August 1, 2010

Innovation Goes Home

Traditional voice and Internet access services, which for years constituted the telecom industry’s foundation, are progressively becoming commodity businesses. Non-traditional players including social networking sites such as Facebook, Twitter, and YouTube  as well as players like Apple and Google, are increasing their share of what used to be exclusively the telecom sector’s revenue and continue to threaten long-held business and customer-relationship models, according to a new study by Booz & Company.

Fixed telecom operators continue to hold sway over a large, captive customer base and have unparalleled infrastructure and relatively significant investment capabilities. Combined, these constitute a powerful array of assets that telecom providers can use to compete in the race to offer next-generation telecommunication services and applications. Owning the consumer relationship is an essential element of their sustainability. “To protect that relationship, telecom operators are reinventing their home communication business—giving consumers the capacity to use services and applications that far transcend basic voice and Internet access services,” commented Karim Sabbagh, a partner at Booz & Company.


The Consumer Evolution

Customers’ growing sophistication, coupled with device and network convergence, has transformed demand for communication services and applications in the home. Plain connectivity has given way to numerous multimedia applications and customers want high-quality, fully integrated services with ubiquitous access that covers their telecommunications, information, and entertainment needs. The number of global broadband subscribers has been rising steadily and significantly and in some markets, broadband subscribers are not just looking for fast Internet; they also want the ability to run multimedia applications and value-added services (VAS).

“The rapid emergence of increasingly powerful digital devices is also contributing to global consumer sophistication, including in the Middle East and North Africa (MENA) region, producing a significant shift in consumer behavior toward adoption of digital content,” said Hadi Raad, a principal at Booz & Company. This shift is evident in behavioral insights about customers in accessing the digital content. The Twitter community in the region grew by almost 300 per cent during the first six months of 2009 with 61 per cent of social networkers updating their Twitter status at least twice a day and 80 per cent of them accessing Twitter through a mobile device. There are 10 million active Facebook users in the MENA region. In countries like the UAE, Jordan, and Lebanon, more than 40 per cent of the online population uses Facebook. Regional broadband growth has been strong and will sustain its pace. According to one forecast, there will be 22 million fixed broadband telecom connections in the MENA region by 2014, representing a household penetration rate of almost 32 per cent.


Empowering the Customer with Interactive Applications

Interactivity of video and entertainment applications is now a must. This is causing a vital transformation in telecom home offerings. This marks a substantive change for the consumer, who used to passively receive and use services, but now is empowered at home with interactive multimedia and seamless fixed-mobile convergence applications.

Multimedia at home: In an effort to elevate the television viewing experience, operators are offering customers a personalized and interactive Internet protocol TV (IPTV) service over the broadband connection, with access to thousands of VoD titles. “Customers can find, manage and interact with a vast array of digital content in just a few clicks of their remote control. Over-the-top applications that run over TV include interactive advertisements, gaming, and remote shopping,” explained Sabbagh.

Online gaming is also gaining momentum. Interactivity and collaboration are becoming integral to gaming, changing the way consumers experience entertainment.

The music scene is similar: Listening to music is no longer limited to iPods or CD players. Consumers today can integrate their music devices with their televisions without compromising quality. Furthermore, global telecom operators are offering personal media-management solutions as part of their multimedia packages.

Seamless fixed–mobile convergence at home: Femtocells are emerging as a key enabling technology for the home convergence of both fixed and mobile telecom services. Femtocells are devices designed to give better indoor coverage of 3G mobile phone signals. They open up the potential to develop high-bandwidth, location-specific applications that enhance the user’s experience.


From Infrastructure Control to Applications Dominance

Multimedia applications have been stoking demand for high bandwidth and likely will continue to do so. Bundles of bandwidth-hungry applications could drive demand for tens of megabits per second (Mbps) in next-generation homes. Forecasts indicate that more than 35 per cent of worldwide broadband connections will exceed 10 Mbps by 2012. Parallel to the increase in demand, bandwidth prices are dropping. To date, the average monthly tariff per 1 Mbps in most developed countries has already dropped to less than US$5.

Telecom operators are recognizing the content and application space as a source of future revenue growth. Multimedia applications will continue to grow broadband revenue. Through premium content, interactivity, and personalization, IPTV could evolve as a key application in next-generation homes, despite the abundance of piracy and free-to-air TV channels in the MENA region. “VoD could prove to be a huge regional success, given the popularity of DVD rental shops and the lack of movie theaters in countries such as Saudi Arabia. Forecasts indicate that roughly 10 per cent of broadband connections in the region will be bundled with IPTV in the next few years,” noted Raad.

Similarly, online gaming in the MENA region could emerge as a strong growth opportunity, despite software piracy. This trend is expected mainly because of the region’s large population of young people; 72 per cent of the MENA population is below the age of 35. In addition, relatively few alternate entertainment choices are currently available, and the recent growth of collaborative online communities allows remote gaming between individuals. Other next-generation applications such as remote storage, 3-D TV, tele-presence, tele-medicine, and virtual sports will all likely follow. Telecom operators, thus, need to reposition themselves to be able to capture value from the explosive growth in the realms of content and applications.


Innovative Business Models

“With the anticipated surge in broadband applications and revenues, telecom operators are changing their business models to create new methods of interaction with customers as well as with content and application service providers,” explained Sabbagh.


Telecom Operators and Consumers

In some business models such as subscription-based, pay-per-view, and other à la carte scenarios, subscribers pay for services these models continue to be key for revenue generation. Micro-transactions are an emerging variant of the pay-as-you-go business model, especially in the gaming space; users pay a small amount of money on an as-needed basis to enhance the game by altering their character or getting additional game resources.

So-called “free” or advertising-based models are key for traffic generation and demand stimulation and could only become lucrative with a critical mass. Targeted and interactive advertising models are an emerging variant of this model that might prove appealing and could emerge as a popular business model. Telecom operators are well positioned to offer targeted and interactive advertising because of the abundance of information they can gather about their users, and the availability of a return channel through the broadband connection.

Although advertising-based business models stimulate demand and increase traffic, they can only be viable with sufficient scale. A combination of business models involving free advertising-based access to restricted applications to drive traffic, complemented by one or more of the pay models through the up-selling of more advanced features, could ultimately prevail.


Telecom Operators and Service Providers

Business models are also emerging between telecom operators and third-party service providers:
Revenue sharing, service provider pays, or telecom provider pays. A few factors loom large in determining which business model service providers and telecom operators will ultimately adopt. If service providers offer “must-have” applications, they will be in a better position to dictate terms, including potentially insisting on a model in which telecom operators pay them outright to give customers access to these premium applications or set minimum guaranteed payments for access. The balance of power shifts to the telecom operator if it has a large customer base, relevant customer segments, sophisticated infrastructure, and good customer insights. In another business model, telecom operators could charge service providers for traffic, or priority access on their networks. Regulators and application providers argue that the imposition of such charges would limit innovation and stall development of nascent services. A final business model is one in which service providers charge telecom operators to access their content or application. The model likely to prevail will be a win-win for both sides, in which operators open up their Application programming Interfaces (APIs) to the developers’ community and compromise by giving them ample margin so they can continue to innovate over the operators’ APIs, while maintaining a stake in this fast-growing, important sector. This will drive the development of targeted applications, such as those with Arabic language content.


Conclusion

“The boundaries between telecom operators, Internet players, and entertainment providers continue to blur, and almost every telecom operator faces a rapidly changing competitive landscape rife with opportunities and challenges,” Raad noted. Three key priorities have emerged for fixed operators to reinvent their home communications business and capture the opportunity in next-generation homes: preparing their infrastructure, ensuring a high-quality experience for consumers, and developing a clear applications road map with the right partnerships and business models to foster innovation while securing their own position in the emerging ecosystem.

For telecom operators, the mounting business generated by applications is more than just another growth opportunity. It is an imperative—a necessary component of the future of the business, in which telecom operators must actively participate in order to thrive and not just become utility-like operators of pipe.