2017 IBM Measuring Business Performance in a New Hyper-connected Data-driven World

1 IBM Corporation Measuring Business Performance in a New, Hyper-Connected, Data-driven World Authors: Ankur Pandey Kiran Kumar TVT Chari IBM Corporation TABLE OF CONTENTS Digital disruption is reshaping the industry Industry in a state of flux – a ‘new’ world awaits! 18 Industry trends and impact to the business metrics 31 CSPs need to look beyond ARPU based metrics 43 New Business Performance Measurement Framework 52 Summary IBM Corporation EXECUTIVE SUMMARY The rise of mobile along with the explosion of data traffic has created questions about how Communication Service Providers (CSPs) allocate resources and where they look for growth With traditional revenue streams declining in most markets, network operators and service providers need answers now Responding to these trends, we embarked on a mission to review the state of the global communications industry Gathering information from a number of trusted sources, our research includes interviews with CEOs, CxOs and thought leaders from across the telecom industry in Asia Pacific It also consolidates insights from the 2016 IBM Global Telecom Survey We focused on the key shifts that have triggered a need to reassess existing performance metrics for Communications Service Providers (CSPs), and also reviewed the core drivers that have led to the explosion of mobile data and the rise of video as major components of mobile data consumption It’s now incontrovertible: the consequences of digital transformation are enormous In terms of voice and text services alone, it is estimated that the shift to overthe-top (OTT) messaging services and social media will cost network operators nearly $104 billion this year1 – the equivalent of up to 12% of their service revenues By 2021, 60% of global mobile phone users will own a smartphone2, while the number of connected devices per person is set to grow to 2.4 This will cause the amount of data to grow by 49% over the next years, resulting in 133 exabytes of data consumption per month The rise of the OTT ecosystem and the data explosion is also creating uncertainty CSPs are now forced to search for newer sources of revenue, while investments in digitisation, business simplification and customer loyalty have yet to yield results Compounding these problems is the imperative to sink money into infrastructure Cash flows Over-the-top (OTT) messaging services and social media will cost network operators nearly $104 billion this year1 – the equivalent of up to 12% of their service revenues By 2021, 60% of global mobile phone users will own a smartphone2, while the number of connected devices per person is set to grow to 2.4 IBM Corporation are increasingly under pressure, leading some CSPs to borrow money to pay dividends This does not paint a pretty picture Yet there seems to be some light at the end of the tunnel Based on IBM’s CXO Insight’s gathered from interviews with select CSP Executives in ASEAN, Content and Media services, Mobile financial services, Mobile payments, and IOT services for retail segments are four key projected areas for revenue growth While KDDI, NTTDOCOMO, and SK telecom offer real case-studies, the Verizon/Yahoo deal presents a bold response towards tackling the challenges that CSPs face today In this new reality, the next round of growth for CSPs will not come from their core business, but from a stream of niche digital businesses that will require continued investments to foster disruptive innovation To nurture this transition, CSPs must reconsider the industry metrics used to currently measure performance Other ‘newer’ metrics may be better able to respond to the rapidly changing nature of business, and the rise of a non-core business model We reveal that using the right set of metrics will empower CSPs to measure not just operations and financial performance, but customer experience and digital innovation as well And in fact, 85% of CSP Executives we surveyed agree — measuring the experience across the customer journey is the right approach for the evaluation of new services In the paper, we focus on metrics that will help CSP measure new business and operational enablers that will define success for the CSPs in 2020, as well as help measure the performance of long-tailed digital business models Based on IBM’s survey insights gathered from interviews with select CSP Executives, digital self-service empowerment, data monetization, and cognitive analytics will be the core differentiators that will help CSPs to remain competitive in 2020 We recommend a multi-disciplinary approach to tackle this conundrum Our approach adopts a combination of “value-driver” and “customer journey” based intervention to identify Key Performance Indicators across all customer experiences, service delivery, financial, and operational domains for the next-generation Digital Service Providers (DSPs) IBM Corporation DIGITAL DISRUPTION IS RESHAPING THE INDUSTRY A lot has been written about how digital disruption is impacting operating models of companies across the globe The digital economy creates challenges and opportunities for Communications Service Providers (CSPs) as they seek to become Digital Service Providers (DSPs) Certain key trends that have shaped this disruption include: global uptake of smartphones, adoption of multiple devices (with large screens and a high display resolution3), and the rise of digital channels as the preferred medium for commerce The appeal of the digital channel lies greatly in its simplicity, ease of use and affordability These dramatic changes have led to an explosion of data traffic, while traditional streams of revenues have plateaued and/or reduced in many matured markets The rise of the OTT ecosystem has also played a leading role in the metamorphosis of the CSP revenue streams As stated by Juniper Research1, consumers’ shift from operator voice and text services to OTT messaging services and social media will cost network operators nearly $104 billion this year1 — a sum that is equivalent to 12% of their service revenues Furthermore, the rise of data has also pushed CSPs to evolve and innovate while looking for newer sources of revenues in an increasingly connected world In parallel, infrastructure investments have continued unabated, painting an unappealing picture Henceforth, every move is significantly reactive Certain CSPs have jumped on the bandwagon in an attempt to be proactive in driving their future, but the jury is still out There is a prevalent need to define new measures and focus  attention on certain other metrics of measurement that consider the industry evolution to “correctly” help track the ‘CSP’s performance in the data world’ The obvious changes include data becoming the primary driver of growth for operator revenue and the increasing popularity of Over-the-top (OTT) services Another vital trend related to future revenue streams, though not apparent yet, is the extreme growth in embedded wireless3 Each of these embedded wireless devices come with different wireless revenue plans and pricing models representing a different business model between the user and the CSP This growth is bound to become super-charged with the advent of the eSIM early last year in United Kingdom and Switzerland IBM Corporation In this environment, the traditional concepts of Average Revenue Per User (ARPU), Minutes of Usage (MOU) and Earnings Before Interest, Depreciation, and Amortization (EBITDA) start to lose their relevance as they describe the facets of business that are on its way to being superseded by a completely different business model The relationship with users has also evolved to what has fast become a multifaceted interaction between the user and the CSP in a multi-channel scenario Users also expect the CSP to be fast, nimble, and smart; they refuse to tolerate any deterioration of user experience while moving from the OTT world to the CSP world It is imperative that operators stay on the top of their game and look at the ‘right’ set of KPIs that will act as Early Warning and Control Systems (EWACS) in this competitive environment The emphasis here is upon leading indicators as opposed to composite or lagging indicators, although the significance of the latter cannot be undermined In addition, the industry changes that are driving this review of performance metrics are: ƒƒ With markets maturing at a rapic pace, Communications Service Providers (CSPs) need to meet the high expectations of more empowered – and less loyal – subscribers Key takeaway: Subscriber retention is going to save the CSP a lot of money ƒƒ CSPs are also making large investments in 4G and 5G network capabilities particularly as the explosive growth in data-intensive applications increases traffic Key takeaway: CSPs need to this in a manner that’s profitable ƒƒ There will be a lot of innovative services driven by network effects based on a volume based realization model (long-tailed) that will require CSPs to innovate and come out of their “Telco” shell. Key takeaway: Innovation demands investments and engenders potential risks/rewards In summary, CSPs must contend with a very different market in the near future as they navigate a shifting industry landscape This ‘new world’ perspective requires a change: the CSPs must examine users more holistically and incorporate their disparate ways of interaction with the CSP as opposed to perceiving a user as a single discrete relationship In the next few pages, we dwell on the industry transition, key trends, and new metrics that aid in further assessing the situation, followed by our recommended framework that CSPs can adopt as a starting point in this journey towards re-engineering their existing set of KPIs IBM Corporation INDUSTRY IN A STATE OF FLUX — A ‘NEW’ WORLD AWAITS! The past decade has witnessed profound changes in the Telecommunications industry, transforming the very nature of business This transition is far from it’s completion; however, we acknowledge that CSPs are moving into a data driven environment — one where data as a source of revenue will be dominant This data revolution has been anticipated for some time now, driven by the uptake of smartphones, consumer preferences for using multiple devices, and the rise of digital channel as the preferred medium for commerce ƒƒ Uptake of Smartphones — While the shift from feature-phones to smartphones is occurring in most markets, the rate at which it is happening differs from region to region According to eMarketer2, roughly half (50%) of mobile phone users across the globe who use a smartphone by 2016 will grow up to 60% by 2021 North America is the worldwide leader in smartphone user adoption with 79% of mobile phone users owning smartphones in 2016; Western Europe is second at 72% By 2020, the share of smartphone users will reach 87% and 83% of mobile phone users in these regions respectively (See Exhibit 1) Samsung — powered by Android — is  globally the top smartphone manufacturer, though Apple controls a significant share of the market in wealthy, digitally developed countries Chinese smartphone brands have also made a  strong headway, especially in Southeast Asia Uptake of Smartphones is one of the  key drivers of the digital disruption CSPs have traditionally subsidized the purchase of mobile phones to drive adoption There is an urge to move away from this trend, though still common in certain markets In Asia Pacific, the Middle East and Africa, there has been rapid growth in smartphone subscriptions with customers exchanging their basic phones for smartphones This is mainly due to increasing availability of low-cost smartphones CSPs are now encouraging device upgrade programs that help users afford newer devices on convenient lease plans through which they cultivate a sense of customer loyalty that helps them to retain their users for longer periods IBM Corporation Exhibit 1: Global Uptake of Smartphones (% of the mobile phone users) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0.0 2015 2016 2017 2018 2019 2020 World Average North America Western Europe Central & Eastern Europe Latin America Asia Pacific Middle East & N.Africa Sub-Saharan Africa Source: eMarketer 2016 ƒƒ Multi-device ownership: Users in mature markets are also contributing to the growth in connections via the adoption of a 2nd and a 3rd device as a part of the overall home portfolio This is a key trend as proliferation of multi-device portfolios have a multiplying effect on data consumption (see Exhibit 2) In a research conducted by Cisco3, the amount of data consumed by a tablet is approximately times the data consumed by a smartphone, and the data consumed by a tablet is set to grow by 2.7 times by 2020 IBM Corporation Exhibit 2: Device-Wise Data Consumption Evolution Trend (in MB Per Month) 7079 5232 4406 2576 670 116 23 Non Smartphone 153 M2M Module 1X 929 558 164 2679 Wearable Device Smartphone Tablet PC 41 X 113 X 118 X 7X 7X 2015 2020 Source: Cisco VNI report, 2017 ƒƒ Globally, each internet user has an average portfolio of 2.0 devices which is set to grow to 2.4 by the end of 2020 (See Exhibit 3) This average number, however, is misleading as there is a vast variation in this figure for different markets (developed/emerging) as can be seen in multi-device portfolios spread across countries On one hand, The Netherlands has the highest multi-devices per user at 3.6, while on the other, the figure for Brazil is at 1.1 This number is highly dependent on country-related factors, such as quality of internet infrastructure, affordability of wireless internet services, maturity of content offerings in the market, and maturity of the Internet of things (IoT) offerings Exhibit 3: Global Connected Multi-Device Uptake (in devices per user, Bn Users/Connections) Devices per user, Users, and Connections Growth 20 18 16 14 1.9 2.0 2.1 2.2 12 10 7.9 08 9.2 8.5 10.0 2.3 3.0 2.4 3 2.5 3.6 10.7 11.6 06 04 4 2.0 Netherlands 3.1 England 1.5 3.1 Australia 1.0 Canada 2.9 USA 0.5 2.4 02 Connect Devices / Person - Select Countries 2015 2016 Internet Users 2017 2018 Global Connections Source: eMarketer, Dazeinfo, Statista, IBM Analysis 2019 2020 0.0 Multi-devices per user Germany 1.9 China 1.1 Brazil 10 ƒƒ IBM Corporation Digital as a foundational channel: Over the years, the adoption of digital as a channel has obviously been growing as a result of increasing internet penetration According to eMarketer2, the internet user penetration will rise to approximately 53% of the population in 2019 from the current figure of 47% in 2016, at a compounded annual growth rate of approximately 6.3% The access to internet, and the growth in smartphones has also contributed to the adoption of digital commerce (see Exhibit 4) Total digital buyers globally are predicted to grow at a rate of 9.5% annually to reach a figure of 2.3 billion by 2019 from the existing figure of 1.8 billion — that is, to approximately 31% of the total world population Exhibit 4: Global Digital Users and Buyers Growth (in Billions, % of Population) 7.5 7.4 7.3 7.2 7.2 7.5 53% 51% 49% 47% 44% CAGR 1.0% 41% 4.0 3.0 3.0 4.0 3.0 25% 23% 4.0 27% 4.0 1.7 1.5 3.6% 6.3% 2.3 2.2 2.0 31% 29% 20% 1.8 5.0 5.0 5.0 4.0 4.0 9.5% 2014 Digital Buyers 2015 2016 Internet Users % of internet users of population 2017 2018 Mobile Phone Users 2019 Population % of digital buyers of population Source: eMarketer 2016, DazeInfo.com; IBM Analysis This trend has manifested itself on the CSP side of business as well as digital sales amount to almost 28% of the total sales for Telstra Australia (See Exhibit 5) This trend augurs well for the future of the CSP as this would not only help in reducing sales costs, but more importantly open up avenues for CSPs to gain the trust of users online and engage them digitally ƒƒ OTT players as “Customer Experience” disruptors: It is no secret that Over-The-Top (OTT) players have redefined the very basis of “user experience” OTT has become synonymous to “digital firsts” and we believe the following key tenets that have become defining principles for any future Digital Service Provider (DSP): —— Re-engineer the experience through design-thinking:  The best mobile experiences don’t just digitize an existing process – they re-imagine customer experience and delight the user ... Corporation AT&T API Platform and Connected car initiatives Case Study AT&T’s APIs are available as web services, consisting of billing, sponsored data, location, In- app messaging and payments... with many upgrading from lower priced 2GB data plans5 Overall drop in data traffic: T-Mobile claims Binge On has been a success, stating in its 2015/2016 financial reporting that data traffic... connected world In parallel, infrastructure investments have continued unabated, painting an unappealing picture Henceforth, every move is significantly reactive Certain CSPs have jumped on the bandwagon