TM Forum’s Chief Analyst Mark Newman looks at whether communications service providers (CSPs) are really making money on digital services. This article is the second in a two-part series we are running in advance of our upcoming Digital Transformation Tracker report, which will be published later this month. The previous article focused on CSPs’ plans to develop new digital services.
Only a small number of CSPs are reporting revenue from digital services. Even fewer are reporting profitability because this would require that they allocate a portion of capital expenditure and operational expenditure from their core operations to digital services.
However, there are enough financial results available to create a reasonable picture of the status of digital service revenue today (see graphic below). Analysis of the financials of 18 CSPs produced by Ernst & Young and Delta Partners, indicates that on average operators (in some cases operator groups) are generating 3.8 percent of their revenue from ‘digital’ services.
This comes with some caveats. Not all the operators specifically report ‘digital’ revenues; in some cases, its revenue from value-added services. Japanese operator DoCoMo, for example, reports digital service revenue in its ‘Smart Life’ services portfolio, which comprises content, commerce, payments, lifestyle, enterprise and support services. DoCoMo is forecasting ¥130 million ($1.2 million) in Smart Life revenue for the current financial year which would be equivalent to 11.4 percent of total revenue.
DoCoMo has been investing heavily in building its own third-party value-added services and reselling third-party partner services for the last 20 years. While DoCoMo undoubtedly has lost some market share to digital natives, a large number of its customers still opt for more expensive pricing plans which include access to these services.
Source: Delta Partners and Ernst & Young
What does it mean?
Here are some key points to consider when it comes to digital services revenue:
- Many CSPs are now reporting machine-to-machine (M2M) and/or internet of things (IoT) revenue. In most cases, this comes from selling 2G, 3G and 4G connectivity (most M2M connections are still 2G), although some operators are starting to generate revenue beyond connectivity. We believe that M2M/IoT is equivalent to around 1 percent of total mobile revenues, with best-in-class CSPs such as AT&T, China Mobile, Deutsche Telekom and Vodafone generating in excess of 2 percent of revenues from IoT.
- Operators in emerging markets, many of which still have a large proportion of revenues coming from 2G services, continue to offer traditional value-added services such as ringtones, interactive voice response and information services delivered by SMS or USSD (unstructured supplementary service data).
- A relatively small number of CSPs are expanding aggressively into mobile payments and financial services. French operator group Orange, for example, offers Orange Money services across most of its African footprint. Millicom, an operator in Africa and Latin America, has ambitious targets for its mobile financial services business.
- It is particularly difficult to separate out digital from non-digital services in the enterprise market. This is because many new cloud-based services such as unified communications act as replacements for traditional voice and messaging services.
- Cloud services are already generating significant revenues for CSPs that traditionally have been major players in the enterprise market. It is proving more difficult for mobile operators to build cloud revenue because they have been mostly consumer-centric until now.
- Many CSPs have made significant acquisitions in digital services which, perhaps, creates a slightly distorted picture of the success that they have had expanding into digital services. Telstra, for example, has acquired Ooyala, a video services company. Telenor bought Tapad, a digital marketing agency, and SingTel owns Amobee, a major player in the mobile advertising space. SingTel has built a dedicated business unit called Digital Life around Amobee.
How to measure success?
Rather than trying to build new ‘digital’ lines of business, CSPs are now looking to develop digital services and capabilities that enhance their core business. As such, it will become increasingly difficult in the future to separate out digital revenue from other revenue.
However, where new product teams remain distinct and separate, there will be pressure internally to report separate revenues and profitability – and if these new products are successful, CSPs will be the first to disclose financials. This is most likely to happen in IoT where many CSPs have dedicated product and sales and marketing functions (although it could be argued that over a period of time the IoT business should be fully integrated into an ICT services business).
When assessing the success of digital service initiatives, it may not always be helpful to measure them as a proportion of total revenue. Today CSPs generate $1.4 trillion in revenue. If the average digital services revenue figure of 3.8 percent were to apply across the entire sector, it would they are generating $53.2 billion in revenue from digital services. This is 50 percent more than Facebook’s annual revenue run-rate of $36 billion.