYGMLimited.AllRightsReserved.

EYGno.EF0116This publication contains information in summary form and is therefore intended for general guidance only. It is not intended tobeasubstitutefordetailedresearchortheexerciseofprofessional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication.Onanyspecificmatter,referenceshouldbemadetotheappropriateadvisor.

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