Lettre convergence n20 en

CONVERGENCE LETTER
Telco 2.0 and the
apple of discord
New business models of Internet
telecom convergence
To get there. Together.
N°20

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While telecoms operators are continuously developing new services
in cooperation with Internet actors, the success of Apple and its
services (Itunes, appstores) illustrates more than ever that the
digital segment of the economy is currently in the midst of a tur-ning
point. The fight to capture the better part of value is bitter.
But it is founded in the construction of new models for sharing
the wealth in the market. For telecoms operators, a transforma-tion
is necessary to make the most of their assets and play an
active role in these new models.
 In a context of converging networks, operators cannot content
themselves with remaining focused on the convergence of lan-dline,
mobile and broadband activities. Each segment of the
“quadruplay” offers, combining high-speed Internet, digital
television, landline and mobile telephone service, is henceforth
confronted with problems generating revenue or challenges
concerning the costs related to these services. Not only are these
markets, which are in a phase of becoming a commodity, seeing
their revenue erode, they are also subjected to fierce competition
from actors who don’t belong to the traditional suppliers of com-munication
services (those branching out from the Internet, such
as Google or Yahoo).
1

Telco 2.0 and the apple of discord
Faced with this dual constraint, the response of the operators
involves the adaptation of their economic models to a dynamic
called “Telco 2.0”. An informal link connects Web 2.0 to the
notion of “Telco 2.0”. Two dimensions can be highlighted. Tim
O’Reilly cites, first of all, the importance of user data (the ope-rators
dispose of databases that are largely unexploited). Next,
he mentions the interconnectivity of the services (mash-ups),
between the third-party partners and the telecoms services. In
this way, Orange permits its customers to register for the musical
offer Deezer in one click, or even the simplified completion of a
shipping form on the Chronopost portal via synchronization with
the personal address book.
 In terms of organization, underlying tensions are taking root
between the traditional model of the operators, based on strong
vertical integration, and that of the new Internet entrants and
of Web 2.0 services, which are more flexible and opportunistic.
One of the characteristics of the actors coming from the Internet
is that they introduce autonomous services vis-à-vis the networks
or operators. This is, for example, the case with Fring in the ins-tant
messaging market. This company offers a peer-to-peer ser-vice
using voice IP to offer telephone and communication services
2
via Internet.

New business models of Internet telecom convergence
In terms of impact on sales, these tensions are attenuated by the
formidable growth of broadband offers and data on mobile; but,
alas, this last lever shall not be eternal. For the operators, the
abandonment of strong integration presents difficulties of seve-ral
types, and risks related to the cannibalization of offers, brand
management or even impacts on the IT Systems.
These very agile new entrants coming from the Internet position
themselves on value-added services. For traditional operators,
this leads to the risk of being relegated to the role of a commo-dity
of low economic value, and to disintermediation by the final
customer. The fierceness of the competition related to “applica-tions
stores”, a market dominated by Apple with its App Store,
bears witness to this loss of control in mobile distribution. In this
regard, the response from the operators was late, beat out by
the terminal manufacturers like Nokia (OVI Store) or software
editors such as Microsoft (Microsoft Marketplace). The operators
are struggling right now to find success with their applications
stores, although they dispose of undeniable assets: privileged
access to customer data about their location and easy means of
billing without an intermediary.
3

In other markets, notably emerging, services of substitution have
established themselves. This is the case of MXit in South Africa,
an instant messaging service whose protocol permits aggrega-tion
of contacts from Yahoo, ICQ, Google Talk, AIM, or Windows
Live Messenger and, thus, replacement of the traditional SMS
offers. Another illustration of this movement of substitution: ser-vices
like Skype are used more and more often by small compa-nies
for long-distance calls and conferences calls. For the time
being, these services remain on the periphery of the market, but
they are growing rapidly. Thus, the competition is winning numerous
market segments, and the position of the operator on the most
profitable section of these value chains is under threat.
Furthermore, video services like IPTV and content broadcast, of-ten
presented as major levers of growth, are not managing to
generate the profits anticipated by the operators. The margins
are even more strained by the meager appetite of users to pay for
these media services (free culture). For IPTV services, the recent
orientation has been towards refocusing on the core business and
partnerships with third parties (“Catch-up” TV services MyTF1
and M6 Replay), whose well-known “Boxes” constitute the an-chor
point for distribution. Regarding music, the position of Apple
is dominant in download offers, but not in streaming offers (liste-ning
directly without downloading), which are already experien-
4

cing intense competition. The operators are turning towards this
model, in the image of Orange and its partnership with Deezer.
This type of partnership allows them to offer mobile subscribers
premium offers for an average price of 5 euros per month. Other
initiatives are expected from the operators and new entrants, be-cause
the allocation of value between the actors (including the
beneficiaries) still leaves enormous uncertainty about the online
music market.
 In the Internet dynamic of 2.0 usages, the convergence of
networks and services has found a powerful catalyst in the evo-lution
of the core business activities of the operator, but also a
powerful competitive prod. The operators have thus set out on a
race against the clock with new entrants (Google, Facebook, Mi-crosoft,
Blackberry, Samsung…) in order to capture the value of
convergent services (in terms of landline/mobile) such as portal
services or application stores. These new services from applica-tions
stores highlight the rapid changes instituted in the balance
5
of power between the actors.
Meanwhile, the advent of the wideband IP network offers tradi-tional
operators the chance to derive value from their historical
assets, via access to service platforms, and to deploy attractive
new offers, as is the case with the IPTV models. One of the major

challenges for them is determining how they are going to rein-vent
the organization of their teams and their systems in order to
position themselves as captains over these new business models.
The first characteristic and virtue of this new order is the capa-city
to bring together an ecosystem of third-party partners which
is favorable to the development of new offers. The role played
by the developer communities is crucial here (those of Apple or
Microsoft can serve as a reference) and while the operators have
initiated programs (Ribbit at BT Business, the ODI program at
Verizon or Orange Partner in France), their offers and approaches
are still not very popular among developers.
The opportunities for new business in an ecosystem extended to
third parties require a new allocation of revenues (for example to
compensate for the drastic decrease in the cost of SMS termina-tion)
and that a real opening be put in place. This will notably be
done through greater collaboration with the industries and the
availability of dedicated offers (banking sector or public sector).
As for new entrants, an ecosystem available at a global scale for
landline and mobile access permits Internet actors (such as Skype
or Paypal), as well as certain manufacturers (like Apple), to attain
a critical mass of subscribers much more quickly than any telecoms
6

operator has done in the past. In contrast, the potential for in-novation
and opening of the ecosystem of the operators is still
slowed down by an information system that is historically cum-bersome
and organizational challenges which the new structures
(Facebook, Amazon or Paypal) have not yet had to confront.
The second characteristic is the increasing complexity of the dis-tribution
of combined services and their access. Until now, the
telecoms operators were able to protect a part of their revenue
from the risks of disintermediation, by controlling the mechanisms
used to provide the services, via the residential gateways (still and
always the famous boxes). With the arrival of open standards and
devices (like Android phones) and the multiplication of alternatives
for accessing the services (such as video consoles connected to the
TV or new digital decoders that complement those provided by the
operators, the set-top box), this control is going to dissipate and a
change will be underway. In this way, the new generation of the
set-top box, like the Cube from Canal Plus, allows Internet opera-tors
and media companies to develop VoD (Video on Demand) of-fers
without the intervention of the operator. This model of broad-casting,
excluding ADSL, is called “hybrid” because it allows access
to content from satellite sources as well as on-demand content
through the Internet (You Tube or DailyMotion, for example). In
other markets, this change is also underway with integrated vocal
7

applications in the iPhone, the catalogue and the Netflix interface
accessible through Wii consoles, or targeted advertising services
from Apple and Google via the application stores.
 Given the competitive pressure on the traditional telecoms
model, the question today is no longer whether the model must
evolve. Now, the focus is on the cadence at which this change
must take place and its key dates of maturity, while assuming
the real risks of cannibalization of offers within the operators’
own companies.
Several evolutions are being observed. On one hand, there is the
concentration on “Business to Business” relays of growth via ser-vices
integrated by solutions or sectors of activity. This concentra-tion
is going to gain momentum while the mass consumer mar-kets
become more and more fragmented. Next, we are seeing
efforts to gain greater value from the use of customer data (deve-lopment
of marketing offers based on trends, real-time targeting
and availability of people…). This smart use of information will
make it possible to develop more profitable personalized services.
Finally, another interesting solution that is taking off is the avai-lability
of service platforms that respond to processes by industry
(order processing, billing, customer relations, distribution and
content syndication…). Regarding this last evolution, “Cloud” ar-
8

chitectures, based on reliance on remote servers for processing
and IT servers, are increasingly appearing to be a significant ave-nue
of growth in the coming years for operators.
For business models labeled “Telco 2.0”, the principal value re-sides
in playing the role of facilitator of daily interactions, which
link companies and consumers, governments and citizens. These
processes, closely linked to the infrastructures, include the au-thentication
of users, targeting to the service from direct marke-ting,
distribution of goods and content, processing of payments
9
and customer follow-up.
The telecoms operators dispose of assets that can provide res-ponses
to the growing needs for knowledge and contact with the
customer: user data available in real time, secure and sophistica-ted
distribution networks, capacities for payment processing, a
positioning of undeniable trusted third party and, finally, a colos-sal
subscriber database.
To reposition themselves on the value chain, the operators must
reorganize and repackage their assets based on the principle of a
two-sided business model. This is characterized by the possibility
offered to two partners to interact and carry out transactions on
a platform, the typical example being eBay.

 While the telecoms operators must continue to develop the
residential market and respond to its needs. They must also de-velop
their traditional offers to include business solutions (CRM
via marketing based on the trends provided by the operator, ad-vanced
billing services…) in the network and service model (Offer
such as NaaS – network as a service). Concretely, it involves trans-position
of the SaaS (software as a service) model by mobile ope-rators.
This adaptation solicits the intelligence of the networks
for the client companies of the operators.
Faced with these evolutions, large companies initiate, in a qua-si-
symmetrical movement, digital strategies that are more and
more integrated. Relying on established CRM mechanisms as
well as Internet assets that are still dispersed (communication,
innovation, HR, marketing…), large groups are undertaking reor-ganizations
of their teams and activities in order to derive greater
value from the channels of distribution opened up by the growth
of the Internet.
The execution of such strategies requires being able to rely on
dedicated value-added infrastructures and services that are adap-ted
to business constraints: adjustment of consumption in real
time in the energy sector, high-end customer relations in the
luxury sector… In order to respond to these new requirements,
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the operators will have to create or upgrade open and standar-dized
platforms to which third parties can connect their company
information systems and communication systems. In the banking
sector, for example, the solicitation of the operators to secure
access to their mobile portals is offering interesting perspectives,
including for new terminals like the iPad.
Actors such as Apple or Google make no secret of their ambitious
focus on the value chains previously controlled only by the tele-coms
operators. Today, they are trying to marginalize them by
aggressively pursuing control of the distribution of value-added
services. While Google is recovering from a relative failure in the
marketing of its Nexus One telephone, its VOIP offer in Gmail,
launched in August 2010 in the United States, is meeting with
real success. And it is competing head-on with Skype. As for
Apple, it can boast several successes in digital Entertainment...
iTunes and App Store coming to mind immediately and, of course,
the iPhone. This positioning should incite the operators to accele-rate
the reorganization of their offers and structures.
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With an ecosystem open to continuous innovation, in phase
with Internet progress, strong commitments to multiple screens
across convergent services, and more flexible organizations and
structures, the operators will be able to honor the Telco 2.0 pro-mise.
Henri Tcheng, Michael Tartar, Jean-Michel Huet
et Vincent Vaudour
12

Lettre convergence n20 en

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