MWC 2018: Key takeaways

MWC 2018: Key takeaways

The Delta Perspective

Author:
Sam Evans - Associate Partner

Context
Another year, another mammoth Mobile World Congress (MWC) with more than 100,000 visitors descending on Barcelona to assess new technologies, discuss strategic themes and do the deals that will shape the future of the telecoms industry.

In previous years, there has been a consistent cycle of innovation with new trends emerging and existing ones maturing, so it’s been simpler to summarize the event and review the key highlights. This year, however, the key takeaways, from a technical perspective, are less clear – the event’s tone appeared to be less about the technology roadmap and the possibilities of technical innovation, but instead focused on the commercial models that will ensure the required “Return on Investment” to justify the next wave of CAPEX deployment.

So, this year the excitement of new technology was matched, or even surpassed, by the tougher discussion of how does a $1.1 trillion industry that is forecast to deliver 11% revenue growth ensures that the next five years ensure CAPEX is efficiently allocated and generate a return.

From the Delta Partners perspective, it is less about the key themes but rather the implications that are arising. Less about 5G technology and more about whether there is a commercial case to be created and what infrastructure model is required. Not whether content is a new growth engine but understanding if there is a sustainable commercial model as the gap between demand and consumer willingness to pay widens. In our summary, we consider the following:

  • 5G: In search of a viable commercial and infrastructure model
  • Content: The ‘affordable premium’ paradox
  • Telco hardware innovation: It’s in the cloud 
  • Social good: An opportunity to level the regulatory playing field?
  • Service innovation: Each for themselves
  • IoT: It’s time to align

 

5G: In search of a viable commercial and infrastructure model 

Overview
Everywhere you walked at MWC there were vendors proclaiming what 5G is – it is apparently ‘seamless’, ‘inclusive’, ‘immersive’, ‘secure’ etc. etc. While it was excellent to see the 5G experience well described, what was lacking was what 5G would actually do, the use-cases it would enable (beyond the ubiquitous cars on most stands) and the commercial models that would justify the investment. While a drone could reduce 90% of remote site inspection costs, what is the commercial model that will compensate the network provider who may just be providing the connectivity? And is 5G really required for that use-case?

For an industry that has invested more than $1.2 trillion globally in its networks since 2010, any new CAPEX cycle needs to be met with an expectation to generate “Return on Investment”. Some estimate 5G may require network investment of $250 billion in the US alone. The numbers do not seem to add up, yet. It was reassuring to hear Sigve Brekke, CEO of Telenor, state that he would not push 5G until they identify use-cases.

For 5G to make commercial sense, we need to look past the hardware – VR headsets, drones and autonomous vehicles – and recognize that a new infrastructure model is needed to support use-cases that have a chance of creating a commercial return. When it comes to 5G, the traditional telecoms logic of build-your-own network infrastructure on which to provision services may not hold. Services will need to be cloud-based with global reach. Leading international enterprises that will power the Industrial IoT will expect one solution to work globally. Infrastructure may need to be shared, with partnerships created between the network operators and global cloud providers such as AWS and Google.

5G will be dependent on an ecosystem approach with technical and commercial interfaces between connectivity providers where provisioning, bandwidth, QoS and settlement can be managed across networks, applications and devices in real-time. When one person controlling a machine can manage, in real-time, a network of millions of mission-critical sensors dispersed across the world, the concept of partnership needs to go deeper than what we see today. 

Exhibit 1: Our vision for the network architecture of the future

There is also the question of timing for 5G infrastructure investment. Too early and there is the risk of high network cost and technology implications, while being late risks losing market share (as late deployers of LTE have found out to their detriment). As if telecom CFOs need another reason to keep them awake at night…

The Delta Perspective
Whether telecoms network providers are ready or not, 5G will herald the next wave of CAPEX investment. As they mull network infrastructure investment, there needs to be consideration about the optimal approach and this is likely to be one which marks a departure from traditional network infrastructure logic. To be commercially viable and sustainable, 5G will need an ecosystem approach that goes beyond purely telecom operators working together and welcomes global cloud and service providers.

Selected 5G-related MWC announcements

  • Intel is working on 5G phones and PCs
  • Huawei, ZTE launch 5G products
  • Sprint announces first six cities to get 5G

 

Content: The ‘affordable premium’ paradox

Overview
Video content is driving data traffic growth, now accounting for over 55% of mobile traffic. At MWC, players from across the value chain participated in conference sessions or met potential partners. While the message at MWC 2017 was that content should be a critical component of telco operator strategies, a year later the focus has shifted to whether there is a sustainable model for the growth of premium content particularly with an OTT VoD model. This is the ‘affordable premium’ paradox.

Mark Britt, co-founder and CEO of iFlix, and Maaz Sheikh, co-founder and CEO of StarzPlay, spoke on stage of their organizations’ opportunities to extend the reach of premium content by making it affordable. In the case of, iFlix they are also venturing into sports. But herein lies the issue.

Exhibit 2: The ‘premium’ of sports continues to increase

It is evident that customers value content but there are two models emerging. One is the subsidization of content by multi-play or platform providers, who see it as a lever to sell a wider bundle of services. The second is OTT platforms using aggressive pricing strategies to capture market share in growth phases of what could be a ‘winner-takes-all’ ecosystem within local markets. The question is whether customers are willing to pay at levels that create a sustainable ecosystem. If the cost of premium content increases and the cost of delivering content over the network increases yet unit price goes down there could be a point where the elasticity of demand is exhausted. 

What we saw at MWC was demonstration of the wide range of content categories that the mobile screen enables. While hype usually follows OTT platforms, there were several examples of how mobile is enabling new production and consumption. As one example, Jukin Media demonstrated their new programme for produced for Verizon’s Oath platform based on user-generated content (UGC) on the ground at global breaking news events. This shows that UGC could become appointment viewing.

Exhibit 3: Mobile video consumption is not just an extension of TV / large-screen consumption

One recurring theme throughout the conference was the need to find a partnership model between the content providers and the network providers. While the message from the OTT platforms that “Telcos are frustrating partners!” continued to be heard there were examples of deeper collaboration, such as SMS marketing or one-click billing sign-up through a mobile operator. Looking forward, there will be only ever-increasing interdependence of content platforms and network providers and MWC demonstrated the need for a sustainable model for all sides. The parties are now coming to the negotiating table but the outcome is far from clear.

The Delta Perspective
The necessity of finding a sustainable model between content providers and network operators is clear and should be a priority for both. For network operators, partnering with third party platforms and developing a self-acquired rights portfolio does not need to be mutually exclusive as they can form part of a broader proposition to the customer. Telco operators have many assets to enable content providers, such as identity management, billing integration and personalized marketing, where content providers are seeing direct benefits. By working closer together network providers can improve collaboration on content delivery to reduce the load on their networks. A ‘win-win’ model is out there and the victors will be those that find it first and scale it.

 

Telco hardware innovation: It’s in the cloud

Overview
MWC is synonymous with device launches. As tradition broadly dictates, Samsung started the night before the event with the launch of its latest Galaxy S device (this edition introduces AR emojis and an upgraded camera). This was followed by further device launches including, but not limited, to Asus’ Zenfone 5 and 5Z (with AI-powered bezel-less screens with a thin strip for the front camera), Sony’s Xperia XZ2 and XZ2 Compact and the Nokia 8 Sirocco and Nokia 7 plus. Beyond highlighting device vendors continual struggle to give handsets consumer friendly names, the main takeaway from these launches was that there continues to be a severe lack of innovation at hardware level. Although this year avoided the depths of 2017, where the greatest device innovation was the relaunch of the 18-year-old Nokia 3310, it definitely did not herald a new hardware era. 

It was not just mobile handsets where progress was limited – from hardware perspective the big demos, such as Samsung Gear and HTC Vive, seemed to be minor iterations on previous years, while the F1 eSports demonstration was innovative because one of sports ‘blue ribbon’ events is embracing gaming rather than any particular hardware set up.

Sam Evans, from Delta Partners, at Mobile World Congress 2018

The plethora of cars on exhibition flagged the next wave of potential hardware innovation, such as what mobile connectivity within cars can enable from immersive content, AR and AI-driven solutions. However, when you consider cars as hardware innovation, beyond the metal and rubber required to manufacture everything else is a software stack – a scary thought if you are an automobile vendor.

Regardless of the level of hardware innovation, MWC reminded us there will be ever more connected devices. In 2015, there were 15.4 billion connected devices and by 2017 there were 20.4 billion. This is expected to reach 30.7 billion and 75.4 billion by 2020 and 2025, respectively. For all these connected devices to communicate with each other and deliver the utility that they seek to enable, there needs to be interoperability. 

Exhibit 4: An increasingly connected world

Given the wide range of networks and geographies these devices will run over, it is likely that such interoperability will need to be at the cloud layer. To create a real ubiquitous multi-device experience this cloud will need to reach beyond the limits of single global cloud provider. This requires a new mindset but in doing so could truly unlock the potential of hardware innovation. 

The Delta Perspective
The traditional telecoms industry needs a new mindset. Cloud providers are very much part of the ecosystem and will be a critical enabler for ‘interoperable’ services across devices. At multiple levels the telecoms industry will need to develop interfaces with cloud providers – with hardware interoperability being a key example.

 

Social good: An opportunity to level playing field regulation?

Overview
MWC clearly positioned itself to show how the mobile industry is aligned to the UN Sustainable Development Goals and its ability to drive social good. Given that some surveys in recent years have placed the telecoms industry beneath the tobacco sector in terms of reputation, it is encouraging to see an industry level commitment to driving forward and showing the social and economic benefits of having everyone and everything connected.

Several initiatives were announced to reinforce the role of the telecoms industry in social good with a common theme of how mobile operators can use the subscriber data to support development projects. One such report was ‘Unlocking MNO Data to Enhance Public Services and Humanitarian Efforts’ from the Digital Impact Alliance (DIAL) in partnership with Delta Partners Group. It analysed applications in five sectors including economic development, humanitarian assistance and healthcare to understand which MNOs’ data elements can create the most value and how to overcome challenges in extracting data.

Exhibit 5: Big data use cases identified for an MNO in emerging markets

While the marketing messages are compelling and use-cases are clearly admirable, there is still some way to go for the telecoms industry consistently to deliver on its promise of enabling and delivering social good. Such activity is a critical component of future regulatory debates as the industry faces a new CAPEX cycle for 4G, increased competition from lightly-regulated digital players, debates on net neutrality, spectrum availability and taxation. The telecoms industry must demonstrate that it can deliver both social good as well as investor returns. This is not an easy balance, but if managed effectively can be one that pays dividends. Literally. 

The Delta Perspective
Regulation has always been one of the most strategic issues in the telecoms industry – going forward it will be so more than ever. It is critical that network operators proactively position themselves as the scope of regulatory debate broadens in the digital ecosystem. Delivering social good with data-analytic driven services can be a key tool to help position network operators in two aspects – it can directly advocate the positive impact that they deliver to society and can demonstrate how to responsibly use customer data.

Selected Social Good MWC announcements

  • GSMA advances first trials of Big Data for Social Good
  • NTT DOCOMO, Telefónica to work on disaster preparedness

 

Service innovation: Each for themselves

Overview
One of the ‘seasonal’ aspects of MWC is that it brings topics to the fore for one week in Barcelona before stepping out of the spotlight for the next 51 weeks of the year. 

In this light, MWC always serves as a reminder that mobile operators are still searching for their upgrade to SMS and RCS is still being pushed as the solution. Except for a handful of enterprise case-studies for brand messaging (for example when a personalized Subway sandwich was ordered via RCS during the opening keynote), it continues to lack the broader industry adoption. 

RCS was originally positioned as the telecom industry’s next generation consumer messaging service until OTTs such as WhatsApp, KakaoTalk and WeChat ended that. So it pivoted towards an enterprise marketing tool – but maybe Apple, Google, Facebook have a chatbot for that? We will surely be updated at MWC 2019.

The continued challenges of adoption, such as Apple’s failure to enable the RCS Business Messaging platform on its devices, highlights a broader issue for the telecoms industry. Where is the next wave of industry-level service innovation going to come from? And can it be driven any more from the network level? Messaging is unlikely and despite continued focus on digital identity, the industry solution, Mobile Connect, is still a sub-scale player in a market that is being increasingly captured by the cloud providers. Mobile Financial Services and IoT-based services are still seen very much as an area of inter-operator competition.

Cloud providers and OTT platforms are very much part of the telecoms ecosystem and above the connectivity layer, their global scale allows them to increasingly become a point of aggregation for standardized services – think iOS App Store, PayPal, Netflix, Spotify, Uber, Facebook Connect etc.  

Exhibit 6: Tech players are competing with traditional telcos

So, again, where is the next wave of industry-level service innovation going to come from? At an ‘industry’ level, this is likely to be the cloud. IP has created a democratization of the service layer where network footprint is no longer the critical point of aggregation. A positive indication from MWC was the multitude of potential options but telecoms operators will need to forge their own paths and identify segments that they can create scale and compete with sector specialists. It could be content, eCommerce, enterprise applications or other verticals. This could allow telecoms operators to reinvent themselves as service providers but whether they will be successful is another question.

The Delta Perspective
As with hardware, the telecoms industry requires a new mindset. The search for the next wave of industry-level service innovation is likely to be futile. Rather, operators will need to build their strategies individually based on asset base, access to capital and local market conditions to determine where they can generate returns. The challenge to identify service innovation should not detract from the on-going priorities of Quality of Experience (QoE) innovation. Announcements on this topic, such as the partnership between T-Mobile and Ericsson were less widely reported than others but they are critical to the operator’s future performance. As networks become increasingly reliant on high-bandwidth services ensuring a high quality of experience is key, there is already evidence that operators that can deliver a high QOE can deliver subscriber gains. As such, it is time that network operators start to take QOE Scoring as seriously as NPS.

Selected Service Innovation MWC announcements

  • Booking.com, ITV trial RCS Business messaging 
  • Google collaborates with SnapTravel and Subway in RCS

 

IoT: It’s time align 

Overview
Telecoms industry marketers would like us to believe that IoT is going to be everywhere and MWC was no exception. Just as mobile operators followed the rule of using cars to signal they were taking 5G seriously, network vendors were doing the same by positioning themselves as ‘smart life’ or ‘connected life’ enablers, demonstrating vertical solutions rather than their hardware. It will be interesting to see whether vendors’ investors buy into this positioning as an equity story and support share price appreciation. It was also interesting to see IoT positioned towards an industry/enterprise solution with lower prominence given to consumer use-cases than previous years. There were definitely fewer connected watches this year.

Throughout the week, there were several announcements demonstrating commitment to scale the IoT. These included Cisco launching its NB-IoT platform worldwide, Ericsson and China Mobile partnering to explore Industry 4.0 IoT opportunities and Jio partnering with Samsung over a new IoT network in India.

Exhibit 7: IoT boom drive revenue growth

While two key components of the ecosystem – use-cases and partnerships – are starting to emerge, there are two key issues which need to be addressed: Fragmentation; and understanding the connectivity provider business model.

Although use-cases within the scope of IoT are abundant, fragmentation in networks, platforms, modules and standards make it tougher to create enough scale to make IoT as ‘massive’ as required. As with 5G, international enterprises will expect seamless global multi-network connectivity-enabled solutions. The connectivity industry needs support this or faces opening the door to a new generation of third party aggregators who will do this alignment, and capture the value, on behalf of network providers.

For the connectivity providers it is likely that connectivity revenues alone will be insufficient to justify the investment required. Also, the current structure of organisations and how they report performance is not yet ready to build the above-the-network capabilities to capture a share of value. Again, as with 5G, telecoms operators spent time at MWC discussing their search for the appropriate commercial models – the challenge network operators face with IoT is defining their ‘right to play’ above the network and, in this sense, not all use-cases are equal. Network operators may need to focus on the use-cases where network connectivity, reliability and guaranteed QoS are most critical.

The Delta Perspective
With IoT being positioned to telecoms investors as a key growth driver it is critical that network operators develop a clear strategy and commercial returns. While the ‘right to play’ above the network may not be as pre-defined as previous generations of connectivity-enabled services, with careful segmentation and analysis operators will be able to develop commercially viable propositions within platforms and vertical solutions. Depending on the outcome of this approach, it becomes less of an ‘IoT’ play than an enterprise solutions or platform proposition. In doing so, their assessment of ‘build, partner, buy’ will be critical to ensure a balance between ensuring a quick go-to-market and enabling the minimum viable scale for customers.

Selected IoT MWC announcements

  • Deutsche Telekom brings 5G to smart bridges
  • Cosmote partners with ISTMOS over smart wine

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Delta Partners - TMD Advisory and Investment