Rewheel

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Making money with mobile data as a digital utility provider

by Rewheel
The smartphone boom resets the mobile industry. We are witnessing data centric phone manufacturers and OS makers dethroning the kings of the voice centric era. Likewise, challenger network gear makers that took the first moves to launching all-IP, high capacity platforms and gigabyte friendly pricing deals, have multiplied their market share. The mass consumer demand for smartphones has opened a similar window of opportunity for challenger mobile operators to move their market share by leaping ahead in the data transformation. The industry winners of tomorrow will be smart operators that seize the opportunity and transform themselves into very efficient data production factories with a sole purpose to serve their customers needs rather than restricting them by volume caps and blocking mainstream internet applications.
2012 Rewheel www.rewheel.fi

Rewheel who we are

Strategic mobile data advisory

Rewheel
o n e s t e p a h e a d

Specialising into mobile data transformation Market modelling & commercial strategy Technology strategy Spectrum valuation & strategy Strategic infrastructure procurement advisory

Established in 2009 Team HQ in Helsinki

High calibre, multidisciplinary team

Commercial Technology Financial Procurement

Tier 1 and most progressive data challenger clients worldwide

CEO, CTO, CMO, CFO, CSO, shareholder sponsored engagements

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Digital utility provider - 4 key success factors

Rewheel
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Fundamental industry transformation: mature 3G technology and ecosystem, internet going mobile, infinite demand for capacity, mobile operators shifting to utility role, eroding network effect Europe: slow moving incumbents, falling behind in mobile data adoption

Sustainable capacity advantage

Lowest cost base, no frills utility business model

Core consumer value proposition: unconstrained fast mobile internet affordable for all, on all connected devices

3
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Partnerships with competitors big enemies

Monetize on speed and add-on devices

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Rewheel
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Fundamental industry transformation:

mature 3G technology and ecosystem internet going mobile infinite demand for capacity mobile operators shifting to utility role eroding Network Effect

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Fundamental industry transformation mature 3G technology and ecosystem

Yesterday (2006) Today

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Tomorrow

Entry level 3G phone 400

Entry level Android smartphone 120 (unsubsidised retail price)

Entry level Android smartphone 150?

Expensive Big, heavy, clumsy Poor battery life Poor call quality Primary use: calls

Very affordable Light, easy to use Ok battery life Good call quality Primary use: internet

Very affordable Light, very easy to use Long battery life Good call quality Primary use: internet

Immature 3G technology and non-user friendly phones were a serious drag on 3G standard based new mobile entrants in 2003-2010. By today 3G handsets and devices became cheap, very easy to use, reliable and mainstream.
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Fundamental industry transformation

Old smartphones = niche new superphones = mass market

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Productivity Tool Nerdy: Niche market Complementary to fixed/PC Primarily voice centric usage
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Fashion, social Cool: Mass market Signs of substituting some PC apps (e.g. Facebook) Primarily data centric usage!

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Fundamental industry transformation internet going mobile (1/2)

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Source: http://www.morganstanley.com/institutional/techresearch/pdfs/Internet_Trends_041210.pdf

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Fundamental industry transformation internet going mobile (2/2)

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Source: http://www.morganstanley.com/institutional/techresearch/pdfs/Internet_Trends_041210.pdf

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Fundamental industry transformation infinite demand for capacity

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Source: http://www.morganstanley.com/institutional/techresearch/pdfs/Internet_Trends_041210.pdf

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Fundamental industry transformation

mobile operators shift to plain access/connectivity utility role (1/2) Telco mammuts losing out to IT titans in the service innovation battle
Yesterday
Mobile operator developed proprietary value added services: Vodafone live, Vodamail, Mobile TV, Ringtone, Permium voicemail, weather, stock news, daily news, traffic info, navigation, mobile parking, music download, game download Mobile internet access (marginal)

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Today

Tomorrow

Mobile internet access (main growth driver) Voice & SMS services (MNO core business) Mobile internet access (bit pipe) (MNO future core business)

Voice & SMS services (MNO core business)

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Vertical service centric

Layering (Denial)
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Utility (Acceptance)

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Fundamental industry transformation

mobile operators shift to plain access/connectivity utility role (2/2)

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Source: Telenor Group Q1 2011

Source: Vodafone Group CEO public presentation September 2011

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Source: Tele2 Capital Markets Day September 2011

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Fundamental industry transformation

eroding Network Effect easing land grab for new entrants
Network Effect (Metcalefs law): customers prefer to follow the crawd and chose the largest operator because that way they can call and SMS more people on cheaper on-net rates Anectodtical evidence says that Westel in the early 90s secured their market dominance by seeding 40-50 thousand VIPs and key corporate clients with free mobile subscriptions Network effect has been the primary force that prevented late mobile operator entrants from breaking out of the 10-20% market share range

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However, as Mobile Termination Rates (MTR) are falling to zero and so drop the price of mobile phone calls and SMSs, the network effect loses its power, alleviating the market share grip of incumbents. By bundling in free or cheap calls and SMSs to any networks, the new entrant can (and should) actively accelerate the erosion of the network effect. For mobile internet centric smartphone customers operators customer base size will not any more be an important selection factor.
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Fundamental industry transformation evidence

Skandinavian operators handset sales are almost entirely smartphones

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Source: TeliaSonera Q1 2011 Source: Elisa Finland

Source: Vodafone, May 2011

Source: DT Europe

Source: TDC Group

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Source: Leap Wireless USA www.rewheel.fi

Source: Verizon USA

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Fundamental industry transformation evidence

o n e s t e p a h e a d Handset space: data challengers dethroned voice-era incumbents overnight Smartphone OS market shares (Gartner)

Rewheel
Wow!

Android

iOS

RIM

Symbian

Windows Mobile

Other

a wake up call for for voice era telco incumbents too

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Fundamental industry transformation evidence

o n e s t e p a h e a d What consumers want from telcos Time to face it: pure, cost efficient, high capacity, ubiquitous connectivity

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Source: Elisa Finland Source: Telenor Group, Q1 2011

Source: Danish Regulator H1 2010

Source: 2012 Rewheel T-mobile USA Q1 2011

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Fundamental industry transformation evidence

Mobile data traffic snapshots from some progressive markets

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Denmark H1 2010 (5.5. million pop) ~ 6 Gbps Telenor Norway, incumbent, fixed+mobile, 3M mobile subs ~ 20 Gbps in 2015

Source: Danish Regulator H1 2010

Sweden H1 2010 ~ 20 Gbps (9.3 million pop)

Source: Telenor Group, Q1 2011

Finland H2 2010: ~ 20 Gbps (3 networks, 5 million pop)

Source: PTS

Portugal Q42010: ~ 15 Gbps (3 networks, 11 million pop)

Source: FICORA
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Fundamental industry transformation evidence

Yes, incumbents have a lot to lose from accelerating data transformation OTT cannibalization started to bite

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Over The Top Voice and SMS substitutes, integrated into the phone books, started to get viral Q1 2011: First tangible signs of serious revenue cannibalisation threat
Source: KPN Netherlands, May 2011
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Ouch!

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Fundamental industry transformation evidence

Some dominant players taking desperate restrictive countermeasures with unintended consequences

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Unfortunately for KPN, this plan might actually backfire. The majority of the Dutch parliament has spoken out against the plans and have urged the Minister to protect net neutrality. Currently the Dutch Telecommunications Law does not provide a good safe harbor for net neutrality, but it soon might... because of this. One parliament member who is part of a ruling coalition party even suggested that if telcos are going to charge more for usage, perhaps the tariffs for normal phone calls should be lowered. Source: Techdirt.com May 2011 the other notable discussion on the Vodafone conference call was the disclosure that Vodafone Netherlands as Internet Telephony (VoIP) enabled on only tariffs more than EUR 40, at a monthly fee of EUR 5, which led to questions about net neutrality, and how regulators view this situation. Source: KPN Netherlands May 2011 Source: Mediamania.com May 2011 Criticism is mounting of telecoms company KPN for using software known as Deep Packet Inspection to monitor what extra services mobile internet users are accessing. KPN said on Thursday it used DPI to monitor use of the WhatsApp application for smart phones but denied it analyses actual messaging and content. Vodafone has also admitted using DPI to monitor mobile internet use. T-Mobile has not admitted using DPI but does say it keeps an eye on what bandwidth mobile internet users are taking up, to make sure there is enough capacity. Source: Vodafone Netherlands May 2011
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Source: www.dutchnews.nl May 2011

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Fundamental industry transformation evidence

and it did backfire

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And it did backfire...

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Business case for digital utilities

can the demand surge be accommodated without hurting operator margins?
Flat or declinig Capex guideance despite 20x traffic surge

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Source: Telenor Group Q1 2011

Declining Network Capex

Source: Vodafone European operations

Yes, by modernising the machinery and squeezing the supply chain (just like in any competitive industry)
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Business case for digital utilities

clearly, existing (dominant) players in different markets are not equally eager to unleash their data pipes
Rewheels home country

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3 3G/HSPA networks (LTE deployments just started) Dongle penetration > 32% pop, overtook fixed BB in H2 2010 Unlimited MBB offers with speed tiers prevail

Moible Data Consumption per Capita GB/month/pop in H2 2010

0.8
0.7 0.6
1,600,000

Monthly Mobile Data Volume (GByte) Unnamed European Country

Suggests large room for accomodating 3G/HSPA traffic
1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0
Sep-09 Mar-09 Mar-10 Sep-10 Jun-09 Jun-10 Mar-11
Dec-08 Dec-09 Dec-10

0.5
0.4

Country total

0.3
0.2

Challenger (3rd) player with challenger,low cost network vendor

0.1
0

Source: Rewheel estimations based on various sources

2012 Rewheel

Not all challengers are strategically incentivised in becoming data challengers. Members of large telco groups are often draged back by their parents
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www.rewheel.fi Source: local Regulator

Business case for digital utilities

The rise of affordable smartphones erodes traditional voice centric subscriber base
Market service revenue forecast by device category
700

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Data centric customers

Market trigger: very cheap (sub 150) touchscreen smartphones Primary use: Data Key selling point: unrestricted data use Voice + SMS + Data Revenues Higher ARPU, growth market No price war Revenue CAGR ~30% Concentrated in urban areas 2G network irrelevant

Machine-machine connections
600

500

Mobile broadband & tablet connections

400

300

New market: Data centric / Digital utility

Smartphones

Traditional customers
Voice only phones

200

100

Old market: voice centric / services

2015
2011 2012 2013 2014 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

Multiple, inactive, sporadic SIMs

Source: Rewheel analysis and bottom-up market modelling

2012 Rewheel www.rewheel.fi

Primary use: Voice & SMS Key selling point: price Collapsing market Subject to price war Fast eroding ARPU (accelerated by MTR cuts, data centric push, voip and SMS substitution) Low ARPU users with cheapest 2G only phones
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Business case for digital utilities

Implemented from the No. 1 mobile operator Elisa in Finland

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2008 Mobile consumer subscriptions in Finland Mobile corporate subscriptions in Finland 1,979,500 562,400

2009 2,308,800 662,100

2010 2,591,000 767,700

Q3/11 2,765,000 852,000

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Finland is a 5 million country Elisas profit before tax for the three quarters of 2011 increased from 16% to 17% (driven by mobile) Elisa added 100k subscriptions in the 3rd quarter of 2011 Slide | 23

Business case for digital utilities

o n e s t e p a h e a d The smartphone transformation resets competitive landscape and opens window of opportunity for mobile data challengers what does it take to become one?

Rewheel

Needed:
Smartphone capacity friendly spectrum (Europe: 2.1 GHz, HSPA+) LTE (1800 MHz, 2.6 GHz) will not be supported by affordable mainstream smartphones in
the next 2-3 years

Nice to have:
Some Smartphone coverage friendly spectrum (Europe: 900 MHz, HSPA+)

Without sub-GHz frequencies the footprint will be limited to urban areas but a
challenger does not necessarily need to shoot on the entire country to crack the market 800 MHz (LTE) will not be supported by affordable mainstream smartphones next 2-3 years

Slow moving voice centric telco competitors preferably owned by large incumbent slow moving telco groups

Useful synergies:
Existing internet subscriber base, brand, distribution network and IP backbone/backhaul infrastructure (fixed broadband operators) Existing mobile operator business, all-IP infra, base, brand, etc
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Thank you
Visit insights.rewheel.fi for more

Rewheel
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Or contact us at rewheel@rewheel.fi / +358 44 203 2339

About Rewheel Rewheel is an independent consultancy specialising in the mobile data transformation. We provide strategic advisory and solutions for mobile operators, their investors and telecoms regulators. Apart from global tier-1 telco groups and many local independent operators our clientele includes the world's most progressive mobile data challengers, one step ahead in the mobile data transformation. Our key competence areas and main engagement points are business planning, pricing and commercial strategy, network and financial data impact analysis, technology strategy, spectrum strategy and valuation as well as strategic network procurement advisory. Rewheel is network vendor independent. Rewheel is headquartered in Helsinki, Finland and our main operating footprint is Europe.
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