Oct 2014
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Strategic
Perspectives
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Oct 23rd, 2014
Subash MANDANAPU,
Executive Summary:
In November 2007 Amazon introduced their Kindle line of products, with a seemingly magical Whispernet functionality where the content can be delivered without a subscription or monthly fee. Whispernet was one of the contributing factors of the original Kindle sales as it removes the friction of connecting to Wi-Fi networks. Amazon had to go great lengths, working with Sprint, AT&T, Qualcomm, and others to set-up the network to support this functionality. A process that proved challenging for Amazon’s competitors to replicate, due to heavy capex and technology complexity.
Today, mobile networks across
the globe are transiting to 4G/LTE, smartphone adoption is increasing rapidly
(70% in the U.S), and billing subsystems are evolving to support dynamic charging.
Industry verticals like health care, finance, automotive manufacturing and
others are embracing this mobility wave. We are entering into a connected
intelligence era, wherein ubiquitous connectivity will enable contextually-aware
objects (machines, medical pills, cars, appliances, food, etc.) in our everyday
lives. This has an impact on how technology is instrumented, and potentially more
importantly how incumbents embrace new business models to capitalize on a
digital economy.
While telcos have done a
tremendous job embracing modern technologies (4G/LTE transformation, cloud
computing, ubiquitous coverage, smart devices, etc.) their business model
remains little changed. Most Telcos are still responding tactically, not
strategically (e.g.: Shared plans and data caps as opposed to sponsored data or
dynamic charging). Telcos continue to be focused, almost exclusively, on mass
market plans as a primary source of revenue. It’s time to apply strategic
thinking to existing customer models as we transition in to the connected intelligence
era, where consumers are at the heart of a myriad of contextual objects and
access is critical to facilitate communication among those objects. Toll-free
data or sponsored data presents a strategic opportunity for long term revenue
growth, where consumers and/or other entities (enterprises, SMB’s) share costs
to create new contextual experiences. By associating consumers and
enterprises/businesses to the Telco value chain, Telcos can reduce the cost of
delivery and increase value for the consumer.
The state of sponsored
data in U.S
As one of the host networks for
Amazon’s Whispernet, AT&T understands the need and potential for new business
models like sponsored data. After mulling for years over net neutrality issues
and waiting for the market to catchup, AT&T recently launched an offering
at CES 2014 with 3 partners (United health, Aquto, and Kony). Their
announcement received split reactions from the press. Negative campaigns were
quick to point out how AT&T stands to make money from both sides
(enterprise customers and their end customers). They also touched on some
regulatory concerns. Nevertheless, here are the two key takeaways from AT&T’s
launch of sponsored data:
a) Taking a platform approach (where startups build the momentum around
sponsored data) is less risky vs going to market directly. Startups are
ambitious to bridge gaps between content providers and Telcos, and are
interested in connecting to multiple Telcos to provide better coverage for
their solutions.
b) While sponsored data is not a tactical business model for most carriers
and enterprises today, it will greatly impact a variety of industry verticals
like connected cars, Healthcare, energy, etc, where Telco’s may not own the end
customer relationship, but may power new connected devices and services for
existing business customers. When Telcos begin to thinks beyond mass market
monetization, sponsored data fits very well into the future of the telecommunications
industry.
In
part from their recent announcement, it is clear that AT&T is emerging as a
leader of sponsored data efforts in the U.S.—by powering startups to go after
the market as well as applying the model on other industry verticals. It is
less clear what direct, bottom line contribution sponsored data has made to
their overall earnings, but we can expect to see the results in next couple of
years.
Verizon’s CFO Franc Shammo
touted sponsored data at various occasions including some analyst conferences
by hinting that content providers like ESPN were asking for sponsored data
solutions. Verizon did work with a start-up called Aquito, who provided
Verizon’s pre-paid subscribers with the Kickbyte app. Subscribers were rewarded
with data when they consumed Kickbyte content (Ex: Surveys). Today, Aquito
expanded their program to rich media advertising on AT&T network. Verizon
is rumored to be evaluating a limited number of partners and content providers
(like ESPN). Overall, Verizon’s network can support sponsored data models but
they are looking for suitable content partners to launch a sustainable business.
T-Mobile USA is also very
aggressive in terms of mass market offers, but they currently do not directly
offer any sponsored data. Instead, they are zero-rating all the music streaming
from different content providers (including Pandora, Slacker, Spotify, etc.). Essentially,
T-Mobile is using a lighter version of sponsored data to gain market share in
the U.S.
Sprint is losing ground and
recently became # 4 in U.S. They have launched unlimited 4G plans to reduce churn,
but have reduces investment in emerging areas like sponsored data. Given their
focus on unlimited data plans, and continued losses, sponsored data may not be
relevant for Sprint at this point. But, on the wholesale side, Sprint currently
hosts more than 35 MVNOs. They are rumored to be evaluating startups which can
enable sponsored data as a re-sellable product to their MVNO partners. Sprint-enabled
MVNOs could then use such an offering to attract more customers by zero rating
the content by region or demography.
Over the last 2 years, there has
been increased activity in the startup ecosystem when it comes to sponsored
data. There are two types of startups: (a) Enablers; and (b) Differentiators. Enablers
build platforms to support content providers with sponsored data initiatives. Differentiators
use sponsored data to differentiate their business model to compete.
The enablers like Syntonic
wireless (a Seattle based startup that recently raised a $1 million seed round)
partnered with AT&T, and announced toll-free data app called ‘Freeway’ on
the Android market place as well as
‘OnRamp, ’ an education program to enable sponsored data on tablets that were
given to children at schools. Syntonic plans to work with other Telcos in the U.S
to go after other verticals like IoT, enterprise services, and health care. Syntonic’
s competitor, ‘DataMi’ (Also an AT&T
sponsored data partner), recently spun out of Princeton University and launched
a limited trial on a subset of AT&T subscribers who use a social news
application called ‘Trove’.
Differentiators like Aquito and
Hipcricket are using sponsored data in advertising and marketing solutions. Aquito launched a product targeting
advertisers to sponsor high quality media content as well as credit additional
data to users as an incentive to consume media. Hipcricket plans to use
sponsored data to increase customer engagement with brands.
Market opportunity:
The market opportunity for the sponsored
data model can be classified into two:
(a) Connect the un-connected; where Telcos target consumers who are not
subscribed to data plans by introducing sponsored content; and
(b) Beyond mass market, where Telcos target premium offerings like
mobile video for content providers like ESPN as well as other industry
verticals like Auto, health, education, energy .etc.
In the table below, the
International Telecommunications Union (ITU) indicates the opportunity
presented to telcos to increase data adoption in emerging markets.
Key ICT indicators for the
ITU/BDT regions (totals)
Mobile-cellular
subscriptions(in Millions)
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Active mobile-broadband
subscriptions(in Millions)
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Sponsored Data presents a
considerable opportunity to engage new customers. As of 2013, mobile broadband
penetration in Africa is only 13% and is only projected to grow by 19% at the
close of this year. According to IDC, 18% of the African population has
purchased a smartphone. This number is expected to double by 2017. With
increased smart phone penetration, sponsored content, or subsidized content,
can of great value to African consumers. It may be challenging to convince
local content providers to sponsor data due to the economics, but internationally
recognized social networks and sports content could be great way to start.
In most developed markets,
mobile broadband has reached affordability levels, and with increased
competition, Telco’s are forced to increase monthly quotas and reduce prices.
At the same time, Mobile video usage is growing exponentially, and consumers
may be attracted to sponsored data models where content providers pay for a consumer’s
access to their preferred video content. In the U.S, many startups are focused
on sponsored advertising content like video trailers, rather than an entire
video episode or film, where the unit economics may not work for the sponsoring
business partner.
As Telco networks are built to
handle peak demand, there is significant availability during non-peak hours. Network
demand based sponsored data can be another model where the network periodically
checks for availability and engages with content providers dynamically to offer
subsidized content paid by the content provider. Along with edge network caching,
this model can be used to sponsor video content or rich media advertising.
Although not a single, definable
industry vertical, the new wave of Internet of things (IoT) will impact many
industries like energy, health care, automotive, and insurance, to name a few. Ubiquitous connectivity will play an important
role in IoT, and there will be challenges dealing with sub-dollar ARPU devices.
Sponsored data models are very well suited to support various IoT solutions
across multiple industries.
Sponsored data
business case – Facebook
Facebook’s ad revenues jumped
67% in Q2 2014 year over year. This was primarily driven by a 151% increase in
mobile ad sales.
Facebook is now delivering 1 billion video views every day. They also announced premium video Ads in
international markets, including France. But going forward, it may be
challenging for Facebook to monetize the video ads, as consumers may take a
cautious approach towards video viewing, as it will be reflected on their
monthly mobile statement. This is especially true for prepaid customers, who
keep a more accurate measure of their data consumption.
By offering sponsored video ads, advertisers can expect
increased engagement, and consumers can see direct benefit where it doesn’t
impact his/her data limit. This, in-turn, can benefit Facebook to increase the click
through rate (CTRs) of video Ads. Operator may initially cannibalize some
revenue from consumer data plans, but over the long term, sponsored data will open
up new markets. Sponsored data will also allow operators to differentiate their
customer offering and diversify their revenue opportunities.
Facebook business case for Premium Ad per Million Subscribers
Non Toll- Free
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Toll-Free 1
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Toll-Free 2
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Facebook Click Thought
Rate (CTR)
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1%
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5%
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10%
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video views
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10000
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50000
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100000
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Data cost to FB (Operator Rev) per ad
( @ .2cents fixed) |
0
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$1,000
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$2,000
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Facebook rev (@ $25 eCPM)
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$250
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$1,250
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$2,500
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Based on the above table, Facebook can double their revenue
with 10% increase in click through rates with sponsored data option, more importantly,
Operator can generate up to 90% of what Facebook can generate in ad revenue
which otherwise is a lost opportunity.
Technology/Architecture
choice
There multiple solutions that can enable sponsored data for a Telco like Operator. Each solution has its own advantages and disadvantages. Telco may need to consider ROI when picking the solution. Here are few solutions that a Telco can consider:
1. In-Network solution: The traditional way of enabling sponsored-data is via an in-network
solution where the Telco has full control and visibility over the packets that
are intended to be toll-free. The In-network
solution reduces chances of fraud, as it will be implemented with-in the Telco network
perimeter using existing network blocks. Unfortunately, this solution requires
changes in various network elements including the policy layer, OSS/BSS layer,
and the Home Subscriber Server (HSS). This solution may take time to implement
and the associated costs are high. This solution can be implemented when the Telco
can expect to generate commensurate revenues (or discounted cash-flow).
2. Wrapper based solution: The wrapper based solution moves some of the policy,
metering aspects from the network to the device to reduce the complexity on the
network side. The native application can be wrapped to provide the same
functionality and synchronize the metering and policy information to an
independent server sitting outside the Telco infrastructure. By exposing an API
(similar to billing credit), the server can credit the user in real-time or
near real-time for the associated toll-free content. The big advantage of this
solution is that the app developer or content provider can enable toll-free
option without making any code changes. While this solution may be comparably cheaper
the In-Network, It has its own limitations including development and management
of wrappers for each handset Operating System and there is possibility that
wrapper can be compromised and become vulnerable to security attacks. This
wrapper based solution takes whole application into toll-free context, hence it
cannot support sponsoring sub parts of the app(ex: only Video advertisements)
3. SDK/Libraries: By providing sponsored data SDK’s /Libraries
and an open source server to the developer, the Telco can not only reduce risk
of managing toll-free content, it gives greater flexibility to the developer or
content owner owner to enable whole or part the application sponsored. The
Telco need to expose an API to content provider to credit the user’s account
for the sponsored content. Some of the limitations include the engagement
during development time, managing SDKs across multiple languages (Ruby,
Javascript, android , iOs, etc). By introducing an open source project, the
Telco can mitigate some of the fore mentioned risks. By combing device based SDKs with exiting
OSS/BSS infrastructure (PCC rules) , Telco can create feasible solutions.
It is highly recommended to
investigate the SDK based approach due cheaper development costs during the
initial phases of market adoption. The open source approach may attract
numerous developers, content partners and Telco community.
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Execution Strategy
APIs: There are multiple ways to ignite the market with sponsored data models. Exposing sponsored data APIs is one of the easiest and least risky ways of approaching the market. This can build a startup ecosystem where the startups who are hungry for success can work with the content providers to make their content free to the end user. Small IoT manufacturers are prone to be attracted to this model as it might be less risky and with less friction to set up. Developer reach can be done via Operator’s existing partner program. The only risk with this model is that it is not guaranteed to produce results within a specific time frame. The success of this model greatly depends on startups that are willing and capable of executing. In U.S, AT&T is following this model by exposing APIs to startups and manages the relationship with a few partners, rather than hiring a direct salesforce and going after sponsored data contracts.
Big Launch: Launching
sponsored data by partnering with big
content players like media houses, social networks, Music services, OTT
messaging services and sports networks can catch attention of public as well as
other content players and developers. Since sponsored data is a new
proposition, it’s often challenging to convince big players to commit. But, if
achieved, this is one of the best ways to create the momentum in the market.
Popular events like mobile world congress, along with big brands, will drive attention
from the industry. After a big launch, the API model for growth is more
realistic. Due to the business complexity of sponsored data, showcase examples
play a significant role in educating the ecosystem (startups, business
customer, end-customers) about the value of sponsored data.
Buzz Maker: As the networks are planned for peak usage, there
is often a lot of unused capacity. Telcos could generate good will by
allocating network resources to good causes. By dynamically detecting network
demand, subscriber profile information and demographic data, Telcos could offer
a very niche group of services to a very niche group of customers, for free, in
exchange for the goodwill generated. For example, telcos could use spare
capacity to “sponsor” data for apps providing:
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Education: Free online education at
certain times for certain students/customers.
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Healthcare: Free access to healthcare
education at certain times for certain customers.
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Government: Free access to government
services at certain times for certain customers.
All of
these arrangements increase the telco’s brand reputation, reduce churn, and
improve customer satisfaction.
Cross-carrier: One of the challenges with sponsored data is
solution coverage for business customers not wanting to address a sub-set of
the population. Content providers are often more attracted to sponsored data
models when it is available across multiple carriers. In a given market, the #1
or #2 Telco could provide a sponsored data business partner customer with a
master agreement, and then work with other telcos in that market (on a wholesale
basis) to provide majority coverage. Based the history of Telco collaborations
this is likely one of the biggest hurdles for operators to execute on a
population wide sponsored data initiative. Startups may have a better chance of
interconnecting multiple operators to create a one stop shop for content
providers.
Regulatory concerns
When AT&T launched sponsored
data in U.S, The digital rights groups like public knowledge, Free Press and
other pro open internet groups criticized that sponsored data falls under net
neutrality laws by encouraging operators to establish agreements with established content providers(for faster
lanes) and hinders the entry of new players. AT&T responded that they are
not prioritizing the traffic when the content is sponsored and they are only
shifting the billing from consumer to content provider. FCC chairman Tom
wheeler told the press that he would investigate potential implications but so
far no action was taken. It is highly recommended to check with local regulatory
bodies to understand and assess potential regulatory hurdles.
Summary
We are entering into an era of
connected intelligence, yet half of the world is not subscribed to data plans,
and Telco business models have not evolved to accommodate new ways of connecting
consumers. Traditional ARPU from mass market customers continues to decline, while
the capex required modernizing and maintaining best in class networks continues
to increase. It’s time to connect the un-connected, and diversify revenues, by
targeting more innovative business models for data delivery. Sponsored data presents a very flexible
business opportunity and can be adapted to suit different market dynamics and
various industry verticals. By working with partners to deliver sponsored services,
telcos can increase the perceived value of connectivity. It’s time to seed new
business models like sponsored data in the market for new growth opportunities.
