The Fast-forward Flashback of Telcos in the Cloud Business

I have recently made an analysis that shows that the share that the Telecommunications Service providers will be able to access for the Cloud Computing business for the year 2015 will still be substantially below the overall potential (see the figure below).

Indeed that potential business for Telco SPs can be split in four main areas:

- The revenues that those Telco SPs are currently making, approximately a 2% of what could be the potential for 2015. This is based on how the hosting and data center companies are currently performing, the Telco SPs are basing their Cloud Computing business on the purchase of some of those companies. Take the example of Verizon and Terremark, this last company is estimated to do 10% of their current turnover in Cloud services, of some annual 300,000MUSD. This business is based on an initial heavy investment stage, which allows Telco SPs to see benefits realized faster than if they tried to build their infrastructure from scratch (it took three years for Terremark to make a profit), and if they had to go through all the legal and security certifications needed.

- What the Telco SPs are able to obtain from the capitalization of their market shares in the enterprise segments (small and business enterprises, and large enterprises). This is estimated at some 15% of the total Cloud services opportunity. Here, the possibility of the Telco SPs capturing this opportunity is highly dependent on their ability to articulate a meaningful value proposition, differentiated for each type of enterprise segment. Really understanding and outlining the Telco SPs’ strengths over their more traditional communications competitors, will be key.
But Telcos should also be wary of the smallest enterprises, who are very sensitive to pricing, a segment where we are seeing and increasing number of specialized and innovative startups, like EyeOS in Spain, but where the potential is enormous.

- What the Telco SPs could think of scratching from their other Telco SPs competitors. This is estimated in approximately 12% of the total Cloud services opportunity, and is based on capturing part of the enterprise market share of the Telco competitors. Here, differentiation is key again. But it’s another type of differentiation, most likely based on a lean operation in the delivery of the Cloud services, aimed at facilitating a seamless migration from one Telco SP to another, and would require an extra mile. Take the example of Verizon, who last year bought CloudSwitch, a company that helps enterprises migrating their IT infrastructure to a Cloud environment.

- Lastly, 71% of the business potential is addressable by other Cloud service providers who do not come from the Telecommunications industry. These are System Integrators, Software Providers, etc. Partnering here will be key for Telcos, and they should first of all prove their value propositions to those other Cloud service providers. Through these partnerships, Telcos will have access to other sources of revenues. Although the margins of the Telcos in these other sources will be low (e.g. in SaaS opportunities), these other sources are essential for Telcos to increase their market shares.

When specifically talking about the differentiation capabilities of the Telco SPs, Informa Telecoms & Media Cloud Monitor reports that Cloud service differentiation among Telcos remains poor, Telco strengths are underplayed. This consultancy reports that the service offering by the Telcos remains focused on commoditized services, with 122 new services last year, of which 70% are mass-market offers,  in direct competition with Internet on-line companies offering IaaS, or with a heavy low margin SaaS usage. So service differentiation between Telcos then remains poor. Informa T&M also points at the fact that Cloud mobility services aren’t pushed hard enough, which offers even more possibilities for MNOs.

The role of Telcos in the Cloud Computing space is a fast race to build the needed infrastructure with all the necessary permits and certifications, mixed with a more accurate segmentation of the enterprise markets, internally transforming their operation capabilities to offer more sophisticated and leaned services to enterprises, leveraging their more traditional value proposition in the communications industry, and identifying and partnering with key companies.

For Telcos to play the Cloud opportunity, it’s like doing a flashback of their communications infrastructure past in a fast-forward mode.

Regards,
Carlos.

Sony and Ericsson, finally time to review their JV?

We have had rumours in the past that Sony would buy Ericsson’s stake in the mobile phone venture.

The WSJ has recently talked again about that possibility.

The origin of this move should be seen in a will by Sony of providing a more sound marketing strategy, and / or in a will by Ericsson to exit a shrinking business, where the later is seen as having less to do than the former one.

I don’t expect though that this move will help Sony much in increasing their shrinking marketshare, with one of the highest churn rates in the UK.

On one hand, they will not be able to compete against Apple, because the success of Apple is based on the asymmetry that they have created between products (CE) and services (music, …), unless Sony makes a similar move with their gaming business.

And on another hand, it makes little sense for them to compete against Google. Because the costs are high and increasing (royalties for patents paid to Google, cf. Samsung will pay royalties to Microsoft for Android, or Amazon to pay royalties to Microsoft for using Android in the Kindle Fire tablet?), and because there seems to be very little room for product differentiation (see the wars that have been going on between Apple and Samsung in Europe and in Australia).

Even more, Android OEM’s are increasingly wary of continuing the partnership with Google, because of the recent purchase of Motorola’s mobile arm. Mix this with (a) the growing importance of the new OSs created in Asia (e.g. Alibaba, China Mobile), and (b) the fact that RIM is could be acquired by other players, as well as WebOS, both trends can offer other possibilities to the existing Andoid’s OEMs.

The issues about the aparent lack of direction and in branding may be solved somehow, but the breakup of the 50-50 JV may not give the needed competitive edge to Sony.

All this is also perceived by the market, with Sony’s shares having fallen 3.7% on October 7th.

Although the WSJ makes a point in that “the strength of the Japanese yen against the euro is another incentive for Sony to reach a deal now”.

Regards,

Carlos.

Separating the sheep from the goats

I have been many times involved in analyzing how companies were performing.

This is generally done using financial ratios.

Sometimes, in some cases, other factors have to be examined.

E.g. in the case of the Telecommunications industry. Some vendors – ALU, NSN, … — merge or perform alliances. Some other vendors – probably the biggest case having been Nortel Networks – are integrated into others. As to the telecom providers, they buy others in the developing economies (see last year’s overtake of Vivo by Telefonica), and they, just until a few years ago, start some alliances in the mature markets in order to manage parts of what they sense to be increasingly less strategic assets: their networks; e.g. recently the Everything Everywhere JV in the UK.

These moves are important. But to who, and to what extent? The sales managers are obviously impacted because their contacts in their clients’ organizations can gain or lose weight, importance; and the sales guys’ results depends on their contacts, a lot.

When launching a new business, this can matter too. E.g. as the telecom operators try to find synergies with their competitors to manage part of their networks, or even outsource those assets, understanding reorganizations are important to try to understand when or where to expect a surge of potential business for the increasingly service-oriented telecom vendors.

But we need to separate the sheep from the goats. What are the reorganizations that really obey to some business needs, and which ones are fake and hide a loss of course?

The Economist found a historical example in the figure of Mao:

Mao was quite willing to avoid tedious or uncomfortable meetings, particularly when he was likely to be criticised. But maybe that helped him avoid getting bogged down. From the Anti-Rightist Movement of the late 1950s to the Great Leap Forward, a failed agricultural and industrial experiment in the early 1960s, to the Cultural Revolution in the late 1960s, Mao was never short of a plan.

Under Mao, China didn’t drift, it careened. The propellant came from the top. Policies were poor, execution dreadful and leadership misdirected, but each initiative seemed to create a centripetal force, as everyone looked toward Beijing to see how to march forward (or avoid being trampled). The business equivalent of this is restructuring, the broader the better. Perhaps for the struggling executive, this is the single most important lesson: if you can’t do anything right, do a lot. The more you have going on, the longer it will take for its disastrous consequences to become clear. And think very big: for all his flaws, Mao was inspiring.

Lots of examples come to my mind that I would be tempted to align with Mao’s ‘inspiring’ helm. I will not name them. But it would certainly be interesting to benchmark the companies per industry, and per chairman, in order to analyze their leaderships.

Regards,

Carlos.

Apple’s latest announcements impact the markets

The market did not react well to the fact that, at Apple’s latest key note, the company did not present any new device. And Apple fell $5.40 (1.57%) on Monday, to $338.04.

It’s true. But the markets react to short term announcements, more than to long term strategic moves of companies. And despite this, the analysts did like Apple’s latest move into the cloud and social networking.

It’s a move that Google and Amazon have already made somehow, but a different one that cares much more about the end user experience. And one that is bolder towards the content owners. Probably this boldness, along with a real clarification about the needed new relationship to those content owners, had also something to do about Monday’s share decrease.

Still, this move by Apple is in line with the company’s wall gardens approach. An approach that, although it has proved very successful so far, also opens new possibilities for Google, who follows a open strategy. Something that may also have had an impact into Monday’s share evolution.

Another possible explanation to the company share decrease early this week may be that Apple had to finally give up about their plans to integrate the SIM in the iPhone 5, a move that, according to Gigaom, was planned for the Californian company to gain independence from the telecom operators, a move that those operators have reacted very strongly against.

By the way, given the cash management problems of Apple, and given the importance that Apple has given to its relationship with Twitter, I would not be very surprised that Job’s company shows at some point in time some interest in participating in the social networking company.

Enjoy,

Carlos.

Social networks: it’s all about advertising

We believe that the announcements of Chrome OS, and of Wave, and of Fast Flip, do not consist of mere launches part of a product roadmap, but a strategic effort to control the final user in an industry that is increasingly concentrated and where rivalry is still to be fully defined.

According to a Wharton professor, “the fact is that Google doesn’t have any competitor because it doesn’t need to generate new revenues in new markets. Apple has Google as a competitor, but Google is not threatened by Apple because it doesn’t offer any search function. Everything is based on searches.” We suppose that by “new markets” this professor makes reference to Google’s incursions to i.e. the Operating Systems (OS) business.

And yes, it’s true, advertising is very much based on searches. And, if we don’t count on Apple, the name of Microsoft evidently pops up as Google’s immediate rival. But there are other possible and threatening competitors in the Conversational Media business, e.g. social networks and blogs.

It’s evident that both Microsoft and Yahoo! share boat in the search and advertising business, the two aspects that made up the recent partnership that those two companies recently announced: Microsoft has reached an agreement with Yahoo! valid for 10 years, to share their technologies for Internet searching, hence decreasing their development costs, and to share the revenues coming from the selling of advertising in Yahoo!’s portal (refer to: http://www.economist.com/businessfinance/displaystory.cfm?story_id=14140641).

And it’s in that framework where Yahoo!’s buying of Maktoob.com makes sense, along with the partnership that Microsoft and Twitter have announced to make the later’s twits accessible from the former’s search engine, Bing.

And this is where we find the first courtship between search engines and social networks.

So, let’s have a quick look at these social networks world as a source of possible competitors of Google in the field of searches, and hence in online advertising: indeed, social networks, and more precisely what is known as Conversational Media, (social networks and blogs), threaten to seriously disrupt the Internet search market.

And that is the reason why it can be an error to exclusively focus on Microsoft (with Yahoo!) as the only competitor to Google.

On one hand, Facebook is facing serious critics to its business (refer to: “Facebook Deal Renews Debate on Social Networks’ Value”, Bloomberg); let us not forget that Facebook makes revenue out of online advertising (refer to: “Facebook Says Customers of Online Ad System More Than Triple”, Bloomberg; also, Facebook has also recently launched a type of advertising that allows companies to target potential customers by letting users click on an advert to become that company’s fan).

And let’s not forget that Facebook already acquired FriendFeed, a social network, in an operation where Facebook has acquired not only new content but also new users to its own social network, where the search for information about users is becoming even more valuable.

That is the reason why some people already point at Facebook as one of the main Google competitors (refer to: “Thompson Sees Facebook Trying to Build `Second Internet’”, Bloomberg). The question is: will Facebook start to be used as a search engine on its own, or will it partner with one of the big search companies (e.g. Google or Microsoft) to make its users’ information searchable, as Twitter has already done with Microsoft.

And let’s not forget neither about Nokia, who “is fundamentally changing its business model as it faces competence from the PC vendors and from the Internet software companies”, according to Nokia’s CEO Olli-Pekka Kallasvuo, through Nokia-Ovi.

Indeed, it’s in this business model change framework where Nokia Ovi has made several companies’ purchases. Like Cellity this past August, to be able to collect and store its users’ contact details, something that could allow it to build its own social network through its commercialized services; or the acquisition of Enpocket in 2007, of Navteq in 2008, and now the mobile advertising company Acuity. And Nokia Ovi is leveraging its actions with partnerships with the mobile communications operators, something that grants them access to an immense amount of user information.

If both Google and Microsoft make up almost all the online advertising market, and if Google is leaving its written press (Google discontinued its Google Print Ads business back in January 2009) and radio (Dmarc Broadcasting was shut off in February 2009) advertising business while it diversifies to TV-based advertising, Nokia Ovi is moving to a terrain – mobile-based advertising -, that is expected to have the highest growth from now to year 2011, with a CAGR between 40% and 79% (cf. the following figure).

This way, we have a plethora of relevant players in the highest growing areas (cf. the following figure), who are competing in a market (non traditional advertising), that is in a fully convergent mode, something that foretells a higher definition and concentration of the sector where Google competes. Social networks provide “the most powerful form of advertising there is”, claims Leon Hill, uSocial’s (an Australian online-marketing company) boss.

And all this, in an environment where margins are decreasing, with a y-o-y growth of online advertising that may diminish by 10% worldwide this year, below past year’s 22% growth, according to ZenithOptimedia.

What will be the result of this higher concentration? Will a new Microsoft arise, or will the market be the winner through a wider diversification of companies?

Some people see Google as the new Microsoft; is this really so?

On one hand, Google tries to calm down the final user: according to Enrique Dans – a professor of the Instituto de Empresa business school -, “a team of Google employees, called “Data Liberation Front”, presents Dataliberation.org, a site dedicated to getting together all procedures that users have to follow to import and export their data from Google products to its competitors’, o viceversa”.

This way, and according to Brian Fitzpatrick, founder of the initiative, the idea is that “users chose our products voluntarily because of the high level of innovation of those products rather than because users feel to be trapped and have no other choice. We can define it as a long term strategy so that only people who want to use our products use them, instead of making it difficult to those who want to leave.”

This way, Google seems to want us to give away our fears about he possible control of our data, moving away from the control that Microsoft exerted through our desktop.

But what is certainly true is that Google is dominating our day to day live through our behavior (i.e. modifying our cultural behavior): just have a look at the increasingly importance Google is playing on our lives, with real debates about the usage of searches in areas like education or entertainment i.e. with the famous TV quizz shows). Or follow up Google’s multiple tries to concentrate the presentation of the information that we users consult in our daily lives (with Google News first, and now with Google Fast Flip), or to control our data management (with Google Wave).

It certainly makes sense for all the information about us to be amply available in the searches where to continue to base the advertising business on.

This way, some sources, i.e. the El País newspaper (“Tu vida digital viaja del disco duro a la red”, August 2009), compare Google to “the big mouse trap of our intimacy”.

What is more dangerous?

On the other hand, Microsoft may not be Google’s most threatening competitor, but Facebook or Nokia Ovi may.

Google doesn’t pretend to compete in the software market, but to control ‘its’ Internet, in the same way in which i.e. Facebook looks to be trying to build up its ‘own’ internet over the worldwide Internet (cf. the Bloomberg interview to Nick Thompson of Wired Magazine http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aF4PKNKgcqok).

Indeed, this seems to be the way that Facebook is following down, with the buying of Parakey first and of FriendFeed more recently (refer to: “Google Engineers Trade Gmail for Startup Bought by Facebook”, Bloomberg, August 2009).

Therefore the announcements of Chrome OS, and of Wave, and of Fast Flip, do not consist of mere launches part of a product roadmap, but a strategic effort to control the final user in an industry that is increasingly concentrated and where rivalry is still to be fully defined.

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Google’s OS market adventure

Google’s announcement of Chrome OS is strategic, not merely yet another product launch, in a situation where Microsoft seems much weaker: indeed, Microsoft has to defend its OS PC marketshare of 88.2% as well as its incursion into the mobile space, with Google having its source of revenue in a totally different business.

The announcement that Google made about the Chrome OS in their blog (http://googleblog.blogspot.com/2009/07/introducing-google-chrome-os.html) read: “Chrome OS is a new project, different from Android. Android was designed from the beginning to run on multiple devices, from telephones to set-top boxes and netbooks. Google Chrome OS is being designed for people who decide to spend most of their time connected to the Web, from small netbooks to desktops. Even if there are areas of overlap between Chrome OS and Android, we believe that the liberty to chose the OS will drive innovation in benefit of everybody, including Google”.

This vision is not entirely clear to everybody: third party developers have already adapted Android on netbooks (devices that were designed to always be connected to the Internet), and even Google has facilitated agreements with chip vendors to support Android on mobile PCs.

Indeed, i.e. two German engineers, Matthaus Krzykowski and Daniel Hartmann, decided to install Android into a Asus Eee PC 1000H netbook (http://blogs.computerworld.com/the_google_linux_desktop_has_arrived). And Qualcomm, member of the Open Handset Alliance, has already installed Android on their Snapdragon chipset (http://gigaom.com/2009/01/08/qualcomm-runs-android-on-netbook-chip/) for mobile terminals (like the G1) and for Mobile Internet Devices (MID).

So the difference between Android and Chrome OS is not that clear as first thought, and there is a degree of confusion in the industry; certainly given the fact that Google does not seem to want to intentionally cannibalize its Android (“Google Attempts Smart Phone Attack With Android System”, Bloomberg, 31Jul).

So why did Google decide to launch Chrome OS, the question is specially relevant because Google already has an OS (Android for mobile terminals), and because this last one started to be adopted by netbook vendors , which is precisely the market where Chrome OS is being positioned.

And we find the first explanation to clear out that apparent confusion in the possibilities offered by the markets, specially the market of netbooks within the one of   laptops: even if the netbooks‘ market continues to be small when compared to the one of the mobile terminals (including the smartphones) and to the one of the more traditional laptops, it is the one with the highest growth, with a forecasted CAGR between 2007 and 2011 of 145%, compared with a 93% for the 3.5G mobile terminals, a 32% for the 3G terminals, and a 24% for the traditional laptops (cf. next figure).

We find the second explanation to clear out the apparent confusion between Android and Chrome OS in the business opportunity derived from the higher concentration of the laptops’ OS market (netbooks included) versus the higher fragmentation of the smartphones OS vendors. Indeed the regulators as well as the final users are positioning themselves increasingly against the main vendor: Microsoft (cf. next figure), giving way to a number of positioning advantages.

Lastly comes the fact that, while Android only supports ARM chipsets, Chrome OS will run on architectures based on both ARM and x86.

And, in fact, taking into account that 98% of the smartphones‘ market is composed of devices based on the ARM architecture, it’s no surprise to find out that Android has so far only supported that type of chipsets.

But if we look at the netbooks business, 90% of the market is based on x86 (Intel Atom), thus explaining why Google is thinking in making Chrome OS run on x86-based devices; notwithstanding, 55% of the netbooks‘ market is expected to be dominated by 2012 by ARM-based devices, and this explains why Chrome OS has to still support the ARM architecture (cf. next figure).

So the difference between Android and Chrome OS is now more clear. And what can surely be inferred from this analysis is that Google’s announcement of Chrome OS is strategic, not merely yet another product launch, in a situation where Microsoft seems much weaker: indeed, Microsoft has to defend its OS PC marketshare of 88.2% as well as its incursion into the mobile space, with Google having its source of revenue in a totally different business.

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