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ANALYSIS

Mobile operators: the digital transformation opportunity June 2016

© CAICT © GSMA Intelligence

www.caict.ac.cn • [email protected] • CAICT@WeChat gsmaintelligence.com • [email protected] • @GSMAi

Mobile operators: the digital transformation opportunity

GSMA Intelligence GSMA Intelligence is the definitive source of mobile operator data, analysis and forecasts, delivering the most accurate and complete set of industry metrics available. Relied on by a customer base of over 800 of the world’s leading mobile operators, device vendors, equipment manufacturers and financial and consultancy firms, the data set is the most scrutinised in the industry. With over 30 million individual data points (updated daily), the service provides coverage of the performance of all 1,400+ operators and 1,200+ MVNOs across 4,500+ networks, 77 groups and 238 countries worldwide. www.gsmaintelligence.com

China Academy of Information and Communications Technology China Academy of Information and Communications Technology (CAICT) is a scientific research institute directly under the Ministry of Industry and Information Technology. CAICT is a specialised think-tank for the government and an innovation and development platform for the industry. Its service portfolio covers telecommunications, the Internet, informatisation and the integration of industrialisation and informatisation. It contributes to the development and innovation of the country and the ICT industry by providing support and services in terms of strategies, plans, policies, regulations, technologies, standards, testing and certification. www.caict.ac.cn

Authors GSMA Intelligence:

CAICT:

David Evans

YU Xiaohui

David George

CAICT - Industry and Planning Research Institute :

Director Director

Tim Hatt Director

Mark Giles

Lead Analyst

Sylwia Kechiche

Lead Analyst, M2M

Mike Meloán Lead Analyst

Chief Engineer

YANG Zizhen

Deputy Director

SUN Luyao

Senior Researcher

ZHANG Yue

Senior Researcher

XU Mei

Senior Researcher

FENG Cheng

Senior Researcher

LIU Qiancen

Senior Researcher

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Executive summary Mobile operators across the world face the twin challenges of slowing growth and ongoing disruption of core services by new internet players, even as the broader mobile ecosystem continues to see significant revenue growth. This report highlights the opportunity for operators to undertake digital transformation to benefit from these opportunities and gain a share of the incremental revenues, by developing new business models and skills to compete effectively. The report has been produced through collaboration between GSMA Intelligence and the China Academy of Information and Communications Technology (CAICT). It examines examples of operator strategies and initiatives from across the world, with CAICT providing an overview of the Chinese market opportunity and specific examples of initiatives from Chinese operators.

The need for digital transformation Mobile operators across the world face common challenges, with increasingly saturated markets experiencing modest subscriber growth and core operator services commoditised by new players successfully monetising high levels of consumer engagement. Although the revenue outlook for core operator services remains muted, significant growth is expected in the broader digital ecosystem. Digitisation has already disrupted the mobile industry and is now beginning to transform a range of other industries, including healthcare, finance and retail. This is creating opportunities for innovative new services, with consumer engagement and data traffic increasingly focused on mobile devices and mobile networks. To date much of the revenue growth (and associated valuation upside) from new digital services has been captured by the new internet players. The challenge for operators is to undertake their own digital transformation to benefit from these opportunities and gain a share of the incremental revenues, by developing new business models and skills to compete effectively.

A strategy for digital transformation To develop innovative new business models and generate incremental revenues from the mobile ecosystem, operators need to devise clear strategies for digital transformation. Several global operators have already set out such strategies and are well along the path to transforming into digital service providers. The leading operators are those that have placed the goal of new business development at the centre of their strategy, alongside the strengthening of existing core businesses and developing broader skillsets to compete in the digital economy. Examples examined in detail in this report include Verizon, Singtel and China Telecom, but other operators are making similar journeys.

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A common factor among these operators is their willingness to embrace new business models and to innovate in the use of technology to provide new services. These operators are increasingly competing directly with internet players in areas such as mobile video and mobile advertising, building platform business models and new capabilities through acquisitions and partnerships. The financial benefits of these digital transformation strategies will take some time to materialise, particularly as many operators are still at relatively early stages and will need time to invest in and develop the key underlying building blocks (including, for example, developing the necessary network capabilities, the partnerships needed to supply the particular content or services, and monetisation strategies). This is a key issue that needs to be acknowledged by both senior management and investors as the benefits of these strategies may take time to become evident. Operators will also need to transform their own operational models to embrace the move to digital services. This includes developing a more open culture and the right skillsets across the employee base. Digital transformation of the operating model includes the move to increasingly software-centric networks1 and cloud-based infrastructure to increase operational agility. Such moves can deliver cost savings and allow operators to launch new services more quickly. Nevertheless, this does not in itself deliver the business model transformation needed to compete in the evolving digital economy.

The focus areas for growth This report highlights five potential areas where operators can look to participate in expected revenue growth in the broader mobile ecosystem: The Internet of Things (IoT) and machine to machine (M2M) The IoT market is moving away from vertical-specific, siloed applications to encompass delivery of horizontal solutions that use big data analytics. Partnerships and collaboration between operators and ecosystem players are therefore increasingly important. The provision of connectivity accounts for a relatively low proportion of the overall revenue opportunity, but providing an end-to-end service can deliver a threefold uplift in ARPU. Operators are therefore exploring opportunities to expand their portfolios, using M&A and partnerships to add service capabilities and global reach. The IoT marketplace remains highly fragmented, but mobile operators have collaborated to define and support common standards, such as for the use of licensed spectrum and for low-power, wide-area (LPWA) solutions such as narrowband IoT (NB-IoT), with the latter seeing a growing range of use cases. China alone could see almost 700 million LPWA connections by 2020, according to CAICT forecasts.

1

‘Software eats the network: strategic implications of SND and NFV’, Mobile Industry Radar, GSMA, 2015

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Cloud, big data and analytics Growth in the number of connected devices and increasing consumer engagement with smartphones are driving exponential growth in the volume and velocity of both human and machine data. At the same time, advances in big data analytics are increasing the value of this data and its use cases. As trusted providers with access to large amounts of first-party data, operators are well positioned to take advantage of these opportunities. Several operator initiatives from across the world, particularly in the areas of mobile advertising and big data analytics, are scaling effectively and showing that operators can compete with the established internet players in this space. The cloud market is highly competitive and dominated by a handful of large-scale providers, particular on the infrastructure side. This has led many operators to refocus their efforts on their core strengths such as providing connectivity services, with operators leveraging their network capabilities to allow a broad range of cloud services providers to deliver their services to end users on a flexible basis. Going forward, the main opportunities for operators in the cloud space are likely to be specific to certain geographies and services. Content and video Video now accounts for the majority of global mobile data traffic and is forecast to be the key driver of data traffic growth, both globally and for the Chinese market specifically. To date, mobile video (and the ability to monetise the content) has been dominated by internet players, such as YouTube and Netflix, with the operator role simply one of connectivity provider. However, a number of operators are developing their own content delivery platforms. Singtel, Verizon and PCCW are three prominent examples of this trend, with their HOOQ, Go90 and Viu video platforms respectively. While HooQ and Viu are variants of the subscription-based model, Go90 more closely resembles the internet business model, with a reliance on advertising for revenues and a focus on millennials. Monetising the growth in data traffic Mobile data traffic continues to show significant growth across all regions. Operators are deploying several types of strategy to monetise and further stimulate data traffic growth. These include migrating customers to higher speed networks (particularly 4G), the use of shared and tiered data plans, and bundling in premium content. Content partnerships play a particular role, through the use of discounted or bundled data with content subscriptions; the net effect is often an increase in overall data usage by the subscriber. The Chinese market has seen a number of innovations – particularly in the development of data transaction platforms that allow users to exchange data allowances and generate data traffic credits through the use of both online and offline merchants accessed via the platform. China has also seen widespread adoption of sponsored data plans to access games and content services. 5


Cyber security The nature of the cyber security threat continues to diversify at an increasingly rapid pace in 2016. Rising smartphone penetration, the unbundling of the service layer and the shift to cloud computing help create more vulnerabilities to be exploited by hackers, and attacks can create significant cost, both financially and in terms of corporate reputation. Operators are undertaking a range of security enhancements, particularly in areas such as enterprise platform scanning and advanced networks. Revenue potential is minimal but the value should be seen in terms of an insurance and reputation premium. Insurance in that the cost of a breach could potentially far outweigh the investment made in security infrastructure. Reputation in that customer loss as a result of account or data breaches can prove irreparable.

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Key learnings from operator initiatives across the world This report highlights examples from across the world of operators launching new services with the goal of growing their share of revenues in the rapidly evolving digital ecosystem. Although these operators are at different stages of their digital transformation strategies, some common themes underpin the most successful initiatives: • F ocus on the key growth areas: this report identifies a number of key growth areas that provide potential focus areas for operator initiatives. The list is not exhaustive, but operators need to focus on those market opportunities that present the best opportunity for success with reference to the realities of the company’s own market conditions and specific capabilities. • B uild or invest to compete: operators need the right skills and assets to compete effectively in the digital ecosystem. In some cases these can be developed organically but in other cases this may require acquisitions. Singtel and Verizon are examples of operators that have made significant acquisitions to build critical scale in their focus markets. Selective M&A activity is likely to become an increasingly important driver of operator digital transformation, while the growing use of venture-capital funds and innovation hubs are further, often lower cost, routes to acquiring new skills and assets. • N ew business models are key: operators will need new, more flexible business models to compete effectively in the digital ecosystem. A common feature of many of the new internet players is their reliance on platform-based business models, with platforms used to attract high levels of customer engagement and a growing range of services that can be monetised in either the business-to-consumer (B2C) or business-to-business (B2B) markets. SK Telecom is a good example of an operator that is transforming itself into a platform player, with services provided over three core platforms. • B uild digital ecosystems through partnerships: the most successful digital companies are building broad ecosystems through a range of partnerships, focusing on collaboration and open innovation. Operators need to be open to partnerships with players from across the digital ecosystem, including other operators, the established internet players and new entrants. The use of open APIs and a broad range of service providers are key to building successful ecosystems. • Scale rapidly: network effects and generating scale are key to success in the digital ecosystem. Once promising new initiatives are established, operators need to ensure that these initiatives are able to scale, and rapidly. Where operators lack the necessary skills or resource, partnerships are again central to success. Where initiatives are not successful operators need the flexibility to exit these ventures and redeploy resources in more promising growth areas. • N o single winning strategy: the mobile operator universe is extremely diverse in terms of the size, resources and market positioning of individual operators. No single strategy will therefore be suitable for every operator. Successful strategies will vary according to differences in local market conditions and the strategic appetite for digital transformation.

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1 Changing industry structure and key drivers 1.1 Global mobile outlook: top line slowing and cashflow margins under pressure Total global mobile revenues reached more than $1 trillion in 2015, an increase of 1.3% on 2014. This represents a significant slowdown compared to growth rates over the last five to 10 years. With limited scope for subscriber growth in developed markets, together with an increase in competition and a challenging macro-economic climate in developing markets, growth over the next five years will be relatively modest, at an annual average rate of just under 2% to 2020.

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Figure 1: Global mobile revenues and annual growth rates, 2010–2020 Source: GSMA Intelligence

Mobile operator voice services have become increasingly commoditised, with a mix of regulatory, OTT and competitive factors placing voice revenues on a continued downward trajectory. We anticipate that this trend will continue over the next five years, reflecting ongoing competition among mobile operators and the impact of IP-based messaging services. The decline in traditional service revenue has intensified the need for mobile operators to capitalise on mobile broadband investment. The growth in 3G/4G mobile adoption and adjustment of mobile operator business models to support data revenue growth have facilitated a substitution of voice revenues for data. As of 2015 global data revenues represented 35% of service revenues, with voice revenues equivalent to 46%. We anticipate that global data revenues will exceed voice revenues towards the end of 2017. Alongside modest connections growth, this will help to offset voice revenue decline over the forecast period. Mobile operators have spent almost $1 trillion in capital expenditure globally since 2010 on acquiring spectrum, rolling out 4G networks, extending the capabilities and coverage of legacy networks, upgrading core networks and developing the myriad of support systems and services to enable mobile growth. This investment peaked in 2014 at more than 18% of revenues, coinciding with a peak in 4G rollout in China, which extended into 2015. 8


Global mobile capex as a percentage of revenues will contract over the forecast period as large-scale 4G network rollouts near completion (with the exception of India), while those markets that have already rolled out 4G networks will continue to invest a significant amount of capex densifying networks and upgrading backhaul/core capacity to support rising data use.

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Figure 2: Global mobile capex 2010–2020 Source: GSMA Intelligence

Slowing revenue growth, coupled with an inelastic opex burden and sustained capex, will depress free cash flow margins from 20% in 2010 to an average of 17% over the forecast period. This is putting pressure on mobile operators to examine new growth areas to drive their top lines, while at the same time attempting to minimise costs.

1.1.1 China market perspective Forecasts for the mobile market in China show mid-single-digit revenue growth over the next few years, even as overall unique subscriber growth rates in the market slow. The Chinese market will benefit from continued strong growth in data traffic and the migration to 4G connections, against a backdrop of relatively rational pricing competition. Handset revenues will also continue to grow, driven by the migration to 4G. Capex levels have been relatively high over recent years in China, as operators moved to aggressively roll out 4G coverage, and are set to decline over the next two to three years as the focus shifts from network coverage to capacity. We then forecast a modest increase in capex by the end of the period as operators begin to invest in preparation for 5G network launches.

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Figure 3: China: mobile market forecast, 2015–2020 Source: CAICT

1.2 Future revenue outlook: the mobile digital ecosystem There remain considerable uncertainties as to the future revenue outlook for the mobile industry. GSMA Intelligence produces detailed revenue forecasts for mobile operators for the period to 2020, covering voice, messaging, data and other revenue sources. GSMA Intelligence has also undertaken a modelling exercise to project revenues across the broader mobile ecosystem between 2015 and 2025. Revenues for the broader ecosystem are grouped into six main areas: devices; advertising; network equipment and services; software; content; and the Internet of Things. The major global companies currently active in these areas are shown in Table 1. Description Voice/SMS

Major companies

Revenues associated with voice and SMS Mobile operators

Data

Revenues associated with mobile internet services

Devices

Revenues from smartphone and tablet sales

Apple, Samsung, Huawei, Xiaomi, ZTE, HTC, BlackBerry, Micromax

Advertising

Total digital ad spending on internet-connected devices

Facebook, Google, Tencent, LinkedIn, Yahoo, Twitter

Spend on telecoms equipment and services contracts

Ericsson, Nokia/Alcatel, Huawei, ZTE, Cisco, Qualcomm, Tyco

Software

Revenues associated with software licensing

Microsoft, Oracle, SAP

Content

Revenues from online video and music streaming services as well as e-book sales

Amazon (excluding e-commerce), Netflix, Hulu, Spotify

Revenues associated with platforms, services and connectivity

Various

Network equipment and services

Internet of Things

Table 1: Mobile digital ecosystem revenue segmentation and major players Source: GSMA Intelligence


For mobile operator revenues, this approach assumes that the growth trends forecast for the period to 2020 continue for a further five years to 2025. For other parts of the mobile ecosystem, forecasts for the 10-year period are calculated based on key inputs from GSMA Intelligence assumptions (such as those around smartphone adoption, data traffic and the migration to 4G) and a range of other datasets. Growth forecasts for the period to 2020 are then extended on a straight line basis for the period to 2025. The results of these forecasts are shown in Figure 4 and represent one possible scenario on the future size and shape of the mobile ecosystem.

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1,000 Content

500 IoT

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Figure 4: Indicative ecosystem revenue projections based on extending current growth to 2025 ($ billion) Source: GSMA Intelligence

Two major trends are apparent from these forecasts. The first is the significant growth in the size of the overall mobile ecosystem, by more than 70% to a total of over $4 trillion by 2025 (with the growth in revenues also reflecting the ongoing shift in consumer time and engagement to mobile – a shift that is being replicated in the enterprise market). The second key theme is that operators will continue to take a smaller share of overall revenues, putting further pressure on free cash flow and investment. The two areas in the digital ecosystem seeing the strongest growth are the Internet of Things and video/music content. The content space will see the fastest overall growth, growing at a CAGR of 25% per annum to 2025, from a relatively low base today, to reach almost $0.6 trillion by 2025. The IoT market2 will see significant growth to reach $0.7 trillion by 2025. However, mobile operators will continue to see their core services commoditised, while the new internet platforms become the focal point for engagement and value creation. In this scenario, operators will see their share of the ecosystem continue to fall, from 39% in 2015 to a third of the total by 2025. This indicative scenario assumes that operators capture only a very modest share of revenues beyond the core communications services and data revenues.

2

For the purposes of these forecasts, the IoT market is defined as that portion addressable by mobile operators 11


For the mobile operators specifically, there are both upside and downside scenarios to these forecasts. The key determinant of operator revenues will be the ability of operators to capture value beyond the provision of connectivity and the extent to which they are able to develop new business models to gain a share of value in parts of the digital ecosystem showing the strongest growth. In essence this is the core of the debate around the future evolution of mobile operators – whether to become the ‘dumb’ pipe, the ‘smart’ pipe or a more integrated player that can offer a broader range of services. The corollary of this debate around the future role and share of value captured by operators is the extent to which incremental growth in value is captured by the internet platforms. Platforms have already captured much of the incremental value to date; for example Facebook and Google have emerged as the dominant players in mobile advertising, while Netflix and YouTube currently dominate the content and video markets. The rest of this report explores in more detail the opportunity for operators to gain a share of the fastest growing areas of the digital mobile ecosystem. However, before exploring these opportunities, it is important to provide some context and to look at the key drivers of the disruption and value creation in the mobile ecosystem today.

1.3 The drivers of disruption The commoditisation of core mobile operator services to date has been driven primarily by the rise of new internet platforms, many of which have scaled rapidly over recent years and been rewarded for this growth with attractive valuations by the financial markets (whether public or private). There are a number of common factors behind the business models of many of the new internet companies: • network effects3 and the importance of scale in building digital ecosystems • two-sided platform business models with asymmetric pricing • mobile as a complement in many asymmetric business models. The importance of network effects in the mobile ecosystem has been demonstrated by the emergence of the two globally dominant mobile operating systems, iOS and Android. Both Apple and Google have succeeded in attracting a broad range of developers to their mobile ecosystems, which in turn has helped drive end-user uptake of devices running the world’s two dominant operating systems. The benefits of the network effect have also been demonstrated by the new internet giants, from Facebook to more recent companies such as Alibaba and Tencent. Importantly, scale attracts investment and innovation, which acts virtuously with consumer take-up to further grow the market. Scale and the importance of network effects in building broad ecosystems have in turn been key factors in the growth of platform-based business models. Two-sided networks typically attract a range of customers and suppliers, who interact across a platform. A key factor in these two-sided networks has been the asymmetry of pricing, with one service offered at a discounted (or free price) to attract users, who then pay for other services. This asymmetry generates demand in one market but then captures profits in another. 3

Where the value of a product or service is dependent on the number of others using it

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Online messaging services that have appeared in many regions of the world, but particularly those in Asia such as Line and Tencent, are good examples of this trend. Both Line and Tencent offer free mobile messaging to grow their user bases, but then look to monetise this user base through the provision of other services. The range of these services continues to grow, starting with emoticons (or emoji), music and video content with associated advertising revenues. It has now evolved into a wider array of functions from built-in search to recommendation (such as taxi or restaurant booking) and, most recently, payments. Many traditional industries have been, and will continue to be, disrupted by the rise of these asymmetric business models. Value in the digital economy comes from attracting complementary participants, so it is more important for mobile operators to catalyse the formation of new ecosystems and partnerships as opposed to going it alone. Health, education, financial services, home automation and energy services are all examples of sectors ripe for disruption. For mobile operators there is an opportunity to play a role using the industry’s unique assets – the network, identity, location and billing, for example. Partnerships with industry players to integrate technology into everyday business operations represent a further strategy for mobile operators.

1.4 Operator strategies for digital transformation If mobile operators are to succeed in the rapidly evolving digital ecosystem and generate incremental revenues from the overall growth in the mobile ecosystem, they need clear strategies for digital transformation. A number of operators from across the world have already developed these strategies, with the goal of fostering new sources of revenue growth through business model innovation. The leading operators are those that have placed the goal of new business development at the centre of their strategy, alongside the strengthening of existing core businesses and developing the broader skillsets to compete in the digital economy. Three examples are highlighted below: • China Telecom: the company has identified five emerging areas where the company will focus its efforts to develop new revenue streams, a core component of the company’s ‘two-five-six’ strategy. Growth in these five new business areas sits alongside the goals of strengthening the existing two core business areas (based on connectivity) and continuing to build strengths in six key capabilities to underpin both the new and existing business areas. • Verizon: the company’s three-tier strategy reflects a similar focus on leading in terms of network connectivity, overlaid with developing new global platforms around digital media and the IoT space, and then developing new services and applications on these platforms that can generate incremental revenues. • Singtel: the company has a twofold strategy – namely, transforming the existing core businesses and capturing growth in the digital economy through developing innovative and differentiated digital businesses.

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Mobile operators have been offering M2M services for more than two decades. The initial focus was on delivering proprietary applications, often supplied in response to specific business requirements and serving the needs of particular verticals, with a large number of M2M applications custom built. However, IoT is now moving away from the provision of vertical-specific, siloed applications to encompass the delivery of horizontal solutions using big data analytics. As a result, partnerships and collaboration between operators and ecosystem players have become even more important. In China, the M2M and IoT market is benefiting from both government support and productive partnerships between companies from different sectors. As it has done in other sectors, China’s central government is leading the development of standards, supporting the establishment of an IoT standards association and promoting Chinese-developed standards internationally.

DEVICE

CONNECTIVITY

APPLICATION

Application areas Automotive

Home

Manufacturing

Medical

Agriculture

Figure 7: M2M/IoT ecosystem in China Source: CAICT

2.2 M2M: the operator opportunity GSMA Intelligence estimates that there were 309 million cellular M2M connections at the end of 2015, a number that is forecast to grow at a CAGR of 26% to reach nearly 1 billion in 2020. In terms of the proportion of total connections globally, M2M accounted for 4% in 2015 and will increase to 10% by 2020. There are significant regional differences: in North America, almost a third of all connections will be M2M by 2020; in Europe, the figure will be 20%. 2G still supports the majority of M2M devices globally (70% in 2015).

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Figure 8: Cellular M2M connections, 2015–2020 Source: GSMA Intelligence

2G networks are sufficient to support the requirements of the majority of M2M devices today. M2M modules connecting industrial equipment, personal healthcare devices, smart meters and other devices used for remote monitoring usually transmit small amounts of data. A number of operators have announced plans to switch off 2G networks, so there is a need for alternative solutions to meet this market need. Low-power, wide-area (LPWA) networks are being developed and offer a range of advantages. LPWA networks are designed for M2M applications with low data transmission levels that require long battery lives and that operate unattended for long periods of time. New opportunities for operators are emerging from 3GPP-approved LPWA standards in licensed spectrum: LTE machine type communication (LTE-MTC), extended coverage GSM IoT (EC-GSM-IoT) and narrowband IoT (NB-IoT). The addressable market for LPWA applications is large, totalling around 1.4 billion connections by 2020, with some industry watchers forecasting 5 billion by 2022. 3GPP-licensed LPWA solutions will complement and extend conventional wide area networks (2G, 3G and 4G) and local area networks (e.g. Wi-Fi, Zigbee). The licensed standards allow operators to optimise their existing mobile network infrastructure through an upgrade to EC-GSM-IoT for 2G networks and LTE-MTC for LTE networks, while NB-IoT can use both 2G and 4G spectrum. They also benefit from GSM-like security, reduced signalling and lower device costs. The Mobile IoT initiative, led by the GSMA, highlights the important role ecosystem collaboration plays in enabling fast and interoperable adoption. It accelerated the 3GPP Group’s progress towards standards for licensed spectrum, all of which will be 3GPPcompliant for Release 13 in the first half of 2016, with pilots planned for the latter part of the year and commercial rollouts in 2017. The Mobile IoT initiative has brought together 30 mobile operators, device makers and chipset, module and infrastructure companies, including AT&T, Verizon, China Mobile, Deutsche Telekom, Orange, Qualcomm, Nokia, Ericsson and Huawei, with the goal of facilitating demonstrations, proofs of concept and trials of three LPWA technologies. Standardisation will enable the industry to achieve economies of scale and interoperability, as well as helping mobile operators around the world source equipment from multiple suppliers, which will shorten time to market and enable mass adoption. 17


NB-IoT currently has the widest industry support and has made good progress, partly due to the NB-IoT Forum launched in November 2015, bringing together the likes of Huawei, Ericsson and Nokia with a number of operators. NB-IoT supports more than 100,000 connections per cell, long battery lives of 10 years, deep coverage with a 20dB+ increase over GSM network (penetrating one more wall than 2G), two-way authentication and encryption. Use cases for NB-IoT have so far centred on smart city (lighting and parking), smart metering (water and gas) and smart tracking (pets, children and containers). M2M ARPU from the provision of end-to-end solutions is at least three times greater than that from providing connectivity alone, highlighting the importance of pursuing these opportunities and building a more global footprint, whether through partnerships or acquisitions. Mobile operator M2M revenues are dependent on the application type and scale of the service, but also on the operator approach to M2M service delivery (wholesale, connectivity-only, or provision of value-added services). M2M ARPU ranges between $0.50 and $5 depending on the market. The vast majority of M2M rollouts are still in the field of remote metering and appliance monitoring, which typically require only a small amount of data to be transmitted. Sweden, for example, has one of the lowest M2M ARPU levels as a large proportion of M2M connections in the country are used for remote metering. $5

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Turkcell

Telefonica Group

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Figure 9: Cellular M2M ARPU, Q4 2015 Source: GSMA Intelligence * 1H 2015 ** Q3 2014 30%

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Figure 10: Cellular M2M revenue and connections growth, 2014–2015 Source: GSMA Intelligence *GSMA Intelligence estimates for connections

Vimpelcom


2.3 China market perspective CAICT forecasts that total IoT revenues in China will exceed RMB900 billion ($138 billion) in 2016, surpassing RMB1.5 trillion ($230 billion) by 2020. These forecasts include all of the IoT revenue opportunity, covering not just connectivity and modules/devices but also application revenues (including platform development and solutions)4. There were 100 million cellular M2M connections in China at the end of 2015, which will increase to more than 350 million by 2020. There is likely to be rapid growth in the number of NB-IoT connections by 2020, totalling up to 730 million, which suggests there could be over 1 billion cellular IoT connections by 2020. China overtook the US in late 2012 to become the largest market in terms of cellular M2M connections, with growth partly driven by the home-grown module manufacturers such as SIMCom, Huawei, ZTE, Quectel, Fibocom and Neoway Technology. China will continue to be the largest market and will grow its share of global connections from 29% in 2014 to 37% by 2020. The Chinese government continues to play a major role in driving the adoption of IoT, providing financial support and strategic direction. Over the past five years, it has unveiled initiatives aimed at turning IoT into a major pillar of the Chinese economy: • T he Made in China 2025 strategy aims to upgrade manufacturing capability, to boost China’s global ranking in manufacturing and production.

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Cellular IoT revenues (RMB billion)

• T he government’s Internet Plus strategy integrates the country’s mobile internet, cloud computing, big data and IoT initiatives to promote the extensive application of IT and smart technologies

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Figure 11: China: IoT revenue and connections forecasts, 2015 and 2020 Source: CAICT , GSMA Intelligence

These forecasts are not directly comparable to those in the first section of the report, as in most regions these are not considered to be addressable by the mobile operators

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The China Academy of Information and Communications Technology (CAICT) and China Mobile, in cooperation with manufacturers, worked on the alignment of two standards: narrowband cellular IoT (NB-CIoT) backed by Huawei, and narrowband Long Term Evolution (NB-LTE) supported by Ericsson, Nokia Networks and Intel with close participation from the Ministry of Industry and Information Technology. The two standards have been merged in 3GPP for Release 13 as NB-IoT, and the standard will be completed in June 2016. The Chinese operators are eager to deploy NB-IoT; China Mobile has announced that it aims to commercially launch its NB-IoT network in 2017, while China Unicom has indicated it will start a commercial pilot in the Shanghai area surrounding Disneyland in 2016. The network will be extended to cover the rest of Shanghai in 2017, with the installation of more than 3,000 network base stations.

2.4 Examples of operator-led initiatives from around the world There is a growing trend of operators bundling additional services with M2M connectivity to become more of a ‘one-stop shop’. Some operators have used M&A activity to acquire the expertise and market knowhow to offer end-to-end solutions, while others are relying on partnerships: • A T&T has a value proposition based on three layers: connectivity, platforms and applications/solutions. It has a number of partnerships in place, for example with GE, Cisco, Intel and Microsoft. It takes advantage of multiple channels to market: a dedicated salesforce, partner channels (OEMs, service providers, application developers) and wholesalers (KORE Telematics and Numerex). In addition, AT&T develops application platforms and end-to-end solutions, such as track & trace, smart city, AT&T Drive and AT&T Digital Life. • T urkcell relies on its network of partners for a deep understanding of the market (with 33 such partnerships in place) and sells services in conjunction with them. The vendor provides the hardware and software, while the operator provides the M2M connection, platform, sales & marketing and billing system for the service. The total revenue from services is shared between the partners. Turkcell also offers its own-branded solutions, for example in fleet management. Turkcell claims its full-service monthly M2M ARPU was four times greater than its connectivity-only revenues for its fleet management solution. • T ele2 focuses on horizontal connectivity provision through a number of partnerships. It has more than 100 partners including SAP, IBM and ThingWorx, as well as many smaller players. The operator’s role in the value chain is as a connectivity provider, partnering with a number of players across the ecosystem to provide platform support and systems integration. Tele2 highlights reduced complexity, shorter time to market and improved quality of service as key benefits of the partnerships. • V erizon exemplifies the role of M&A in building solutions, having bought Hughes Telematics in 2012. It reported annual revenue growth of 18% in its M2M and telematics business due to its focus on end-to-end solutions, with a significant portion of revenues coming from the application layer.

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• V odafone has spent €145 million (£115 million) acquiring Cobra Automotive Technologies, a security and telematics solutions provider, to enhance its M2M capabilities and establish itself as a key player in the smart car market. • O range Business Services acquired Ocean, a fleet-management company, to strengthen its own vertical expertise and facilitate development of customised M2M/IoT solutions. Orange also plans to work with Ocean to develop new fleet management solutions based on Ocean’s service platform. This acquisition supports Orange’s ambitions to achieve a revenue target from IoT and M2M of €600 million by 2018, as outlined in its latest fiveyear strategic plan “Essentials 2020”. Operators are also looking to innovate with their existing business models. For example, Deutsche Telekom offers value-based pricing – monetising IoT solutions by charging customers a percentage of the value delivered to them, such as savings made or new revenue generated. Chinese operators have also recognised the importance of partnerships and are cooperating with hardware and software providers, equipment manufacturers, platform providers, system integrators and other companies to establish an ecosystem and enable economies of scale. • C hina Mobile is working with Thunis, a provider of cloud services, to produce a SIP module that uses China Mobile’s private network and platform, and Thunis’ expertise in chip design, development, manufacturing and sales. The module provides cloud appliance solutions for smart home device manufacturers. China Mobile has also set up an IoT company that focuses on producing modules and delivering IoT solutions. It has expanded its own-brand product offering, launching a number of IoT intelligent modules, 11 models of automotive device and two on-board diagnostics devices. At the end of 2015, China Mobile had reached more than 60 million M2M connections, and is targeting over 100 million in 2016. • C hina Unicom is working with Jasper on a service called Smart China Unicom Connection. This combines China Unicom’s mobile network with Jasper’s global Internet service platform. The service provides enterprises with flexible turnkey solutions, reducing time to market. At the end of January 2016, China Unicom reported that it had around 5 million connections on the service. China Unicom has also enjoyed an early-mover advantage in the domestic connected car market, such that many large car manufacturers are adopting China Unicom’s 3G and 4G technology in their vehicle communications modules. China Unicom is targeting 20–30 million connections by the end of 2016 across its industry verticals. • C hina Telecom is working with GE on industrial Internet solutions, furthering China’s Internet Plus agenda. They aim to explore how the GE Predix software service platform can be leveraged alongside China Telecom’s telecoms infrastructure and value-added services to offer improved industrial IoT solutions for the aerospace, medical, energy and other manufacturing industries. China Telecom has identified IoT as one of its ‘five emerging areas’ in 2016, and aims to significantly grow its IoT revenues such that they equal those from mobile services within three to five years. The company plans to invest RMB304 million ($46 million) in IoT terminal subsidies, with the aim of achieving 10 million IoT terminal sales by 2016. 21


3 Cloud, big data and analytics 3.1 The move to the cloud The potential market opportunity around big data and analytics is considerable, with estimates placing the market size at up to $50 billion by 20195. However, these forecasts are typically broad in nature, covering several different areas including big data related infrastructure, software and services. The first two of these areas are in most cases unlikely to be addressable by operators. The move to cloud-based computing is now fast becoming a reality across many industries. Analysts suggest that the public services cloud market is likely to be worth more than $200 billion by the end of 20166, and dominated by familiar players such as Amazon, Microsoft and Google for infrastructure, and companies such as Oracle, Salesforce and VMWare for software and services. A number of operators are establishing themselves as providers of cloud services in the enterprise space. The move to cloud-based infrastructure is a key component of an operator’s operational digital transformation, both in its own data centres but also as a component of the move to increased ‘softwarisation’ of the network (which enables the move to network virtualisation and software-defined networks). These developments allow increased agility and enable operators to offer a more flexible range of managed communications services, in some cases opening the door to a broader service offering. This section focuses on the mobile operator opportunity as related to the cloud and big data service space. For big data, there are two particular focus areas: the opportunity around the use of the large amount of user (human) data that operators already hold, and the opportunities related to the exponential growth of machine data. The latter includes the ongoing rapid growth in the number of connected devices as part of the broader development of the Internet of Things. There is therefore some overlap with the opportunities explored in other areas of this report, especially those around M2M and IoT. For the purposes of this report, these two opportunities are referred as human data and machine data.

3.2 Big data and analytics: the operator opportunity Mobile operators have always had access to significant amounts of customer data (in the consumer and enterprise spaces), but the challenge has been finding ways to use it effectively and generate value. Much of this data has historically been used for operational reasons to improve efficiency or reduce churn, rather than to launch new services.

“New IDC Forecast Sees Worldwide Big Data Technology and Services Market Growing to $48.6 Billion in 2019, Driven by Wide Adoption Across Industries”, IDC, November 2015

5

6

“Gartner Says Worldwide Public Cloud Services Market Is Forecast to Reach $204 Billion in 2016”, Gartner, January 2016

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The amount of data held by operators is now growing almost exponentially, due to increased customer engagement with their devices but also the increase in the number of connected devices as the IoT market begins to mature. The increasing amounts of machine data provide an opportunity for operators to play a central role in the development of a range of new services and applications in the IoT space. With the right technology and analytics, the growing volume of both sensor/machine and people-generated data can be used to develop, for example, a range of smart city initiatives and applications. For many operators there is the unique opportunity to capture and analyse data that runs over a range of networks other than the core cellular network, such as Wi-Fi or other IoT networks (including LPWA). There are though a number of commercial and technical barriers to realising the potential of IoT big data, including data accessibility and interoperability (with data often held in ‘silos’ by individual service providers), privacy and security, innovation, skills and resource challenges. The GSMA and its mobile operator partners have a vision to collaboratively establish an IoT Big Data Ecosystem (IoT BDE). The intent is to enable the monetisation of data assets and to facilitate the development of the next generation of IoT solutions by enabling participants to cost-effectively create new data-centric IoT solutions, products and services. See the GSMA 2015 report: Unlocking the Value of IoT Through Big Data.

3.2.2 The mobile advertising opportunity With the rapid adoption of smartphones and tablets over recent years, consumers are spending an increasing amount of time using these devices as opposed to more ‘traditional’ digital media such as TV and desktop PCs. Data from Flurry Analytics suggests that in 2015, mobile apps became the dominant media channel in the US, even before considering mobile browser use. While the average time spent on TV viewing has remained constant, time spent on mobile apps has increased by more than half over the last two years. These shifting patterns in user engagement are reflected in the ongoing growth in mobile advertising, as advertising dollars typically follow eyeballs. Total global mobile ad spending is forecast by eMarketer to total more than $100 billion in 2016, by which point mobile is forecast to account for over half of all digital ad spend. In the fourth quarter of 2015, Facebook generated $5.6 billion in advertising revenues, with 80% now from its mobile business.

200

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60%

125

50%

100

40%

75

30%

50

20%

25

10%

0

0 2013

2014

2015

Mobile ad spending ($ billion)

Figure 12: Global mobile ad spending Source: eMarketer

2016

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Percentage of digital ad spending

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Mobile operators were some of the original pioneers in the mobile advertising space, but their efforts coincided with a time when mobile content failed to scale, before the mass adoption of smartphones and the rise of new apps and mobile services. However, with the overall mobile advertising market forecast to see continued strong growth, there is a clear opportunity for operators to play a central role in this market. A number of operators already have established advertising businesses, while technological developments are creating new opportunities for service providers. Operators have a number of factors that they can utilise, in addition to the verified firstparty data that customers provide when they first subscribe to a service. In addition, there is unique location data, which may not be as accurate as that available from some apps but is more frequent, given that devices are almost constantly connected to the network. Technological developments such as beacons and other short-range radio technologies can allow more precise location data and a uniquely tailored experience. Opportunities include ‘in-the-moment’ targeted ads, as well as the scope to analyse data post the event to help predict future behaviour. Some operators have already launched location-based advertising services, allowing advertisers to use the unique data insights. A further extension of contextual advertising is the growing trend towards ‘cross-device’ advertising. This allows marketers to follow user behaviour from desktops to mobiles and other devices, gaining more data on consumer behaviour and allowing more targeted advertising. While Google and other internet players are well placed to exploit the crossdevice opportunity, there are a number of integrated telecoms operators (with both fixed broadband and mobile networks) that have a similar capability. Several operator initiatives in the areas of mobile advertising and big data analytics are highlighted below. There is a wide and growing range of applications and use cases for data-centric analytics, including increasingly targeted and consumer-focused advertising, helping retailers understand customer footfall, and helping urban planners to understand traffic and commuter travel patterns and so help better plan services. A number of operators including Verizon, Singtel and Telefónica have already created business units that deliver advanced analytical services and hence allow these operators to monetise data. As the number of connected devices grows, particularly as the IoT market matures, so the opportunity for operators to benefit from data analytics will continue to grow.

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Singtel Amobee Singtel has built a digital marketing business as part of its Digital Life initiative. Singtel acquired Amobee in 2012, and has subsequently added companies to the portfolio including Adconian (which offers cross-channel ad solutions across mobile, web and social media) and Kontera (a digital intelligence company). Prior to its acquisition by Singtel, Amobee had already worked with a number of large telecoms companies and had an established presence in the mobile advertising market. Through these acquisitions Singtel has been able to scale its advertising business effectively and offer a range of different services to advertisers and other ecosystem players. Amobee’s goal is to ‘offer the most advanced cross-channel digital marketing technology platform and solution’. Amobee has the flexibility to manage first-party data from within the Singtel group but also other providers through a data management platform. Amobee has a programme trading platform, a mechanism by which advertisers and agencies can acquire advertising space. As is the case with many other operators, Singtel is able to utilise its unique location data from the subscriber base of its various operating companies, and has the ability to track behaviour and user activity across a range of devices.

DataSpark Also part of Singtel’s Digital Life division, DataSpark provides insights and analysis on consumer behaviour, using data from cellular networks, Wi-Fi and increasingly other connected devices and networks under the broad umbrella of IoT. The company focuses on two areas: • G eoAnalytics software: produces mobility intelligence around network data and subscriber behaviour. Several regional telecoms operators have entered into multiyear licensing deals to look at areas such as revenue stimulation and cost optimisation. • Insights consultancy services: provides insights using proprietary GeoAnalytics software. DataSpark has engaged with the Singapore government to help develop the Smart Nation project. One example is with the Mass Transit Authority, where it is analysing commuter travel patterns based on access to individuals’ location data.

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Verizon Verizon has acquired a number of assets in recent years to develop its own advertising platform, with a particular focus on mobile. This includes the AOL acquisition in 2014, a deal that was driven by its ad-tech capabilities and digital media properties (such as the Huffington Post), and the subsequent purchase of Millennial Media. The latter acquisition bolstered the company’s capabilities in mobile media and complements AOL’s more desktop-focused capabilities. Verizon is building the capabilities to compete with the more established players in the mobile advertising space, particularly Google and Facebook. The AOL and related acquisitions give the company the technology platform to exploit the huge amount of anonymised customer behaviour data that Verizon has across its fixed and mobile networks. At the same time, AOL has been increasing the range of content it offers; for example, it has a video content deal with NBC Universal, with the goal of further expanding the company’s reach. Verizon has a twofold strategy as it looks to expand its role in digital advertising: firstly to develop the technology and platforms to fully exploit and maximise the potential of its own customer data; and secondly to improve the attractiveness to advertisers of AOL and the other digital properties in the group. There is a clear overlap here with other elements of Verizon’s digital strategy, particularly the company’s Go90 video platform (covered in the content and video strategy section of this report).

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3.3 Cloud: the operator opportunity There are three key components of the cloud market: • C loud-based services (software-as-a-service or SaaS): SaaS providers offer software solutions that are used by customers as they manage their business, with software often focused on specific use cases. SaaS providers offer proprietary software and solutions and those licensed from third-party providers. • C loud infrastructure (infrastructure-as-a-service or IaaS): IaaS is the provision of the hardware for storage and processing, with customers able to run their own software on the infrastructure provided. • P latform-as-a-service or PaaS: PaaS is the provision of an environment and a platform to developers to allow them to develop applications and services, typically for software services. The operator opportunity is primarily in the first two categories. There has been a natural route into the provision of cloud services for many operators given their key role in the cloud computing value chain, namely the provision of connectivity, without which the cloud model could not function. Many operators have invested significantly in their own data centres over recent years, which in turn meant that IaaS was a natural evolution of the operator service offering.

3.3.1 Operator initiatives in the cloud market Over recent years the growth opportunity in the market for cloud services has gone beyond hosting and storage, meaning telecoms players with ambitions in the cloud services market have had to re-position themselves as solution providers. This involves offering a wider portfolio of services and more personalised problem-solving for their enterprise customer base, often through partnerships with software providers and other players in the cloud ecosystem. At the same time, some of the early operator movers in the cloud space have found it increasingly difficult to compete directly with the large-scale cloud providers, particularly in areas such as cloud hosting in the public/private cloud market. In the face of increasingly competitive (and capital-intensive) markets, where scale and cost of service were often the key success factors, a number of operators have begun to refocus their cloud strategies. In part this has been reflected by operators refocusing efforts on their core strengths such as providing connectivity services, with operators leveraging their network capabilities to allow a broad range of cloud services providers to deliver their services to end users on a flexible basis. Going forward, especially for operators that have not already invested capital in the necessary infrastructure, the main opportunities in the cloud space are likely to be specific to certain geographies and services. Beyond connectivity, the intersection of operator network capabilities and telco-centric SaaS offerings may prove to be the best area of growth opportunity for operators.

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AT&T AT&T’s cloud strategy has evolved over recent years, with the company launching its NetBond service in 2015 which is a now a key component of the company’s cloud offering. NetBond creates flexible, highly secure connections to cloud providers, allowing the customer to seamlessly control the services it accesses. This model supports the increasingly common ‘hybrid’ model of cloud provision, which involves the use of both private (on a corporate’s own premises) and public (hosted by a third-party provider) cloud services. As part of a general shift to partner with cloud service providers rather than compete directly, AT&T is now building a growing range of partnerships, with a focus on enabling the network connections that these services require. There are now around a dozen of these partnerships, with IBM, AWS and Microsoft, for example.

NTT Through its subsidiary NTT Data, NTT aims to be a full service provider to mid to largesized corporates, with its cloud service encompassing infrastructure, services and advisory capabilities. NTT’s core strengths are in infrastructure and connectivity; the company owns significant data centres across the world with more than 1 million square meters of total floor space, as well as its global network reach. The company’s goal is to build on its strengths in hosting and offer a ‘full stack’ experience, helping corporates manage all their cloud activities through owned professional service providers such as Dimension Data. Although the vast majority of NTT Data’s revenues are domestic, the overseas contribution is growing strongly, helped by a number of acquisitions. From an initial focus on emerging markets, NTT recently acquired Dell’s North American IT services operations. The latter includes one of the largest providers of cloud and other services to medical establishments in the US.

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3.4 China market perspective The potential for cloud computing has been recognised for some time by the Chinese authorities. Indeed it is included as a strategic priority in the 12th Five Year Plan (covering the period 2011–2015). As a result, the Chinese cloud industry has seen rapid development over the last few years. According to the MIIT, by the end of 2015, the Chinese market for public and private cloud services reached RMB10.3 billion and RMB27.5 billion respectively. Private rather than public cloud services have been the main choice for companies in China to date, whether government departments, state-owned enterprises or other large corporates, and this primarily reflects concerns over data security. This preference has tended to favour local providers (including the telecoms operators), though companies such as Amazon Web Services (AWS) are active in the public cloud market, with a focus on the SME segment. The 13th Five Year Plan (covering the period 2016–2020) and the policy for ‘the promotion of innovation and development of cloud computing to foster new formats of information industry views’, both released by the State Council, highlight the need to improve cloud services capabilities and innovation. The long-term growth potential of the Chinese cloud market is significant. According to a CAICT survey, just under 20% of Chinese companies are currently using some form of cloud service. Among those companies that are already using the cloud, a significant proportion (67% and 85% for private and public cloud users respectively) want to migrate more of their services to the cloud, highlighting how a positive experience can drive further migration to the cloud. Chinese telecoms operators based their cloud activities on their existing assets and services in the IT market, with a significant market share in data centres and other forms of IT service provision. These services have already become an important income growth driver for Chinese operators. On the basis of their established infrastructure and industry presence, China Telecom and China Unicom have extended their offering from infrastructure and hosting to a broader range of cloud services, providing customers with services across the main focus areas of IaaS, PaaS and SaaS. Through four cloud products – government cloud, video cloud, community cloud and education cloud – China Telecom’s cloud revenues reached CNY1 billion in 2015, second only to Alibaba in China. The big data market in China is at an earlier stage of development, but has also been recognised as a national priority. The State Council issued the ‘Outline of Action Plan for Promoting the Development of Big Data’ in September 2015. The action plan includes a range of development targets with the goal of establishing new industrial models. The plan also includes the creation of a government information-sharing platform, which will allow public access to government data across a range of areas.

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In addition, the digital advertising market in China will continue to show high growth rates, especially mobile advertising. According to iResearch, mobile online advertising is set to grow at a CAGR of 26% over the next three years, double the rate of growth for the broader digital advertising market. With a supportive policy environment and exponential growth of both human and machine data as more devices are connected, the development of big data services and applications in China is set to accelerate over the next few years. Telecoms operators in China are in a strong position to exploit the opportunities around big data, given their existing presence in the ICT market, the large amounts of data already held, and their strong brands. They have an established track record in applying big data analytics in areas such as marketing, product innovation, customer service, network management and other fields of internal management. The challenge going forward will be to actively innovate big data for external applications and consequently develop new services and new revenue streams.

3.4.1 Examples of Chinese operator initiatives in cloud and big data Operators in China are currently focused on two areas to monetise big data: social assistance management and supporting enterprise decision-making. The latter includes using the verified data that mobile phone companies have to help companies with their planning and to offer precision advertising services. As in other regions, a number of Chinese internet players such as Alibaba are already generating material revenues from mobile digital advertising, but the size and growth in the mobile market mean that there will also be a role for other players, including operators. In social assistance management, Chinese operators are exploring applications in areas such as urban planning, public security surveillance, traffic management and tourism management. For example, in the field of urban planning, China Mobile Jiangsu Company is providing analysis of real-time traffic dispersion and urban population distribution to the Nanjing government, which is using this for planning the provision of transport and other services. In tourism, China Mobile Sichuan Company has provided analysis of population density and visitor flows to local tourist site management offices, allowing better management of capacity flows at these attractions to enhance the visitor experience. In terms of monetising the large amounts of human data held by operators, Chinese operators are exploring applications such as precision marketing, store location planning and consumer insights. For instance, for precision marketing, China Telecom has launched an advertising platform. This uses the operator’s verified customer data and other behaviour insights to provide services to business customers, including potential customer mining and the delivery of targeted mobile advertising. In the field of consumer insight, China Mobile Tianjin Company provides a service based on both a user’s identity and geolocation data (such as travel patterns) to local shopping malls, which helps the companies track market trends and customer flows to better plan their services.

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Building partnerships with big data service providers across different industries is a key way to develop big data business. Although they have advantages in terms of data assets, operators have to cooperate with big data service providers to fill the gaps in their skillsets and provide an integrated offer to customers. For instance, China Telecom’s financial data inquiry platform was set up in cooperation with Datatang, a global data provider, while China Telecom’s advertising platform was set up in cooperation with HWseeker, a data-based consulting company. China Unicom and Telefónica have formed a big data joint venture using Telefónica’s SmartSteps technology. The service uses anonymous and aggregated mobile data to improve decision-making at corporates through better understanding of user behaviour. There are a broad range of application areas including traffic operation and construction, urban planning, tourism management, public safety, financial risk control, commercial real estate and retail analysis. In the cloud market, Chinese operators’ core advantages lie in their network capabilities and data centre assets. For example, China Unicom has developed its “Integration of Network and Cloud” strategy, with the company currently building 10 next-generation data centres that will offer a combination of more powerful computing capabilities, more bandwidth and more storage capacity. China Unicom plans to integrate resources across the network, data centres and big data to provide a complete solution to government and enterprises.

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4 Content and video 4.1 Video drives data traffic Globally, video represented 54% of all data traffic in 2015 and will reach three-quarters by 2020, with growth projected at an average annual rate of 63% to the end of the decade. Asia-Pacific video traffic is growing more rapidly than the global average, with video-related data growing at a 65% rate to 2020. China is in a similar position to the rest of world, with video already accounting for more than half of all mobile data traffic. However, growth rates over the next few years are set to be well ahead of the global average, with China set to catch up with the US and South Korea by the end of the decade (see Figure 13) in terms of video-driven mobile data.

80% 75% 70% 65% 60% 55% 50% 45% 40% Global

APAC 2015

China 2020

S.Korea

US

CAGR

Figure 13: Video as a proportion of total mobile data Source: Cisco

4.2 Content and video: the operator opportunity Mobile operators have a long history of trying to monetise content, particularly through development of their own web portals and the sale of content, from ringtones to games and music. However, the explosive growth of video traffic is refocusing operator attention on their video and content strategies. There are essentially two different options for operators to capitalise on the growing importance of video. The simplest of these options is to use bundled video and other content (such as music) to stimulate data traffic growth, though the operator role for this scenario is limited to providing connectivity (albeit operators may compete on providing better ‘pipes’, in terms of both coverage and download speeds). Examples include Vodafone UK’s strategy of bundling content such as Now TV and Spotify with its 4G plans. This approach is generally lower-risk as the only capital requirement is network capex (which may not necessarily be materially higher than otherwise would be the case) and it allows the operator to stick to existing core competencies. However, much of the upside in these situations accrues to the content partner.


The alternative is for operators to move further up the content value chain through the creation of some form of content delivery platform. Singtel, Verizon and PCCW are three prominent examples of the trend towards building mobile video platforms, through their HOOQ, Go90 and Viu video platforms. There are similarities in these companies’ approaches as they look to create an over-the-top platform, competing with a number of existing players in this space. However, a key difference lies in monetisation strategy: • V erizon’s Go90 is ad-supported and explicitly open to subscribers of any network in order to drive its traffic figures and hence attractiveness to advertisers (though, for its own subscriber base, Go90 can also help monetise data traffic). Verizon has more recently launched a sponsored-data initiative that means its own customers are able to access the service without incurring data costs. • S ingtel’s HOOQ is a fee-based subscription service, with pricing varying across its operating countries to reflect local market realities. The company is also offering more flexible tariff plans in several markets, including a seven-day access pack for $1.40 for a limited range of titles. In some market such as the Philippines, tariffs are available that include bundled data to be offset against the streaming of content. • P CCW’s Viu service is a freemium offer, with some content available for free (but including advertising), and the full range of content available for a flat monthly fee. The service is being rolled out across a number of Asian markets, including recently in India, with a focus on providing local content in each market. The overarching goal of these companies is to create a content platform that attracts users, which thereby allows the operators to monetise this growth twofold: in the first instance, through higher data traffic on their network, and in the second instance through a combination of subscription or pay-per-view fees and/or advertising. Obtaining relevant content is key to the success of this strategy. For Verizon this has been achieved through a mix of partnerships and proprietary content. Verizon has access to content from both existing TV channels and other suppliers, including multichannel networks and live events (Verizon is the exclusive provider of live mobile video streaming for the NFL). The range of content partnerships continues to grow; Verizon recently announced an agreement with Sony Music to distribute a range of original video content. Verizon is also taking direct stakes in multichannel networks, including a 25% stake in Awesomeness TV (alongside DreamWorks Animation and Hearst Corporation) for $160 million and a 50% stake in Complex Media for up to $150 million. Commenting on the strategy behind the recent acquisitions, and how this fits into the broader strategy for Go90, Brian Angiolet, Verizon’s SVP of Consumer Product and Marketing, said it is “a continuation of our media strategy, which is focused on disruption that is occurring in digital media and content distribution, and involves building a portfolio of the emerging digital brands of the future for the millennial and Gen-Z audience.”7 The Verizon product is relatively unique from three perspectives: it is one of the first mobileonly content platforms; it focuses on millennials as a key target audience, the segment that has moved furthest away from viewing traditional TV (and which advertisers therefore struggle to engage with); and it relies on advertising as the primary revenue model. 7

“Verizon furthers digital media M&A with Complex buy”, Mobile World Live, April 2016 33


For HOOQ, content is primarily sourced from its joint-venture partners, namely Sony Pictures Television and Warner Bros, as well as regionally based local content providers. The company is also looking to broaden its content sources with a move into proprietary content – for example, with local partner Globe in the Philippines and a local entertainment company to produce a mini-series. Viu relies on a range of partnerships in each launch country to develop a broad and locally relevant content offering, as well as drawing on more regional and global content sourced from parent PCCW’s content portfolio. In India, for example, the company has signed content agreements with a number of local production houses and content owners such as Reliance Big Entertainment, Sony Music and Zee Digital Convergence. All these video platforms face relatively challenging competitive landscapes. Go90 is effectively competing with the likes of YouTube and Netflix. Netflix has recently launched in south-east Asia and will be an immediate competitor for HOOQ and Viu, with the Malaysian-based iflix also available in several markets in the region.

4.3 China market perspective In China, regulatory policy divides video and television services into two broad categories, namely ‘over the top’ (OTT) and broadcast television. The latter covers content broadcast by television stations and where the receiving equipment is typically a television (but can also include for example a mobile device). The regulation covers a range of TV services, including traditional broadcast, digital and satellite TV, as well as IPTV broadcast over fixed line networks and mobile television. OTT video regulation is then concerned with content not covered by broadcasting regulation, and where the receiving equipment can be one of a range of devices, including laptops, PCs, tablets and mobile devices. As a result of these regulations, there is a clear distinction in the scope of business that operators are able to undertake in the OTT market as compared to the TV video market, with the former allowing operators to play a fuller role as they can directly hold licences to operate OTT video services.

OTT video

TV video

Business scope

Licence

Operator can own?

Content production

Radio and television programme production licence

Yes

Content integration Content delivery and distribution

Internet audio-visual programme service licence

Yes

Content production

OTT TV/IPTV/mobile TV content service licence

No

Content integration

OTT TV/IPTV/mobile TV No integrated service licence

Content delivery and distribution

OTT TV/IPTV/mobile TV delivery service licence

Table 2: OTT and TV video licences in China Source: CAICT

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Yes


As shown in Table 2, an operator that wants to provide either a mobile TV service or other traditional TV video service has to cooperate with a company that already holds either a mobile TV integrated service licence or other TV integrated service licence. An example here is China Unicom’s strategic cooperation agreement with BesTV, a company that owns a mobile TV integrated service licence. In contrast, for OTT video, operators are able to participate in all aspects of the business, from content production to the delivery of OTT video content to consumers.

4.3.1 Opportunities for operators and the role of partnerships in China Establishing a broad range of partnerships has been central to the content strategy of operators in China. For example, China Mobile created MiGu to manage its content services. MiGu has built several open platforms to make cooperation across the ecosystem easier, such as in the areas of media convergence, digital content aggregation, copyright transaction and so on. By the end of 2015, MiGu had established nearly 800 partnerships to develop China Mobile‘s online reading delivery service MiGu Read. In January 2016, MiGu signed a strategic cooperation agreement with CRI NewsRadio to develop a programme called Global Reading, which will be exclusively distributed on MiGu Read. MiGu Read has established a content platform of almost half a million titles, covering novels, comic books, magazines and other publications. To date, MiGu Read has generated more than RMB12.1 billion for its content and channel partners. 8 Cooperating with content producers is also key to developing the proprietary content that can differentiate services in an increasingly competitive market. In July 2015, China Mobile signed a strategic cooperation agreement with Zhejiang Huace Film & TV, a video content production and distribution company. The agreement allows for the development of several TV mini-series and a number of films to be produced by Huace and distributed via the MiGu video platform (under the China Mobile brand) as its main distribution channel on the internet. In 2014, China Telecom signed a strategic investment cooperation agreement with Chinese All, Phoenix Publishing & Media and Xinhuanet, a news and content service company in China, to develop TianYi Read. Xinhuanet invested RMB138 million in the project and took a 20.7% stake in the venture. It plans to use its experience in areas such as marketing and content management to support the development of TianYi Read. China Unicom signed a strategic cooperation agreement with BesTV, which owns a mobile TV integration licence, allowing China Unicom to provide mobile TV transmission services. Using its 4G mobile network and fibre connections, China Unicom aims to provide a full range of video services and a multiscreen, interactive experience, to meet customers’ needs for TV anywhere, any time.

8

Sohu.com, April 2016 35


4.3.2 Examples of operator initiatives China Mobile, China Telecom and China Unicom all provide video and content delivery (distribution) services to their own subscribers and subscribers of other networks, including video, music, books and games. Examples include China Mobile’s MiGu platform outlined above; China Telecom‘s TV189, iMusic, TianYi Read, iPlay and iCartoons; and China Unicom‘s Wo Music, Wo Read, Wo Games and Wo Dongman. At present, these services have a number of ways of generating revenues, including advertising, subscription fees and/or transactional on-demand fees. By the end of April 2015, according to the yearly active user numbers, MiGu Video ranked 14th in the OTT video market, MiGu Music ranked sixth in the OTT music market, with MiGu Games ranked in ninth place. There is no data as of yet on how China Telecom and China Unicom are performing with their content offerings. It would generally appear easier for operators to enter the OTT video market as they are able to gain licences for all aspects of the OTT business, and the overall mobile video market is seeing explosive growth in China as it is in other markets across the world. There are already some established players in the OTT video market, including internet players Tencent, Alibaba (through its Youku video platform) and Baidu (with iQiyi). The internet players in China have benefited from a number of factors, including innovation around new content and business models, as well as appealing user interfaces. Acquisitions have also played a role in some cases for the digital players to build capabilities in the OTT video market, with M&A more of a challenge for telecoms operators that need approval of major investment plans by State Council committees. However, there is scope for operators to develop innovative new content and to enter into distribution agreements with international content providers (as the major OTT players have already done) to boost their OTT video offerings.

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5 Monetising the growth in data traffic 5.1 Understanding the rise in data traffic Global mobile data traffic is forecast to increase from 3.7 exabytes per month in 2015 to 30.6 exabytes per month in 2020. This will be driven by several factors: • Increasing adoption of smartphones and, therefore, access to a wider selection of content. GSMA Intelligence estimates that smartphone connections will represent 66% of total connections by 2020 (up from 45% in 2015). • T echnology migration towards higher speed networks. In 2015 4G represented 15% of total global connections. As the rollout of higher speed networks continues, this figure is forecast to reach 35% by 2020. • W ider proliferation of mobile content and services tailored to local markets and help for consumers to learn the digital skills required to access this content. • M obile operator actions to stimulate increasing data usage, such as flexible tariffs and partnerships.

16

North America

14

Western Europe

12

Asia Pacific

10

Latin America

8

Central and Eastern Europe

6

Middle East and Africa

4 2 0 2015

2016

2017

2018

2019

2020

Figure 14: Mobile data traffic forecast (exabytes per month) Source: Cisco

In China, the ongoing migration of mobile subscribers to 4G and the growth in the number of M2M connections will drive data traffic growth, with CAICT forecasting a CAGR of 73% between 2015 and 2020. As a result, operator revenues from data traffic as a proportion of telecoms revenues will reach 54.5% in China by 2020. Video is the leading category of application consuming mobile data but it is important to recognise the impact of other services. Proportionally, data consumed from web activities (including VoIP) will account for a significant amount of overall data traffic. Driven partly by web-based voice services, this growth will also be generated through new mobile internet users finding, consuming and creating content that is relevant to them.

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Web, data & VOIP

2020 Video

2019

Audio streaming

2018

File sharing

2017

2016

2015 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Figure 15: Global mobile data traffic forecast by category Source: Cisco

5.2 Growth in data traffic: the operator opportunity The latest estimates highlight how data traffic will continue to show significant growth. This will be partially driven by organic growth from the continued desire of consumers to engage with increasingly data-rich content, as well by connecting new users to the mobile internet. Operators are deploying several types of strategy around the world to stimulate growth in data traffic and, crucially, ensure that they effectively monetise this growth. Strategies include migrating customers to higher speed networks (particularly 4G), the use of shared and tiered data plans, and bundling premium content. A number of operators are looking to build content delivery platforms to generate new revenue streams. A simpler option is to use video and other content (such as music or games) to stimulate data traffic growth, though the operator role in this scenario is limited to providing connectivity (albeit operators may compete on providing better ‘pipes’, in terms of coverage and download speeds). Bundling premium content with higher data packages can allow operators to stimulate overall data traffic and hence incremental revenues. Examples include Vodafone’s higher level data packages, which come with a ‘free’ subscription to Spotify or Now TV for part (or all) of the contract length. Vodafone also demonstrated that users with bundled content packages typically consumed more data overall, highlighting the indirect benefits of bundled content.9

9

Vodafone Group Plc Preliminary results for the year ended 31 March 2015

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Emerging markets have also seen the widespread adoption of sponsored data plans, which can offer free or discounted access to certain apps or to services such as mobile banking. These approaches have proved effective in encouraging new subscribers to begin using mobile data and explore new content and services. These plans may not in themselves offer significant revenue upside, but are an important step in helping users become more familiar with online content, as well as allowing operators to explore new and more flexible business models as they look to build partnerships and increase user engagement with devices. Sponsored data offers are distinct from zero-rating of certain services, where the cost of the data is absorbed by the operator, such as the Facebook Zero partnerships that operators have launched in a number of markets. An example from a developed market is T-Mobile US’s Binge On zero-rated data option, which allows users to view content (including YouTube, Google Play, Netflix and Hulu) without eating into their data plans. In this case, where the operator bears the cost of the zero-rating, the content access is used as a tool to attract new customers and drive loyalty among the existing base. Multi-device and family plans are also used widely in some markets; a ‘bucket’ of data can be shared across family members or different devices. This is likely to become more widespread as multi-device ownership (for example a phone, tablet and wearable) helps to increase overall data traffic and subsequent revenues. As highlighted in research completed in 2013, it can also result in larger data bundles and lower rates of churn.10

5.3 China market perspective In China, operators are deploying a mix of strategies to encourage data usage, including partnering with content providers, encouraging app development and an innovative approach to data traffic platforms. 1) O perators can partner with video and gaming companies to provide dedicated traffic packages to consumers. In China this has been used in two ways to encourage data usage and generate additional revenue: a) M obile users can freely browse the content offered by the partners with the traffic cost covered by the content partner. For example, 22 provincial operators of China Telecom, 14 of China Unicom and Shanghai Mobile are partnering with Snail Mobile to allow users to freely download games in the Snail Store and play games without incurring data charges. A further example, also related to gaming, is Beijing Unicom working with POPGAME to allow Beijing Unicom users to download for free and play games in its gaming center with no data fee charged. This is expected to generate RMB0.4 million in data traffic revenue for Beijing Unicom per year.11

“The case for shared data plans”, techzine.alcatel-lucent.com, July 2013 cww.net.cn

10 11

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b) O perators can partner with content providers to offer video or music at very low cost, leading to increased revenue from the data being used to access the content (with the overall revenue being shared between the two organisations). An example of this type of partnership is between China Unicom and SoHu video, which provided a CNY15 video package. After one month, new subscribers to the content exceeded 100,000, data traffic increased by 123% and ARPU increased by 51%12 . 2) O perators can encourage application development by enabling an open API platform and working with internet companies. The three operators in China have built app ‘factories’ through developer networks, enabling app developers to utilise the operator UAM, messaging and billing systems, and access location-based services. Operators can also offer API-based information such as weather forecasts, microblogging sites and search information by opening their cloud service, digital content and other internet services to developers. he operators have then entered the application distribution market to directly serve T mobile users with, for example, the China Mobile MM store, China Telecom 189 store and China Unicom WoStore. The most successful of these is the MM store with revenues in 2014 of RMB0.4 billion per month.13 Distribution of the apps can be further stimulated through partnerships with major internet players – for example, MM partners with Baidu, UC Web and WanDouJia. 3) D ata transaction platforms have been established, such as Bank of Data, LiuLiangBao, LoveData and Data Wallet. These platforms allow users to exchange data allowances but also connect mobile users with online (e.g. e-commerce) and offline (e.g. airlines, banks and catering) industries. Through the platform, users can turn membership or loyalty points from other merchants into data allowances. When Data Bank of China Unicom was launched it attracted 800,000 subscribers in the first month, with almost 35% using it every day, resulting in 1.38 million interactions14. For the non-operator companies using these platforms, it opens new marketing and promotion opportunities – for example, Alibaba partnered with the three main operators to launch the data wallet to customers of TaoBao. With this scheme, customers who buy goods in designated stores during the promotion receive a credit for a data allowance. or operators, this not only helps to drive traditional data usage through accessing F the platform and any subsequent data usage; it also establishes a new data traffic ecosystem with mobile users and online/offline merchants creating opportunities for further expansion (for example with OTT players). These types of innovative transaction platform are likely to develop further as more enterprises and industries take the opportunity to partner with the mobile operators.

“A Brief Analysis of Data Traffic Product Collaboration”, Qi Shuai and Zhao Zhanchun cnii.com.cn 14 China Unicom 12

13

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Further to the examples above, the development of mobile internet has embraced the concept of the electronic “red packet” 15 as operators and their partners send out free data traffic packets to users during holidays. This is a clear example of how traditional lifestyles are combining with newer technologies and how operators can base data and internet promotions around local culture and traditions. Overall, mobile operators and content providers need to recognise that increased data traffic will come from both new and existing subscribers. Education and relevance are needed for new subscribers but, once a consumer has fully embraced the mobile internet, a flexible set of tariffs, add-ons and options will be needed to sustain data growth. Innovative solutions such as the data transaction platform seen in China can help stimulate data traffic growth and create revenue through partnering with other industries.

15 A ‘red packet’ or ‘red envelope’ is a monetary gift given during holidays or special occasions such as weddings, graduations or the birth of a baby

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6 Cyber security 6.1 An evolving threat landscape The nature of the cyber-security threat continues to diversify at an increasingly rapid pace in 2016. Rising smartphone penetration, the unbundling of the service layer and the shift to cloud computing (particularly for enterprise) represent a double-edged sword. On the one hand, they are enablers of digitisation. On the other, they provide the groundwork for vulnerabilities to be exploited by hackers. The infrastructure risk is most direct for the telecoms and tech sectors, but the increasing prevalence of all-IP networks and cross-sector use of the Internet of Things have raised the profile of the security issue among boardrooms of all stripes. The World Economic Forum’s 2016 Executive Opinion Survey highlighted security as the number one perceived threat among business leaders in eight countries (US, Germany, Japan, Switzerland, Netherlands, Estonia, Singapore and Malaysia). Similarly, it is now seen as the number two threat among CEOs on the Fortune 500 in the US. There are three key reasons for this. Firstly, the financial implications of attacks are significant. At a global level, the impact is estimated to be around $445 billion per year or 0.6% of GDP.16 Numerous companies have provided disclosure of these costs, of which we show two: • J P Morgan (US, June 2014) – theft of non-financial account details for 76 million household and 7 million business customers. The company did not disclose trading impact but provisioned a new $250 million annual ‘envelope’ for cyber-security defences. • T alkTalk Group (UK, October 2015) – account records compromised for 157,000 customers (4% of its customer base), of which 15,600 had full bank details stolen. Reported £15 million trading impact related to the breach and a £45 million charge for the incident response. Secondly, there is a clear reputational risk. Most of the security breaches so far have been related to software and apps, meaning the solution (a patch or fix, and communicating that to customers) has come from internet companies. Mobile networks themselves have (fortunately) remained relatively well protected but the reputational impact on operators can still be felt indirectly given their role as network provider to the internet.

16

Centre for Strategic and International Studies, McAfee (2014)

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Thirdly, the nature of the threat has become more complex, agile and diffuse, making it more difficult to respond or pre-empt. PC-era hacking techniques such as Trojans and viruses are now being iterated on to spawn new variations (chargeware, for example). Recent denialof-service attacks have targeted enterprise and government, with motivations ranging from customer fraud to industrial and state espionage (complementing well-known hacktivist campaigns such as Hacktivists Anonymous). Fundamentally, social engineering and a range of nuanced approaches based on subterfuge underline a shift in the hacking approach to reach a central network via vulnerabilities in the user (hence the phrase among security professionals, ‘the user is the new perimeter’). Exacerbating all of this, bring your own device (BYOD) and a lack of rigorous security protection systems with patch updates for third-party apps have combined to increase the vulnerability of individual enterprises. NTT Group estimates that it takes an average of 200 days for organisations without a vulnerability management system in place to remedy vulnerabilities. Contrasted against the rising incidence of zero-day exploits – attacks that target deficiencies previously unidentified in newly released software code – this paints a stark situation. Technique

Description

Recent examples

Brute force and cracking

Programs that systematically try out all possible passwords or encryption keys until the right one is found.

Apple iCloud (September 2014)

An attempt to render a computing device or network resource unavailable to its Distributed denial of service users, so as to prevent access to the TalkTalk UK (October 2015) (DDOS) Internet, temporarily or permanently. A DDoS attack is one originating from multiple (often thousands of) IP addresses.

Malware

General name for a variety of attach vectors that seek to infect an end user device or network as a means of stealing private data or consuming excessive power/bandwidth, rendering a loss of user control. Examples include Trojans, viruses and worms (which also includes the botnet family).

Sony Pictures Entertainment (November 2014)

Tactic that tempts people to offer up sensitive personal data (such as passwords and bank security numbers) via email, Target Corp (November 2013) Phishing (or spear phishing) often containing links to spoof websites. Spear phishing targets specific companies or individuals, often armed with nonpublic information about their target.

Social engineering

Any attempt to trick individuals, such as employees, into providing information that helps gain unauthorised access to systems: essentially, a con trick (phishing is one type). This has become a common route into enterprise systems.

Table 3: Current hacking techniques (non-exhaustive) Source: GMSA Intelligence

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Threat and attack levels generally rise in proportion with the financial value and public profile of the sector. Financial services remains the most vulnerable; depending on the security tracking database (see Figure 16), it accounts for around 20% of detected attacks. Geographic origination is more difficult to accurately represent given the complex nature of IP hosting, VPNs and traffic flows. The US accounts for over 50% of attacks based on the footprint of NTT’s security companies clients, but this likely underrepresents Russia and China (Russia, for example, is known to have an increasingly large web of clandestine criminal gangs with sophisticated operating structures for industrial-level cyber-attacks). Consumer-level data sheds some light on this. Lookout, a start-up security firm, tracks threats dynamically across a sample group of 70,000 users of its Android and iPhone apps. Encounter rates are by far highest in Russia and China (63% and 27% of the sample base respectively), driven by high penetration of Android, which has proven more pregnable given its open code base and prevalence of uncertified forked versions of the OS (particularly high in China), consumer use of unscrupulous third-party app stores and a lack of awareness.

Finance

11%

18%

3%

Retail

3%

Manufacturing

4%

Health 7%

15%

China Australia

2% 2% 2%

UK France

3%

Tech Education

7%

US

15%

Professional services

Germany 9%

56%

Government

Russia Other

Pharma 7%

14% 12%

Insurance

10%

Other

Figure 16: Distribution of cyber-attacks on SMEs and enterprises Note: figures based on client footprint of NTT Group security companies (18,000 clients) Source: NTT Group Global Threat Intelligence Report (2015)

6.2 Cyber security: the operator opportunity Successful attacks within the TMT space have mostly targeted software and apps provided by internet players. Android’s vulnerability is well documented. Apple has also been exposed through the iCloud breach of celebrity photos, and more recently in China, in 2015, where hackers exploited developers’ use of unofficial iOS code (xCode) to infect multiple apps with malware, including big names such as Tencent and Uber. The mobile operators have, so far, largely avoided high-profile intrusion. Risk levels are, however, high. The response in deploying security solutions has, over a short span of time, become more comprehensive, stratified and public. The security approach can be segmented into three broad tiers: customer protection, platform and radar scanning, and advanced network security. We illustrate this below, using examples from five leading players in the space in the US (AT&T, Verizon), Europe (Deutsche Telekom) and Asia (NTT, SK Telecom).

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Overall, we view these security enhancements, particularly in enterprise platform scanning and advanced networks, as significant strategic upgrades. Revenue potential is minimal but the value should be seen in terms of an insurance and reputation premium. Insurance in that the cost of a breach could potentially far outweigh the investment made in security infrastructure. Reputation in that customer loss as a result of account or data breaches can prove irreparable.

6.2.1 Consumer protection This type of security generally is sold to consumers as an add-on to contracts. It may include anything from device location if stolen or lost, photo and contacts back-up, and a wipe feature should an incorrect device password be entered repeatedly (this being the root feature of the Apple-FBI standoff over the San Bernardino terrorist’s iPhone). AT&T and Verizon both sell this entry package at $11 per month, an increase of 18% on an average monthly contract spend of $60. Additional add-ons for Lookout’s security app to provide anti-virus scanning are also offered, as is insurance. In Europe, Deutsche Telekom offers a similar package, but goes further to pre-install the Lookout app on all Android devices. It reports a total of 800,000 active Lookout users across seven markets in Europe. Unfortunately, this equates to only 1.2% of its customer base, a very low take-up level. The US incumbents do not disclose take-up figures, but we suspect the figures are also low (less than 10%). Consumer awareness of security risks is growing, but willingness to pay is low and is likely to stay low given that the value is seen as intangible. Non-essential features of entry-level security packages (like phone locator) are likely to continue to be charged for, but the case for pre-installed security apps such as Lookout becoming free, or built into the overall bundle, is growing rapidly.

6.2.2 Platforms The platform approach is now being deployed in enterprise security. Deutsche Telekom, NTT and SK Telecom have each developed a version of this. The common objectives are to pre-empt attacks instead of merely responding (slow and often ineffective once a breach has hit and spread), increase scalability of the solution, and configure the platform so that the company can work and share information with partners in industry and, if necessary, law enforcement. Deutsche Telekom’s solution is built on the company’s existing radar model, which it uses internally to detect business-level disruption and trends. Security threats are segmented according to potential target (customers versus Deutsche Telekom versus both) and translated into a risk portfolio. This allows the company to prioritise resources towards threats that are imminent and potentially high impact – in this case, advanced persistent threats (APTs), malware and DDoS.

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The security radar patrols threats to its enterprise clients and is managed by a central cyber defence centre (the Cyber Emergency Response Team or CERT). This is crucial because once threats are moved to high risk, a pre-emptive or response action can be directed to enterprise networks and Deutsche Telekom’s own network simultaneously. In parallel, CERT monitors traffic on Twitter for suspicious activity that can be triangulated with weak or strong signals detected by the radar to arrive at a rounded picture of whether something is likely to happen or not. Offline, the company has made use of ‘honeypots’, dummy corporate networks built to attract cyber threats that can be analysed by experts as a means to understand how attacks are evolving but cannot actually impact a business. NTT Group has a larger enterprise customer portfolio with around 18,000 clients across multiple sectors served by a number of businesses within the NTT conglomerate (e.g. NTT Communications, Dimension Data and NTT Data). It runs a security radar platform that aggregates threats and attacks in real time. The scale is huge: 6 billion attacks on its enterprise customer footprint in 2014 (itself de-duped from what it calls ‘trillions of logs’). The platform allows NTT to pre-emptively respond to clients before damage is done, but it also yields advanced analytics that cover the range of evolving attack types, virulence, geographic origin of threats, and details of exploit kits being used by hackers. This role of educational provider in addition to cyber defence is very much a new one for a mobile operator. SK Telecom’s foray into platforms is tied to its ventures in the smart home and, more recently, the LPWA network space in IoT. The company has recently partnered with Samsung to integrate its own platform with Samsung’s S1 security solution, allowing customers to remotely control home security through a smartphone app. On LPWA, it is committed to rolling out a nationwide network in 2016. This will be open to third parties across multiple sectors and, in a security context, will include a dynamic control centre that diagnoses and removes vulnerabilities remotely.

6.2.3 Advanced network security There are two elements to advanced network security. The first is a result of the shift to virtualised networks, referred to as network function virtualisation, or NFV. This involves moving away from hardware-based components within the network (such as routers and load receivers) to software that is provisioned in the cloud and can control the same functions centrally. Security has been seen in some quarters to be compromised in a virtualised environment where most operators deploying NFV are doing so using open source architecture. However, NFV networks are provisioned with redundancy to ensure operations and service continue to be available in the event of a network attack, and centralised control reduces the risk of an attack on the perimeter. The vulnerability from having an open code base remains, but this is mitigated by having encrypted network keys and by making auditing stricter for third-party vendors accessing the network via APIs.

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The other element is quantum cryptography. This technology is not new (Nasa’s jet propulsion lab is exploring its use for space communications) but its applications have expanded to include network security in the last two years. Quantum cryptography is based on quantum physics and, from lab experiments and published research, provides a higher level of security than encryption for network keys as data cannot be intercepted without either the sender or receiver becoming aware of it. SK Telecom is one of the leading operators in this space. It led a consortium of universities and research institutes that was selected by the Korean government in September 2015 to prototype this technology. The company reported in March that it had now developed and begun operational trials of test networks using this technology in five areas of the country.

6.3 China market perspective There are several example initiatives taken by mobile operators in the Chinese market, including those focused on SIM security, secure identity authentication and DDoS protection: • C hina Unicom’s mobile security SIM card includes digital authentication capabilities in the SIM card, using a combination of digital certificates, SSL data encryption and VPDN network security tools to ensure the safety of the network transmission channel. • C hina Unicom offers electronic authentication data security solutions to the government and other major enterprises in the Chinese market. It is based on PKI technology, and can monitor the whole process from user login to data transfer, data storage, data sharing and so on. It provides secure login, information confidentiality and nonrepudiation services. • C hina Telecom has launched its ‘cloud dam’ service, which offers a complete solution to the challenge of DDoS attacks. The service encompasses attack monitoring, source suppression and then source cleaning, to ensure minimal disruption to a customer’s activities. The service is offered to provide protection for the company’s government and corporate customer business. • C hina has been relatively late to the field of quantum cryptography but has seen significant progress in recent years. For example, in Hefei the e-government network incorporates elements of quantum cryptography to increase security. Work on a 2,000 kilometre secure network between Beijing and Shanghai is due to be completed in 2016. The University of Science and Technology in Hefei, which is leading this project, intends to use the network and a planned quantum satellite to undertake further tests on the potential of quantum theories.

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