Significance: The major mobile operators are struggling to adapt to over-the-top rivalries and new cloud services, and to understand their role in the new digital world. Most are engaged in a variety of initiatives, some aiming to harness the networks to differentiate services, some trying to go head-to-head with the web giants. Meanwhile, they are trying to take a controlling role in emerging new value chains such as mobile payments or M2M. Telefonica is one of the most advanced and coordinated in its thinking, and has set up a dedicated division focused on new business models. It aims to replicate new services, often pioneered in the O2 unit, across its high growth Latin American territories, and to adapt its offerings for vertical sectors. Telefonica Digital head Mathew Key set out his agenda last week, boasting of strategic deals with Etisalat and Firefox, and a revenue target of €5bn in three years.
Telefonica may generally behave like a slow moving juggernaut, but when it set up its Telefonica Digital unit last year, it signalled its intention to blaze a trail in new business models, and set itself up as the poster child for the new-look ‘Telco 2.0’ cellco.
The Spanish giant reorganized itself last September in the face of eurozone slowdown, tough competition in its higher growth Latin American markets, and hefty debt. It retains its two regional groups, Europe and Latin America, and added a third unit, Digital, based in the UK and designed to give new businesses greater autonomy to pursue growth without conflicts with traditional operations.
The division is headed Mathew Key, previously at the helm of O2 UK and Telefonica Europe, and has about 2,500 staff. It incorporates many of Telefonica’s recent digital acquisitions such as Terra, Tuenti and Jajah, as well as existing activities in R&D, media, vertical markets and, interestingly, device procurement. The last two highlight how many of the new revenue streams Digital will explore look well beyond traditional consumer and enterprise voice/data ‘ specialized services for key verticals, including machine-to-machine, will be important, and that will entail a new approach to devices, embracing new form factors and embedded products.
In London last week, Key presented his progress in establishing Digital as the template for future Telefonica growth, and implicitly for many other stagnant multinational incumbents. The burden on his shoulders is a heavy one ‘ many of the ideas and services which will be pioneered here, often in the highly competitive UK market, will only deliver real scale and returns if they can be successfully replicated elsewhere. In particular, Telefonica needs to leverage successful pilots in Europe to take a lead in Latin America, where there is a greater opportunity to be a trailblazer in new-look services and steal a march on arch-rival America Movil. And similarly, plans which work well in one vertical must be repeatable across many industries.
At its formation, the new division stated that its aim was ‘to bolster Telefonica’s place in the digital world and leverage any growth opportunities arising in this environment, driving innovation, strengthening the product and service portfolio and maximising the advantages of its large customer base.’
Last week, it had more concrete targets. By 2015, it said, it is targeting revenues of €1bn from mobile advertising and the same amount from financial services and mobile payments. In addition, it aims to generate €500m apiece from M2M, ehealth and security. Achieving these sums will be highly dependent on bringing Latin America up to speed in short order, to ensure the necessary scale. Among the subsidiary digital businesses which live within this division, special attention was paid to Brazilian internet TV service Terra, which has 100m users in Latin America. This will be a key ingredient in a plan to get €1bn from the subsidiaries by 2015.
By that time, the total business unit should be worth €5bn in revenue ‘ still a drop in the total ocean of €62.8bn (last year’s group revenue), but with higher potential for growth and global alliances and influence. Telefonica would not indicate what margins it expected however.
Many of the services at the heart of the plan have particular relevance to the two main growth areas ‘ Latin America, and/or business verticals. Mobile money, health and advertising are all in their infancy in the huge region, especially if they can be delivered on affordable handsets ‘ hence Telefonica Digital’s responsibility for liaising with device suppliers worldwide, influencing their designs and pricing; and its heavy commitment to the upcoming Firefox Mobile operating system, which promises to bring full cloud and smart app capabilities to sub-$100 cellphones. Latin America is already responsible for 48% of Telefonica’s consolidated revenues and achieved an increase of 8.3% year-on-year in 2011, making it the driver of the group’s albeit limited growth.
That growth curve could be sharpened if new services are combined with the subscriber increases inherent in the region. For instance, the company will make a multimillion euro investment in setting up a mobile advertising platform in Brazil, based on the model successfully pioneered in the UK, where ads generate £100m a year. Key noted that mobile ads in Brazil are growing faster than in western Europe, and the carrier will invest to put a local team in place to accelerate the deployment of platforms.
Telefonica concedes it needs to learn lessons from the over-the-top camp and is a firm devotee of the carrier religion that they can harness the advantages of their networks and subscriber data, to improve on such services. That thinking is inherent in their commitment to initiatives like Firefox Mobile, the GSMA’s RCS, and the Wholesale Application Community (WAC), in which Telefonica is a leader.
The user data can, of course, help deliver targeted adverts, promotions and tariffs, and another important advantage is carrier billing for digital purchases and in-app items. Telefonica announced carrier billing deals with Facebook, Google, Microsoft and RIM, and plans a branded store-within-a-store in Google Play and Windows Phone Marketplace. The direct-to-bill payments are live in Germany and will be available in 14 countries worldwide by year end.
But it also concedes it must take a ‘if you can’t beat ’em, join ’em’ approach sometimes, as with its Tu Me over-the-top communications app, which is designed to rival Viber or WhatsApp. And it points out that such apps can extend the reach of its brand and platform beyond its own networks ‘ the third largest user base for Tu Me is the US, where Telefonica does not operate directly.
Partnerships in new markets will be important to add a global edge to the vertical segment plans and to bulk up when negotiating deals for content or devices. Telefonica Digital announced an alliance with Middle Eastern giant Etisalat, to cooperate on new M2M, financial services, cloud computing, ehealth and over-the-top opportunities, across the firms’ territories. Etisalat operates in 17 countries in Africa, Asia and the Middle East, a highly complementary footprint to Telefonica’s, and it also set up a dedicated digital division earlier this year. It will take part in the Spanish group’s global device procurement process and the pair will jointly purchase video content.
An important objective for the Digital unit is to behave more like a Silicon Valley player and less like a telco, with continuous innovation and new ideas. Feeding its pipeline of new services will be Wayra, a program to invest in start-ups. It has put an average of €50,000 into 140 digital businesses so far, and will take the products of those businesses into its own portfolio, through acquisition where appropriate. ‘If we think we can produce differentiated products on our own platforms ourselves, we will. But if we can’t, that’s fine. We’re very open to partnerships. And if we can’t find a partner, we’ll buy or invest in a company, such as Joyent,’ said Key.
However, he said Telefonica has learned its own limitations too. ‘We are clear about what we are good at and it’s not hardware,’ he said in an interview. ‘We also don’t want to be the next Facebook or Google. That game is over. We don’t believe you can own the ecosystem from end to end.’