2017 IBM Measuring Business Performance in a New Hyper-connected Data-driven World

The rise of mobile along with the explosion of data traffic has created questions about how Communication Service Providers CSPs allocate resources and where they look for growth.. We fo

Measuring Business Performance in a New, Hyper-Connected,

Data-driven World

Ankur Pandey Kiran Kumar TVT Chari Authors:

TABLE OF

CONTENTS

Digital disruption is reshaping the industry

Industry trends and impact to the business metrics

New Business Performance Measurement Framework

Industry in a state of flux – a ‘new’ world awaits!

CSPs need to look beyond ARPU based metrics

Summary

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The rise of mobile along with the explosion of data traffic

has created questions about how Communication Service

Providers (CSPs) allocate resources and where they look

for growth With traditional revenue streams declining in

most markets, network operators and service providers

need answers now

Responding to these trends, we embarked on a mission

to review the state of the global communications industry

Gathering information from a number of trusted sources,

our research includes interviews with CEOs, CxOs and

thought leaders from across the telecom industry in Asia

Pacific It also consolidates insights from the 2016 IBM

Global Telecom Survey

We focused on the key shifts that have triggered a need to

re-assess existing performance metrics for Communications

Service Providers (CSPs), and also reviewed the core

drivers that have led to the explosion of mobile data and

the rise of video as major components of mobile data

consumption It’s now incontrovertible: the consequences

of digital transformation are enormous In terms of voice

and text services alone, it is estimated that the shift to

over-the-top (OTT) messaging services and social media will

cost network operators nearly $104 billion this year1 – the

equivalent of up to 12% of their service revenues

By 2021, 60% of global mobile phone users will own a

smartphone2, while the number of connected devices per

person is set to grow to 2.4 This will cause the amount of

data to grow by 49% over the next 5 years, resulting in 133

exabytes of data consumption per month

The rise of the OTT ecosystem and the data explosion

is also creating uncertainty CSPs are now forced to

search for newer sources of revenue, while investments in

digitisation, business simplification and customer loyalty

have yet to yield results Compounding these problems is

the imperative to sink money into infrastructure Cash flows

Over-the-top (OTT) messaging services and social media will cost network operators

service revenues.

mobile phone users

while the number of connected devices per person is set to

grow to 2.4

are increasingly under pressure, leading some CSPs to borrow money to pay dividends This does not paint a pretty picture Yet there seems to be some light at the end of the tunnel Based on IBM’s CXO Insight’s gathered from interviews with select CSP Executives in ASEAN, Content and Media services, Mobile financial services, Mobile payments, and IOT services for retail segments are four key projected areas for revenue growth.

While KDDI, NTTDOCOMO, and SK telecom offer real case-studies, the Verizon/Yahoo deal presents

a bold response towards tackling the challenges that CSPs face today

In this new reality, the next round of growth for CSPs will not come from their core business, but from a stream of niche digital businesses that will require continued investments to foster disruptive innovation To nurture this transition, CSPs must reconsider the industry metrics used to currently measure performance Other ‘newer’ metrics may be better able to respond to the rapidly changing nature of business, and the rise of a non-core business model

We reveal that using the right set of metrics will empower CSPs to measure not just operations and financial performance, but customer experience and digital innovation as well And in fact, 85% of CSP Executives we surveyed agree — measuring the experience across the customer journey is the right approach for the evaluation of new services

In the paper, we focus on metrics that will help CSP measure new business and operational enablers that will define success for the CSPs in 2020, as well as help measure the performance of long-tailed digital business models Based on IBM’s survey insights gathered from interviews with select CSP Executives, digital self-service empowerment, data monetization, and cognitive analytics will be the core differentiators that will help CSPs to remain competitive in 2020

We recommend a multi-disciplinary approach to tackle this conundrum Our approach adopts a combination of “value-driver” and “customer journey” based intervention to identify Key Performance Indicators across all customer experiences, service delivery, financial, and operational domains for the next-generation Digital Service Providers (DSPs)

A lot has been written about how digital disruption is impacting operating models of companies

across the globe The digital economy creates challenges and opportunities for Communications

Service Providers (CSPs) as they seek to become Digital Service Providers (DSPs) Certain key trends

that have shaped this disruption include: global uptake of smartphones, adoption of multiple devices

(with large screens and a high display resolution3), and the rise of digital channels as the preferred

medium for commerce The appeal of the digital channel lies greatly in its simplicity, ease of use

and affordability

These dramatic changes have led to an explosion of data traffic, while traditional streams of

revenues have plateaued and/or reduced in many matured markets The rise of the OTT ecosystem has

also played a leading role in the metamorphosis of the CSP revenue streams As stated by Juniper

Research1, consumers’ shift from operator voice and text services to OTT messaging services and

social media will cost network operators nearly $104 billion this year1 — a sum that is equivalent to

12% of their service revenues Furthermore, the rise of data has also pushed CSPs to evolve and

innovate while looking for newer sources of revenues in an increasingly connected world In parallel,

infrastructure investments have continued unabated, painting an unappealing picture Henceforth,

every move is significantly reactive Certain CSPs have jumped on the bandwagon in an attempt to

be proactive in driving their future, but the jury is still out There is a prevalent need to define new

measures and focus attention on certain other metrics of measurement that consider the industry

evolution to “correctly” help track the ‘CSP’s performance in the data world’ The obvious changes

include data becoming the primary driver of growth for operator revenue and the increasing popularity

of Over-the-top (OTT) services

Another vital trend related to future revenue streams, though not apparent yet, is the extreme growth in

embedded wireless3 Each of these embedded wireless devices come with different wireless revenue

plans and pricing models representing a different business model between the user and the CSP

This growth is bound to become super-charged with the advent of the eSIM early last year in United

Kingdom and Switzerland

In this environment, the traditional concepts of Average Revenue Per User (ARPU), Minutes of Usage (MOU) and Earnings Before Interest, Depreciation, and Amortization (EBITDA) start to lose their relevance as they describe the facets of business that are on its way to being superseded by a completely different business model The relationship with users has also evolved to what has fast become a multifaceted interaction between the user and the CSP in a multi-channel scenario Users also expect the CSP to be fast, nimble, and smart; they refuse to tolerate any deterioration of user experience while moving from the OTT world to the CSP world It is imperative that operators stay

on the top of their game and look at the ‘right’ set of KPIs that will act as Early Warning and Control Systems (EWACS) in this competitive environment The emphasis here is upon leading indicators

as opposed to composite or lagging indicators, although the significance of the latter cannot be undermined In addition, the industry changes that are driving this review of performance metrics are:

ƒ With markets maturing at a rapic pace, Communications Service Providers (CSPs) need to meet the high expectations of more empowered – and less loyal – subscribers Key takeaway: Subscriber retention is going to save the CSP a lot of money

ƒ CSPs are also making large investments in 4G and 5G network capabilities particularly as the explosive growth in data-intensive applications increases traffic Key takeaway: CSPs need to do this in a manner that’s profitable

ƒ There will be a lot of innovative services driven by network effects based on a volume based realization model (long-tailed) that will require CSPs to innovate and come out of their “Telco” shell. Key takeaway: Innovation demands investments and engenders potential risks/rewards

In summary, CSPs must contend with a very different market in the near future as they navigate a shifting industry landscape This ‘new world’ perspective requires a change: the CSPs must examine users more holistically and incorporate their disparate ways of interaction with the CSP as opposed to perceiving a user as a single discrete relationship

In the next few pages, we dwell on the industry transition, key trends, and new metrics that aid in further assessing the situation, followed by our recommended framework that CSPs can adopt as a starting point in this journey towards re-engineering their existing set of KPIs

The past decade has witnessed profound changes in the Telecommunications industry, transforming

the very nature of business This transition is far from it’s completion; however, we acknowledge

that CSPs are moving into a data driven environment — one where data as a source of revenue will

be dominant This data revolution has been anticipated for some time now, driven by the uptake of

smartphones, consumer preferences for using multiple devices, and the rise of digital channel as the

preferred medium for commerce

in most markets, the rate at which it is happening differs from region to region According to

eMarketer2, roughly half (50%) of mobile phone users across the globe who use a smartphone

by 2016 will grow up to 60% by 2021 North America is the worldwide leader in smartphone user

adoption with 79% of mobile phone users owning smartphones in 2016; Western Europe is second

at 72% By 2020, the share of smartphone users will reach 87% and 83% of mobile phone users

in these regions respectively (See Exhibit 1) Samsung — powered by Android — is globally the

top smartphone manufacturer, though Apple controls a significant share of the market in wealthy,

digitally developed countries Chinese smartphone brands have also made a strong headway,

especially in Southeast Asia Uptake of Smartphones is one of the  key drivers of the digital

disruption CSPs have traditionally subsidized the purchase of mobile phones to drive adoption

There is an urge to move away from this trend, though still common in certain markets In Asia

Pacific, the Middle East and Africa, there has been rapid growth in smartphone subscriptions

with customers exchanging their basic phones for smartphones This is mainly due to increasing

availability of low-cost smartphones CSPs are now encouraging device upgrade programs that

help users afford newer devices on convenient lease plans through which they cultivate a sense

of customer loyalty that helps them to retain their users for longer periods

ƒ Multi-device ownership: Users in mature markets are also contributing to the growth in

connections via the adoption of a 2nd and a 3rd device as a part of the overall home portfolio This is a key trend as proliferation of multi-device portfolios have a multiplying effect on data consumption (see Exhibit 2) In a research conducted by Cisco3, the amount of data consumed by

a tablet is approximately 3 times the data consumed by a smartphone, and the data consumed

by a tablet is set to grow by 2.7 times by 2020

Exhibit 1:

Global Uptake of Smartphones

(% of the mobile phone users)

Western Europe Asia Pacific

ƒ Globally, each internet user has an average portfolio of 2.0 devices which is set to grow to 2.4 by

the end of 2020 (See Exhibit 3) This average number, however, is misleading as there is a vast

variation in this figure for different markets (developed/emerging) as can be seen in multi-device

portfolios spread across countries On one hand, The Netherlands has the highest multi-devices

per user at 3.6, while on the other, the figure for Brazil is at 1.1 This number is highly dependent on

country-related factors, such as quality of internet infrastructure, affordability of wireless internet

services, maturity of content offerings in the market, and maturity of the Internet of things (IoT)

offerings

Device-Wise Data Consumption Evolution Trend

(in MB Per Month)

Source: Cisco VNI report, 2017

Global Connected Multi-Device Uptake

(in devices per user, Bn Users/Connections)

Source: eMarketer, Dazeinfo, Statista, IBM Analysis

0.5 1.0 1.5 2.0

Canada

England Netherlands

Australia

USA Germany China Brazil

Connect Devices / Person - Select Countries Devices per user, Users, and Connections Growth

ƒ Digital as a foundational channel: Over the years, the adoption of digital as a channel has

obviously been growing as a result of increasing internet penetration According to eMarketer2, the internet user penetration will rise to approximately 53% of the population in 2019 from the current figure of 47% in 2016, at a compounded annual growth rate of approximately 6.3% The access to internet, and the growth in smartphones has also contributed to the adoption of digital commerce (see Exhibit 4) Total digital buyers globally are predicted to grow at a rate of 9.5% annually to reach a figure of 2.3 billion by 2019 from the existing figure of 1.8 billion — that is, to approximately 31% of the total world population

This trend has manifested itself on the CSP side of business as well as digital sales amount to almost 28% of the total sales for Telstra Australia (See Exhibit 5) This trend augurs well for the future of the CSP as this would not only help in reducing sales costs, but more importantly open up avenues for CSPs to gain the trust of users online and engage them digitally

players have redefined the very basis of “user experience” OTT has become synonymous to

“digital firsts” and we believe the following key tenets that have become defining principles for any future Digital Service Provider (DSP):

just digitize an existing process – they re-imagine customer experience and delight the user

Exhibit 4:

Global Digital Users and Buyers Growth

(in Billions, % of Population)

Source: eMarketer 2016, DazeInfo.com; IBM Analysis

Digital Buyers Internet Users Mobile Phone Users Population

% of internet users of population % of digital buyers of population

— People use multiple devices to access the same content at different locations: The mobile

device is quite powerful – the physical capabilities (camera, GPS / location, accelerometer, etc.)

combined with the benefit of a larger screen at home or on a tablet for when on the move

capabilities that should be leveraged

beginning of the buying process to the actual buy button

gets stronger Making a user loyal through repeat purchases but letting them feel larger than the

brand by creating a platform of loyalty beyond the CSP brand

traditional web transactions into more rewarding and valuable user experiences

physical channels together to take convenience to the next level & “wow” customers

Exhibit 5:

Digital as a % of Sales for CSPs

Source: Delta Partners Group

3.6 3.1 3.1

Exhibit 6:

Digital Disruptors – Key Differentiators

Source: IBM Analysis

Amazon Transformed the ecommerce industry through various industry firsts

• Peer-recommendations and reviews of products

• Easy shopping cart and checkout process

Free; Giffgaff

• No physical stores, new users self-provisioned online

• Crowdsourced customer service

Netflix Disrupted the video rental business to create a massive streaming

entertainment business

• Personalised recommendations and access to highly curated content

• Complete re-invention of the retail space

• Cashless mobile payments through Apple Pay

Shopkick Re-defined the loyalty industry

• Drive footfall through OTT app

• Drive loyalty by getting users to go beyond window-shopping

• Innovative use of i-beacons to pinpoint customers around the shop

via private drivers

• Owns no inventory of its own

Whatsapp Disrupted the communication service providers traditional service market

• 42 Bn WA messages in 2016

• USD 18.8 Bn decline in CSP revenues between 2013-2015

Burberry Re-invented itself in the new digital era

• High-end fashion company with new, digitally integrated flagship store

• Showcase high-end tech harnessed for visual inspiration;

RFID – to engage and service customers

AirBnb OTT disruption of the hotel industry

• Sharing economy driven by peer to peer reviews

• Owns no inventory of its own

• Redefined user experience for searching, reviewing and booking for a stay

channels as a preferred user medium has evidently provided immense benefits to the users These

benefits range from ease-of-use and engaging user experience to new options where none existed

previously (e.g Airbnb offering home-sharing rooms for frequent travellers/backpackers on a budget

or increased service levels offered by part-time drivers on Uber)

In addition to leveraging user experience as a differentiator, the OTTs have benefitted greatly from

the adoption of an innovative business model (see Exhibit 7) Based on the two-side concept, this

innovative model entails creation of a platform for interaction between consumers and suppliers to

provide value-added services to users The value offered by the platform grows with the uptake of

services (i.e customers) For example, the adoption of texting services offers more value when many

of the customer’s contacts are already using the platform Similarly, a social network offering is more

valuable when a user finds their friends and colleagues on the same network The platform becomes

more and more difficult to disengage from with the rise in adoption

From a monetary perspective, two common methods are commerce and advertising Commerce

involves offering additional services (apart from the “real” value added service) that can be converted

to revenue, for example, providing stickers/special emojis on line chat that are charged to the

consumers Similarly, selling other products or services on the platform, for example, ecommerce

on the WeChat platform and/or building a service such as Uber and Grab that are self revenue

generating YouTube also introduced the “click-to-buy” option on advertisements to get a larger part

of the pie through enablement of commerce in addition to advertising This model is predicated on a

combination of providing a highly attractive product or service to a set of consumers and developing

a monetization model along with increased uptake of services

Exhibit 7:

OTT Business Model Disruption

Source: IBM Analysis Source: Source: Cisco VNI 2017.

Network Effects

via growth on

Consumer Side

Two – Sided Business Model

Attracted by complementary offerings (e.g free texting)

Offering a valued service

to the customers for an

introductory or throwaway

price to grow customer base

Monetization done via

commerce or advertising

in most cases

Monetize the large base via advertising

These key industry shifts have contributed to an explosion of data for the CSPs It is predicted that data will grow at a Compounded Annual Growth Rate (CAGR) of 49% over the next 5 years3 to reach 133 EB per month by 2021, of which mobile data is expected to be 49 EB, while offloaded data constitutes the rest Mobile data alone is projected to explode at a CAGR of 47% over the next 5 years (see Exhibit 8).

Growth of data consumption per user is expected to multiply 7 times by 2021 (see Exhibit 9), with North America leading the charge with an expected 9 times growth in monthly consumption. Finland, Latvia, and Sweden are the highest per capita consumers of mobile data today at 5, 3.7, and 2.7 GB per month respectively4

Exhibit 8:

Global Mobile Data Growth

(in EB per Month)

Source: Cisco VNI Report, 2017

As per Cisco3 estimates, by 2021 of, the total mobile data pie, mobile video will take the lion’s share at

78%, followed by mobile web browsing, and mobile audio at 14% and 5% respectively (see Exhibit 10)

This has key implications for a CSP from an operating model perspective:

ƒ One must have an end-to-end video/media platform strategy and

ƒ The incremental impact to CSP in terms of CAPEX and network investments will continue as

high quality video delivery will require a different set of KPIs to be measured and be successfully

accomplished (e.g Peak Download Rate and End-to-End Round Trip Time for packets (E2E RTT

delay) as the high quality video delivery is positively correlated to the initial maximum downlink

rate of video and negatively correlated to the E2E RTT5)

Mobile video is fast becoming the dominant source of data traffic on mobile networks in  many

countries and is already making a significant contribution to growth of data revenue in both developed

and emerging markets The stickiness of mobile video is real:

ƒ After enabling video autoplay, Facebook reported 1.04 billion Daily Active Users (DAUs), including

934 million on mobile, who watch 8 billion videos a day, equivalent to 7.7 videos per user per day5

ƒ Snapchat has 100 million DAUs but also reports 8 billion daily video views5, which equals to

80 videos watched per user per day5

Yet another trend that is driving more growth of mobile video is ‘personal streaming’ Twitter’s

Periscope, the market leader in live video streaming, revealed that they conducted 200 million live

broadcasts in a year5

Exhibit 9:

Data Consumption Trends

(in GB Per Month)

Source: Ericsson Mobility Report 2016; tefficient Industry Analysis 2016

5.0 3.7 2.7 2.5 2.2 2.1 2.0 2.0 1.9 1.8

Korea

Latvia Finland

Sweden

USA Japan Denmark Austria Iceland

Estonia

22

2.5

2 18

1.3 6.5

1 6.3

1 6

Many CSPs realise the importance of mobile video and a few of them have also made initial offerings

of ‘media platform’ services to their users:

ƒ Verizon has developed its own Over-the-Top (OTT) application for distribution via the Apple App

Store and Google Play Verizon licenses content for Go90 directly from content owners Go90’s

business model is based upon sales of video ad-inventory (via AOL) that allows advertisers to

sponsor the data traffic for Verizon’s postpaid users, thus promoting greater use

ƒ Similarly, SingTel has created its own OTT subscription video app called HOOQ, offering regional

and international TV shows and movies SingTel licenses video content from content owners

including its joint venture partners and charges a subscription fee for users to access its content

ƒ T-Mobile USA’s Binge On provides customers with zero-rated access to partner video streaming

services as long as users opt for receiving video delivered at standard definition rates

ƒ In addition to its IPTV offerings via SK broadband, SK Telecom in Korea has its mobile media platform

“Oksusu” Oksusu has reportedly approximately 3.1 mn users6 It provides up to 33 sports-related

video content channels including 18 real-time broadcast and VOD categories

Exhibit 10:

Evolution of Global Video Tsunami

(in EB Per Month)

Source: Future of TV, BCG 2016, Cisco VNI Report 2017, IBM Analysis

T-Mobile US Video App Case Study

Customer and ARPU growth: In order to qualify for Binge On T-Mobile customers had to sign up to 3GB tariffs, with

many upgrading from lower priced 2GB data plans5

Overall drop in data traffic: T-Mobile claims Binge On has been a success, stating in its 2015/2016 financial reporting

that data traffic on its network has declined by between 10%-12% since launch5

have doubled their video consumption 34 Petabytes of video data streamed by end January 2016, and Binge-On video content provider partners include Netflix, Hulu and HBO They have also has grown the number of total partner count to 40, including YouTube

Source: Huawei, Strategy Analytics

Source: Reliance Jio Public Announcement, media clippings, 2017

Data Disruption Case Study — Reliance Jio, India

Disruptive Launch

ƒ Launched with an “unlimited voice calling” bundle with a selection of 10 data plans ranging from ₹149 for 300

megabytes (MB) of data to ₹4,999 for 75 gigabytes (GB) of data, with a maximum validity of 28 days

ƒ Jio Prime membership plan also added at an initial charge of USD 1.5 and a recurring USD 4.5 per month that

comes with a full media services offering, including JioTV, JioCinema, JioMags, JioMusic, and JioXpressNews

(worth USD 149 per annum complimentary for the initial one year)

Rock-bottom rate per MB

ƒ The cost of data to the consumer comes down progressively as tariffs go up For example, the 20 GB of data

package at an average price of the package ₹74.95 per GB (USD 1.12 per GB) going down with other plans to

₹50 per GB (USD 0.75 per GB)

ƒ Rich Content Offerings: The range of RJio applications include access to television programmes, films, music,

news, travel services, financial services as well as online chat services RJio has priced these services and

applications at a minimum of ₹1,250 per month

Results

ƒ 100 million customers in 170 days

ƒ Usage of 1Bn GB of data consumption per month and 200Bn voice and video minutes in a day

ƒ Industry consolidation (Vodafone and IDEA merger)

3 INDUSTRY TRENDS AND IMPACT TO THE BUSINESS METRICS

The shifting technological, competitive, social and customer environment clearly calls for a renewed look at the metrics operators use to measure and report their operational and financial performance The changes impacting the industry are profound and multi-dimensional There is also impact from the investors as shareholders increasingly seek new revenue streams in the wake of infrastructure upgrades that unfortunately seem like a permanent feature of this industry Meanwhile, CSPs are gearing up to tackle the challenges brought ashore by the digital tides of change This calls for a full review into the set of internal metrics that can be used to calibrate the changing nature of the CSP business Arguments pertain that while many of the operational metrics used to measure performance from an intrinsic perspective (i.e internal company performance) are still relevant, there are areas related to innovation, evolving business models (e.g new business opportunities like media platforms, internet of things (IoT), etc.) and user experience (onslaught of OTT players, explosion of data usage, and fickle-minded subscriber behavior that place high importance on user experience as

a differentiator) that are rightfully not considered by the existing set of metrics

Robust metrics are not only critical to support informed decision-making across the industry, but they also maintain the relevance of CSP reporting as well as sustain investor confidence If the metrics used by the industry are to continue fulfilling these aspects, it is critical that they keep pace with evolving market conditions, business models and new products and services It is also important to maintain consistency across regions and markets in these new and evolving metrics as investors and regulators demand new insights into CSP performance and customer experience

To do this, we will continue to review the industry changes and understand their impact on the existing metrics, if any, and propose alternative measures, where relevant

have grown from USD 966 billion in 2010 to 1.13 trillion in 20157, growing at a CAGR of approximately 3% Of the total revenues, data revenues have grown from USD 253 billion to 453 billion7, growing

at a CAGR of 12 %, while other services revenue have dwindled at a rate of approximately 1% Most of the industry literature points to this well-known fact However, it is essential to understand how this is attributable to data or non-data elements of the revenues when voice and messaging are often bundled as part of an integrated plan along with data as offered by most CSP plans With these new integrated offerings, it is not voice or messaging that dictate the adoption of a plan but rather the allocated data quota that will influence the choice of the end users, making

it effortless to see that data will drive revenues of the future The trend of substitution varies, wherein, a few countries have seen a very high rate of data substitution like Japan at almost 74%

of revenues from data to relatively less impacted markets like India at 28%7 (refer to Exhbit 11)

ƒ Rise of the 4th wave (IOT, digital lifestyle based services and DSE type services 8 ): The rise of

the new internet players and their disruptive business models highlights the challenges that CSPs

face across the world as they look to invest in expanding mobile broadband coverage to drive newer

pastures for accelerated revenues CSPs continue to develop new applications and services- often

referred to as the 4th curve of revenues (refer to Exhibit 11), the curve which will drive the revenues

for CSPs in the next decade in same way as voice, messaging, and data connectivity have done to

CSP revenues until now

Exhibit 11:

Evolution of CSP Revenue Streams

Source: Statista, Informa

Rest of Services Revenues Mobile Data Services Revenue

Mobile Data Revenue % of Total Revenue

Germany

Singapore Korea Sweden China

Brazil Poland

India UK Spain

By exploring opportunities to expand their portfolio to services beyond providing data connectivity (an

evident result of the rise of OTTs) into areas such as (See Exhibit 12):

Exhibit 12:

Telecoms Revenue Evolution: Emergence of the 4th Curve

Source: AT&T, Chetan Sharma Consulting, Verizon, Operator Annual reports, IBM Analysis

Voice Messaging Data 4th Curve

4th Curve – Sample Problems

AT&T – IBM Smart City Case Study - Mueller Water’s Bottom Line

• 30% of the pipes serving populations of 100,000+ are 40 to 80 years old

• 6 billion gallons of water lost per day in the US

US Smart Grid - 70% of country’s power transmission system 25+ years old

• 1% of revenues written of due to unpaid bills translating to USD 1Bn

• USD 1BN+ of revenues from 4th Curve

• 4th Curve services include Content, Security, Finance/payment

services, Health, Enterprise IoT, etc.

• 17% CAGR

• IoT Solutions include inventory control, accident prevention,

telematics, fleet management, home security

• 3 – Platform strategy (Media, Lifestyle enhancement, and IoT)

• Big focus on Wearables – 1.4 M sold in 2016 (T-Kids, T-Outdoor,

T Pet, T-Pocket WiFi)

• USD 150M + revenues from wearables (est.) 2016;30 Mn of Energy Solution revenues (Smart grid and infrastructure management solutions) - 2015

• 1st LTE-M LoRa IoT exclusive national net complete

• 25 Mn Devices Connected, 2016

• 10 M+ Connected Cars (2017)

• 1.9 M Fleet vehicles on-net (2015)

• 280 K refrigerated containers across 619 container vessels on-net

Hum is a service involving installation of a plugin device into a car’s on-board diagnostic port, enabling drivers to gain access

to services like boundary and speed alerts, vehicle location and driving history It also lets subscribers with a car problem talk to a live mechanic via hum’s mechanics hotline, pinpoint roadside and emergency assistance

— Wearables: Connected wearables such as smartwatches are increasingly popular With the

launch of the eSIM early last year, the wearables market are expected to see a spurt in growth

Most operators see this as the next avenue for growth and a driver for the overall account

revenues (refer to the Sidebar below)

such as navigation, real-time information about local traffic, listing nearby facilities, and other

entertainment services

with regulations requiring them to track and report driving behaviour and drivers’ hours

Furthermore, driver logging and reporting has been tied to reducing highway accidents and

fatalities since it alerts drivers when they are nearing their drive time limit

dynamic monitoring of overall consumption and by controlling the operation of lights, switches,

and the HVAC using IoT sensors

care and medication tracking are some of the examples of how IoT services are being applied

to the health sector Certain other models include a subscription based personalized health

consultation service complete with partner institutions and pharmacies within the network that

may offer discounts on prescription medicines

Snapchat's first hardware product is coming to the market sooner than anyone expected The company said tonight that it will sell Spectacles, a set of connected sunglasses that record 10-second snippets of video

First e-Sim enabled smartwatch hits Europe,-Mobileeurope,2016 Samsung’s Gear S2 classic 3G, the first smartwatch with the GSMA-backed e-sim, has gone on sale in Europe, with exclusive deals in place in the UK and Switzerland

Launch of eSIM to Spur wearables growth and potentially a larger retention battle amongst CSPs

Snapchat Announces Spectacles: $130 Camera Sunglasseshttp://www.theverge.com/

O2 exclusively launches UK’s first smartwatch with embedded sim, the classic 3G, http://news.o2.co.uk 2016 O2 today announces that the Samsung Gear S2 classic 3G, the UK’s first smartwatch

to feature the GSMA approved Consumer Remote SIM, aka the e-sim

Global Wearables Market

— Smart Grid and Metering: Smart metering and grid IoT solutions help manufacturers and

utility providers to manage devices and ultimately conserve resources and save money by using smart meters, home gateways, smart plugs and connected appliances

home automation and security market with integrated solutions using connected cameras, locks, control panels and a variety of sensors

mobilizing the trust they’ve generated and leverage it through provision of identity management services to its users

services which allow users to make transactions, pay for bills, goods and services and perform other digital banking tasks via their brand apps Moreover, the large population in emerging markets without access to banking services offers tremendous potential for P2P payment and money transfer services via mobile apps

and CSPs They need to have a media platform strategy that will contribute towards a strong market value proposition for media services consumption

enterprises to help them target customers in a better way and/or ability to provide a new layer of insights adds tremendous value to the SSP-DSP framework (refer to sidebar below)

their own and externally developed digital products/services They can also use their branded retail stores as an extension of the online business

economy Billing capabilities, Quality of Service (QoS) based connectivity services, Profiling APIs etc can be exposed to businesses and organizations for reaping mutual benefits By enabling third parties to use these capabilities and build their own service offerings, operators explore new ways to generate revenues As per Ovum estimates, the global carrier billing market alone will be worth USD 25.3 billion by 2020

Source: Forbes.com, News clippings, IBM Analysis

Verizon – Yahoo: Formation of a Mega-data management platform Case Study

The recent USD 4.8 billion-dollar buyout of Yahoo by Verizon is a step along the path towards building

of a mega-data management platform that will help Verizon get beyond the current 114 million customer base and hit the 1 billion mark This positions Verizon well against the likes of FB and Google in the display advertising market, while picking up great content along the way.

Pros

ƒ Yahoo is one of the most widely read news websites of the world extremely popular in the United States and

with over 7 billion views per month, being the fourth most visited website globally

ƒ Yahoo’s key advertising assets include Gemini – which combines search and native ads for superior

results — and BrightRoll, which offers programmatic buying and selling tools for video, display and

native advertising Pairing up would make Yahoo and AOL a strong No 3 player in the display advertising

market, behind Google and Facebook

ƒ Combined, AOL and Yahoo will have 25 content brands, across key online properties such as Search, Mail,

Finance and Tumblr, with roughly 600 million monthly active mobile users who could provide a valuable

audience for mobile advertisers

Cons

ƒ $350 million shave off Yahoo’s $4.8 billion asking price to reflect huge security breaches that affected the

accounts of more than 1 billion Yahoo users

ƒ Yahoo’s core internet properties such as Mail, Search and Yahoo.com have reported to be witnessing declines

in daily active user base

ƒ Yahoo’s core business is on the decline with revenue fall of approximately 17% last year

Source: Cisco Case-Study, APIGEE AT&T case study, AT&T corporate website

AT&T API Platform and Connected car initiatives Case Study

AT&T’s APIs are available as web services, consisting of billing, sponsored data, location, In-app messaging and payments (e.g use Alexa to send messages), speech recognition, device capabilities, AT&T U-Verse nabled (access to connected TVs, real-time commenting, screen shares, etc.) and M2X APIs.

Results:

ƒ The number of API calls increased 15x to 4.5 billion, in the first two years of the program

ƒ Exposing systems through APIs has shortened the time to get a new app up and running by as much as 30%

ƒ AT&T’s developer on-boarding time has been cut from months to days/hours contributing to productivity gains

of as high as 25% through enablement of code reuse, rather than requiring a fresh start for every new project

AT&T Drive

Connected car platform for automakers to choose solutions ranging from connectivity to billing solutions to data analytics AT&T is also partnering with OEMs, vendors, and application developers to provide connectivity, including telematics, information, and analytics The AT&T connected car initiative is linked with its wearable devices and home automation (AT&T Digital Life) initiatives AT&T treats mobile enabled cars as devices within their mobile share plan, that is an add-on to their existing smartphone plan, effectively letting data to be consumed by car through the mobile share plan

Monetization:

ƒ Wholesale telematics with OEM

ƒ Monthly fees for mobile share plans

ƒ Analytics - Deals with third parties, whether advertisers or local governments, to gather and use information about driving habits and routes

Success Metrics:

ƒ More than 9.4 million connected cars on AT&T network as of 2Q16

ƒ 8 agreements in place with automotive OEMs for wholesale telematics

ƒ >56% of postpaid subscribers on mobile share accounts in short period of time and growing

benefit from an increased number of connections on their network and the potential for additional

revenue through these smart “4th Curve” services It is too early to predict the rate at which these

“4th Curve” service streams will start making an impact to the CSP revenue streams, but we can

certainly see a few early indicators (See Exhibit 13):

ƒ NTTDOCOMO reports a smart services constituent of the revenues (4th Curve Services,

excluding pure data connectivity) as approximately over USD 7 billion per annum, growing at

the  rate of approximately 22%9 The portfolio of 4th Curve services offered include Content/

Video App Services, Security, Finance/payment services, Health, Enterprise IoT, etc From an IoT

perspective the services offered include inventory control, accident prevention, telematics, fleet

management, and home security

ƒ Verizon reported approximately USD 690 million of revenues from IoT10, while AT&T sold

approximately 25 million connected devices in 2016 and 10 million+ connected cars solutions16

Our findings suggest that this should soon hit the run rate of a billion a year by 201710(at a predicted

growth rate of approximately 18% per annum for IoT and the rise of other adjacent services as well)

Exhibit 13:

4th curve services and first mover CSPs

Source: AT&T, Chetan Sharma Consulting, Verizon, Operator Annual reports, IBM Analysis

Projected USD 1.3 Tn

Market by 2019;

CAGR 17%

DSLP Market – Still early to predict Energy

IPTV and Media services

Data Management Platform

Identity/Risk Management

API Economy

Connected Home PreventionAccident

Preventive Maintenance

Experiences

Health &

Wellness

Content, Payments, and Mobile financial services are the top initiatives on the 4th Curve !

“Mobile payments for growth markets has been solved for most mature markets Apart from payments, digital content and media platforms will contribute towards the next wave of growth for communications service providers.”

Nick Gurney,

Communications Sector Lead IBM Asia Pacific

Source: KDDI Annual reports, Corporate website, IBM Analysis

4th Curve Strategy

KDDI has adopted a 3-prong strategy that includes:

1 Providing users with multiple devices (e.g IoT based) and offer multiple services (e.g content, media, music, and others)

2 Evolving into a lifestyle based operator by providing access to multiple services, e.g access to food, insurance, goods, commodities, etc enabled by the au wallet

3 Monetize the digital lifestyle opportunity in (2) above through

(prepaid/credit card) for offline payments

ARPA)

publishers, and other businesses

4 Wrap-around loyalty ecosystem to promote “earn-and-burn” behavior

Key Results:

ƒ Valid “au WALLET” cards issued (prepaid cards and credit cards) reached 20+ million in 2016 AU smartphone users who had additional au smart wallet credit card and smart value services had a churn rate of less than half

of that of users with just a au smartphone service

ƒ Value-added ARPA (combination of settlement commissions and smart pass (cloud, content, apps, etc.) is

expected to grow by 14% from ¥ 440 in 2016 to ¥ 500 in 2017

ƒ Cumulative gross merchandise value from au wallet use in 2016 was approximately ¥ 897 billion (USD 7.9 billion)

ƒ “au Smart Pass” members numbered 15+ million in 2016, at a CAGR of 7.5%

evident difficulty in assessing operators’ future capex commitments as mobile traffic growth

outpaces revenue growth (see Exhibit 14) This ambiguity, coupled with a falling Average Revenue

Per User (ARPU) and uncertainty in the global economy pretty much sums up the anxiety amongst

investors To further complicate matters, CAPEX trends across the globe have shown no signs of

abatement (See Exhibit 15)

Exhibit 14:

Revenue Growth Evolution for CSPs (2008 to 2016)

Source: ycharts.com, IBM Analysis

VOD Revenue - 57.33 BN USD TEF Revenue - 57.59 BN USD SKM Revenue - 14.71 BN USD CHA Revenue - 52.92 BN USD

SGAPY Revenue - 12.23 BN USD T Revenue - 163.79 BN USD

163.79 BN USD

57.59 BN USD 57.33 BN USD 52.92 BN USD

14.71 BN USD

12.23 BN USD

Revenue growth for most operators has been flat over the last decade or so, with a few operators showing a fall in revenues as well

Exhibit 15

European vs US Capex Trend

Source: Delta Partners Group, EU, IDATE, Macquarle Research, 2016

US Capex% of Revenues

EU Capex% of Revenues

3% 8% 41%

Planned FTTH Rollouts - EU (% of Households)

US & European Capex trend (% of sales)

as incumbent operators invest in fibre & copper enhancement technologies (see Exhibit 15) In contrast,

US operators’ higher per capita CAPEX is primarily focused on technological leadership in terms of

network enhancements and 5G, and digital partnerships This trend of rising capex intensity has also

been witnessed across Asia-pacific (see Exhibit 16) Thus there is a growing trend amongst CSPs

to optimize CAPEX for 4G/5G network upgrades through Wi-Fi/Small cell offloading and network

sharing for reducing OPEX increase as a result of data growth on 3G networks

combined number of sites and sharing mobile backhaul links (see Exhibit 17) In addition, CAPEX

can also be significantly decreased Instead of independently deploying base stations to optimize

population coverage or rolling out new technologies (such as 4G/5G), two or more operators can

pool all or geographically limited parts of their RAN assets and jointly extend capacity

Exhibit 16:

Capital intensity evolution – Select Telcos

Source: ycharts.com, IBM analysis

Capital intensity has grown tremendously over the last few years for most of the operations, except for the US operators, where the CAPEX has been more controlled

ƒ Offloading data via Wi-Fi and Small Cells: According to Cisco, 63% of the cellular data will be

offloaded to fixed/Wi-Fi networks by 2021, contributing to over 83 EB of data per month and growing

at a CAGR of approximately 51% between now until 2021 (See Exhibit 18) However, a volume of this

offloading will either take place at home or at office/work place as users typically tend to spend

most of their time in 2 or 3 cell-sites during any given day For users at home with fixed broadband

or Wi-FI networks, or the users at work served by CSP-operated small cells/Wi-Fi networks would

experience offloading of data from mobile to the fixed/Wi-Fi networks

0 20 40 60 80 100 120

Site cost Site Rental Maintenance Energy

Own FTE

Site cost (After sharing) Backhaul

65-75%

Network OPEX % of Revenues

2-3 % 4-5 % 4-7 % 7-9 % 8-11 %

Mobile data growth and offloading

(in EB per Month)

Source: Cisco VNI Report, 2017;Offload pertains to traffic from dual mode devices (excluding laptops) over Wi-Fi or small cell networks

5

Cellular traffic Offload Traffic

Global Mobile and Offloaded Data Global Mobile Data by Network

55.4

33.4

83.6

49.1 36.7

22.7 16.1

20.0 30.0 40.0 50.0

2020 2021

Source: Solon Consulting, LTE Model, Above model assuming no upgrades

to 4G/LTE models and the jump of 1.9 X on the OPEX side assumes % of

Voice is no longer subsidizing data While on the other hand, for an increasing number of subscribers,

data quota and network speed are more important than voice and/or messaging It is data that really

drives the decision-making process and not the other way around While it is a case of stating the

obvious, the evolution in the voice/data relationship has some deep implications for the relevance and

usefulness of data ARPU as the metric to understand CSP performance and their ability to generate

revenues from data services

Verizon, for example, has stopped quoting data ARPUs as a key metric, and some European operators

have done the same Voice accounts for a reducing percentage of network traffic, while, data traffic

continues to surge, making the business case for data miserable

If we continue to consider the data ARPU as the marginal revenue subtracted from total ARPU that

includes base plan and voice, then we are ignoring the reality Atleast a part of the base plan should be

allocated to data as well Many CSPs now charge the subscribers for a bundled plan that includes voice

and data in the same plan, as a testimonial to the fact that it really serves no purpose to separate them

(other than to confuse the subscribers even more)

Turkey

Singapore

Low Per MB Cost contributing to higher consumption along with higher Data-Only penetrations in these countries

Data per MB prices continue the downward trend with the return of unlimited data plans in countries like Finland, Latvia, etc.

ARPMB vs Data Consumption per SIM per Month

(Euro Cent, MB) 2015 Data revenue per MB (EuroCent) 2016/2017

6.00

0.60 0.56 0.50 0.43 0.38 0.33 0.30 0.27 0.21 0.15 0.15 0.12 0.10 0.07 0.06 0.05

Portugal Romania US Germany Spain Netherlands Singapore Luxembourg Korea Japan Austria Turkey Latvia UK Finland France Estonia Australia