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Ian Waters David Hilliard

HOW WILL THE MOBILE INTERNET SPREAD ITS WINGS? by David Hilliard and Ian Waters Big technology disruptions crop up every 10 years or so – and they are electrifying. Driven by the iPhone, a new chapter in the mobile internet has begun. But this change looks different. It is growing faster and looks bigger than anything we have seen before. How will MNO’s respond? Who will make the most of the opportunity? Shaping the opportunity The iPhone’s global success, coupled with HSPA (High Speed Packet Access) has already provided a glimpse of the future and given the UK mobile internet an impressive kick-start. Now it looks as though the mobile internet may stimulate record traffic demand and an exceptional opportunity for UK MNO’s to achieve renewed financial growth. With an array of new Smartphones and access technologies in the pipeline, these developments will provide the UK industry – one of the toughest in the world - with the best opportunity, in recent times, to reinvigorate the mobile market. Ronan Dunne, O2 UK’s CEO says “at O2, we’re seeing a doubling of data traffic on our networks every four months, and we are far from the only operator worldwide seeing growth of this kind of magnitude”.

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Some analysts predict 50% Smartphone penetration by 2015 – and that subscriber data usage could grow in excess of 100% each year. Estimates may be overblown – and there is still uncertainty about the size and timing of the opportunity. Clearly, a major factor in the speed of take-up will be price. But price can only come down if costs come down quicker. Enormous demand will only come to pass with lower costs per unit of data delivered. Forecasts imply that costs will need to be between 50-100 times cheaper in 2015 than they are today. But what seems certain, when the market does take off, is that the sheer number of mobile users almost guarantees that the ramp up will be faster and bigger than anything seen before in the technology industry. UK mobile seems set for a major structural change that will be “global” from the outset. All MNO’s should benefit - but perhaps the biggest potential opportunity lies with the merged Orange/T-Mobile company. The new venture is already heavily promoting the Everything Everywhere theme. But, by contrast, it may also have the biggest problem – since it must integrate two companies and in parallel create a “single super-network ……….. giving customers instant access to everything everywhere”. The big question for O2 and Vodafone is how should they respond? Will they sit back and conserve cash - trusting that a distracted Orange/T-Mobile will be way off the pace for some time to come? Or will they use the time to build a leadership position in the mobile internet - and spoil Everything Everywhere’s party? Big bets always place heavy demands on major players – and this one will be no different. Building credibility with customers will bring its fair share of headaches. Widespread adoption of the mobile internet will have intense implications on network capacity, coverage, reliability, resilience and, radio spectrum. Large financial investments will be required. What is more, to become the lowest cost “network of choice,” each MNO will have to set standards of operational brilliance that are simply poles apart from anything seen over the last 25 years. In the iPhone world, it is striking that MNO’s, like AT&T, have so far carried the reputational damage, service and network fix cost burden prompted by customer complaints. Today, MNO’s run far less risk than their fixed line counterparts did 10 years ago. Many fixed operators built huge capacity ahead of demand and got it wrong, with devastating consequences. The iPhone has already demonstrated that there is a pent-up demand for mobile internet applications – and the irrational exuberance associated with the internet bubble is unlikely to be repeated this time, particularly within the financial and radio spectrum constraints of the UK mobile industry today.

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The MNO that drives down the cost curve fastest, to reach attractive price points will be best placed to mop up demand - a market dynamic clearly evidenced in the airline industry with BA and Ryanair. Because it has the lowest cost base, Ryanair is one of the most profitable airlines in Europe. In the mobile industry, Bharti’s famous “minute factory” voice model produces EBITDA margins above UK levels at prices of about $0.01 per minute. This is quite a feat in arguably the world’s most competitive mobile market – only achieved through ruthless cost cutting and innovative use of technology suppliers. The message seems clear. The MNO that is earliest to market, with huge low cost capacity, has a once in a lifetime opportunity to be the premier player in mobile internet. There is an opportunity for a shrewd MNO to build a new business that puts competitors in the shade. But this will only happen if price and service levels are dramatically better than they are today. Implications for delivery Given the industry’s chequered track record in implementing new technology-based services, how could an MNO deliver this scale of transformation? Getting the execution task wrong - or moving piecemeal, too slowly, may have far reaching consequences. Press announcements already made underline the need, not only for speed, but also for a radical approach. A brilliant mobile internet strategy is like an artillery shell – it does not matter how powerful it is. It is useless if you cannot fire it. Without a radical approach, the execution task may not even fire enough shells to land on the target. While all strategic execution tasks profess to be complex and demanding, this particular challenge is severe because:

• Timescales are hugely aggressive • Investment requirements are massive • User expectations demand completely new delivery standards • Propositions must beat “equivalents” from other delivery platforms • “Time to market” must be at “internet” speed • Matching new technology to launch releases is critical

It is a good bet that normal “worn-out” execution approaches will not move fast enough – and have almost zero chance of success, within internet timeframes. New approaches are needed. The key to constructing a winning delivery programme is to understand what the key levers are. Levers are the activities that rapidly lead to a high level of success. Levers deliver 80% of the result for 20% of the effort. Many other activities are secondary – these are like rocks. Castles cannot be built without

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rocks – but attempting to move any rock by hand instead of using levers multiplies pain, frustration and delays. Getting these key distinctions right – and using them in a telling way - will harness the energy of the team behind critical activities and swiftly drive progress. One approach might be to throttle demand (caps, pricing etc), pushing timescales into the future when "worn out" execution approaches may deliver. This is a questionable tactic as it leaves MNO’s open to attack by others who have adopted a radically new approach. This radically new approach to the execution task covers the entire business and should incorporate at least three levers:

1. Implementation of the Delivery Model In any time-critical venture, four building blocks should be dovetailed - business strategy, design of strategic initiatives, implementation and delivery. Combining these under a single management structure, helps to guarantee the entire lifecycle runs as fast as possible - without being overly compromised by other day to day business pressures. Other industries have tackled this apparent “Catch 22” dilemma with exceptional results by giving priority to the new initiative and setting up a completely separate unit - as if it were a new business segment. BT and Racal Electronics both did this at the start of mobile in the UK with Cellnet and Vodafone. Typically, this approach has many detractors within the business. Opposition comes in various forms ranging from transparent hostility to other more subtle forms of “innocent” and “silent” non-cooperation. But mostly these arguments and behaviours are “turf” based. The more normal practice of time-sharing critical resources between “business as usual” and a new initiative, on a best efforts basis, looks appealing on a chart. But in reality it is a comforting management delusion that simply does not work in practice. For questionable reasons, people rarely find time to work on the new initiative. Without doubt, the complexity of this task provides loads of opportunities to scatter accountability and to drop the baton between functions. A unified management team is more likely to be successful.

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2. Different technology supplier relationships

The term “strategic partner” is often used to describe a key supplier. But the actual relationship rarely meets this implied standard. MNO’s could consider an “intercept” strategy with one or more world-class suppliers based on authentic business collaborations, rather than the traditional arms-length relationships that have served the industry well in recent years.

There are pros and cons but, with typical procurement models, MNO’s can end up with network technology designs that are anywhere between 3 and 5 years old in their networks. There are cost penalties associated with this that ultimately impact the MNO’s costs and pricing flexibility. This design “intercept” approach is routinely used in the computer industry where companies secure privileged access and knowledge about new technologies from world-class suppliers - at future price points. This is exceptionally valuable since many technologies in the pipeline do not sit on vendors published technology roadmaps.

Structured in the right way, collaborations with world-class suppliers can produce many benefits. For example, early visibility of what is possible, sharing massive financial investments and, creation of “showcase” operating environments.

3. A different network operating environment

Competition for non-access revenues will be intense and MNO’s must have a network cost base that guarantees the lowest cost per unit of data. The challenge for MNO’s is to develop a network operating environment that allows them to secure a satisfactory share of non-access revenues. This means developing a wholesale capability for mobile developers and system integrators that positions an MNO as the “network partner of choice” – effectively leveraging other unique assets such as billing relationships, device subsidies and knowledge of where customers are and what they are doing on the network. Strikingly, the fixed internet and mobile data in Japan shows that non-access data revenues (content, services, e-commerce, etc.) grow more quickly than straight access revenues. So far, Apple has captured the majority of non-access revenues with the iPhone, leaving MNO’s to compete for access revenues, based on price and network quality.

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The strategic quandary

Vodafone and O2 both have simpler tasks than Everything Everywhere and have a short term opportunity to turn the competitive screw – by being faster and more nimble. The big question is whether either player will actually do it? Both companies may delay plans - adopting a more cautious approach and hoping that Everything Everywhere develops an acute attack of corporate indigestion.

Undoubtedly, Everything Everywhere has the biggest potential to go farthest down the cost curve and reap the largest rewards. A network with around 30 million subscribers can drive the greatest economies of scale. Nevertheless, by contrast with O2 and Vodafone, the task is highly complex.

Everything Everywhere must integrate two large businesses - this is fundamental to success. And it must continue to compete effectively in a rapidly evolving market – managing multiple stakeholders, including Orange, T-Mobile and H3G.

Can the new business rapidly execute a programme of this magnitude, the likes of which has not been seen in the mobile industry anywhere in the world?

The mobile internet and Smartphone revolution is here to stay. No MNO can afford to be unprepared or taken by surprise. The lingering mystery in the UK is which MNO will make the most of the opportunity on offer? Who will lead the charge down the cost curve by adopting a radically single-minded approach? David Hilliard is the Chief Executive of Mentor. He is an expert in strategy execution - and a seasoned IT & Telecoms executive. His direct approach quickly helps clients get to grips with execution challenges. David is an experienced mentor, a top-class educator- and has a fund of real life stories that vividly illustrate the "do's" and "don’ts" of execution. Email David at: dhilliard@mentoreurope.com Ian Waters is a founding Partner of Credo. Ian is an expert in strategy development in the Telecoms industry. Working with Operators and Vendors across the globe, Ian has developed and executed pragmatic strategies that have delivered material results. Email Ian at: ian-waters@credo-group.com