2014/10/06 Operator digital services strategy: sharper focus and greater industry co-operation

Telecoms groups reacted to pressure on traditional revenue in the past few years by increasing their focus on digital services and creating dedicated business units, notably Telefónica Digital, SingTel Group Digital Life and SK Planet. In this initial phase, operators addressed a wide variety of service areas, including over-the-top (OTT) services, advertising and analytics, payments and e-commerce, and M2M, but this approach is evolving. This article presents Analysys Mason's framework for analysing operator digital services strategy and examines the key trends that are likely to develop in this area.

Analysys Mason has developed a framework for analysing operator digital services strategy

Analysys Mason's framework for capturing the approach to digital services covers the strategic objectives and execution model (see Figure 1).

Figure 1: Framework combining strategic rationale and execution model for digital services [Source: Analysys Mason, 2014] (Click to enlarge)

The execution models of the operators are summarised below in order of increasing effort required.

• Partnership-based approach: Telefónica Digital has partnered with Blackstone to launch Axonix (advertising), Capita (e-health), MasterCard (joint venture in Latin America for payments) and Onstar (M2M).
• Acquisitions through venture capital companies: SingTel Innov8, SK Ventures and Telefónica Ventures are all examples of venture funds that have bought stakes in Internet companies.
• Acquisition for capabilities: SingTel acquired amobee to gain traction in mobile advertising, and Telefónica Digital acquired Jajah to launch its own OTT services (Tu Go, Tu Me).
• Build capabilities in-house: SK Telecom created 11th Street, its own online marketplace.

In the past year, the next phase of operators' digital services strategy has unfolded with an emphasis on delivering revenue streams. The following key trends have emerged.

• Closer co-operation between digital services units and OpCos for better execution: The recent news that Telefónica Digital is being merged into the Group seems to be a sign that operators are under increasing pressure to deliver successful services to market.
• Partnerships between Internet specialists and mobile operators: Rocket Internet has formed joint ventures with Millicom, Mobile Telephone Networks (MTN) and, most recently, Ooredoo to create commerce-focused entities. Working with Internet players with established track records reduces the risk for mobile operators.
• Partnerships between mobile operators: SK Telecom has expanded its online marketplace offering to Indonesia with PT XL Axiata – transferring established services to new markets.

Operator digital services strategy is evolving to focus on commerce and advertising and will lead to more partnerships

We expect the next phase of operator digital services strategy to include higher financial returns with low risk of failure – and the key trends we expect to see are as follows.

• Sharpen focus of areas within digital services to invest in: We expect ecommerce and payments, and advertising, to be key areas of focus – both activities are local in nature and enabled by smartphone adoption. Content services are challenging, given the absence of effective monetisation models.
• Increased role for industry partnerships: The inability to accelerate the adoption of services run by single operators will result in more industry-wide partnerships (among operators as well as cross-industry) – particularly in advertising and payments.
• Increased possibility of M&A: Operators will focus on either direct acquisitions or investments in market-leading players through venture funds, rather than building capability in-house.

Looking ahead, established players will be more realistic about opportunities in the digital services arena, leading to greater focus of effort and improved co-ordination.

Source: Analysys Mason