Generation Next. Five pathways to TMT growth in emerging markets.

Transcription

1 Generation Next Five pathways to TMT growth in emerging markets

2 2 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Contents 3 Contents Generation Next: Five pathways to TMT growth in emerging markets 1 Introduction About the report This report is for TMT leaders and investors, their trusted advisers, in-house counsel and anyone doing business with TMT and related companies to help navigate pathways to TMT growth in emerging markets. The Generation Next study is based on Linklaters specialist legal and TMT insights, Ovum s market and forecast data and qualitative interviews with business leaders from 30 multi-billion dollar TMT power players, including mobile network operators, technology vendors, content providers and banks. 2 Key trends 2.1 Next generation broadband 2.2 Content and applications 2.3 Mobile money 2.4 The Cloud 2.5 Mobile health 3 Conclusion

3 4 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Key trends 5 Generation Next: Five pathways to TMT growth in emerging markets This report highlights five routes to growth in emerging markets TMT players can t afford to ignore in their search for the next billion consumers, the obstacles they may face along the way and the countries where we believe most of the growth will take place. The emerging countries featured in this report are: Brazil, Russia,,, Indonesia, Malaysia, Mexico, South Africa, Nigeria and Kenya. Content and applications 84% increase in content and applications revenue in emerging markets $30bn forecast revenue $16.3bn revenue Obstacles Licensing structures, political uncertainty, local infrastructure, skills Mobile VAS revenue Mobile music revenue represents $1bn existing revenue represents $1bn forecast revenue growth Next generation broadband 174% increase in broadband connections in emerging markets Mobile health $10bn existing revenue (2012) $10bn forecast revenue growth (2017) $8.8bn forecast revenue (2017) NEXT BILLION NEXT BILLION Mobile gaming revenue Obstacles Obstacles, piracy, privacy rights Connectivity, interoperability, infrastructure, IP rights protection, operational risks, censorship 184% increase in mobile health revenue in emerging markets $3.1bn revenue (2012) Obstacles Mobile penetration, literacy levels, affordability, regulatory framework, bureaucracy, taxation Obstacles Operational execution, restrictive regulation, complex taxation, service quality, interoperability The Cloud 382% $10.4bn forecast revenue increase in Cloud ICT service spend in emerging markets $2.2bn revenue Mobile money predicted increase in mobile money transactions by $858m revenue 3376% $29.8bn 2017 forecast revenue

4 6 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Introduction 7 Introduction Emerging markets present a unique set of challenges which defy the rules of developed market business models. Emerging markets represent the greatest revenue opportunity for a telecoms, media and technology (TMT) industry facing stagnant revenue growth, market saturation and declining profitability, a far cry from the double-digit growth which companies and their investors had become accustomed to. Today s TMT power players are shifting their focus to the promise of high growth offered by emerging economies. But with this great opportunity comes great risk. Having connected the next billion consumers with the low hanging fruit of voice and SMS services, the rules of the game for TMT players in emerging markets are changing fast. Emerging markets present a new set of challenges, as companies face a need for new business models. Winners and losers will be determined by their agility in overcoming challenges of geography and technology, but more importantly by how they remake their organisations and ways of working and partnering to meet the demands of this radically different landscape. The TMT markets in the emerging economies of Africa, Asia, Eastern Europe, the Middle East and Latin America have changed beyond recognition in the last decade. The growth of mobile networks and services in particular has enabled established global players such as Vodafone and Orange to enter new markets while also creating opportunities for new regional powerhouses such as Airtel, América Móvil and MTN to emerge. In the process, TMT players have transformed the way people communicate, work, live and play in these rapidly changing economies. As the initial land grab for new connections begins to subside, traditional forms of TMT revenue growth are beginning to slow down in these markets, competition is increasing, tariffs for basic voice and SMS services are declining, and margins are beginning to come under pressure. These factors pose a number of fundamental questions for TMT leaders, namely: Where geographically will future growth come from and how can companies localise effectively to capture it? What are the product and service segments that will drive profitable growth? What strategies and business models should TMT players adopt to tap into these growth opportunities? How can companies align effectively with diverse government TMT strategies and navigate complex regulatory frameworks? And what are the most significant risk factors associated with these opportunities? This report is for TMT leaders and investors, their trusted advisers, in-house counsel and anyone doing business with TMT and related companies to help navigate pathways to TMT growth in emerging markets. We have combined Linklaters specialist TMT insights, Ovum s market and forecast data, and qualitative interviews with business leaders from emerging market TMT power players to forecast market growth, identify key go-to-market strategies and signpost the critical success factors that will shape the future of TMT in emerging markets. We examine in detail five big bets for TMT players in emerging markets and their implications for the future of the industry: 1. Next generation broadband 2. Content and applications 3. Mobile money 4. The Cloud 5. Mobile health Our report concludes with an examination of five critical success factors for TMT players in emerging markets. We hope you enjoy our report, which can be reviewed as a whole or by diving into the five sections described above. This study is part of Linklaters TMT Sector Programme. If you d like to find out more, please get in touch. Roger Barron and Julian Cunningham-Day Telecommunications, Media and Technology Global Sector Co-leaders TMT players have transformed the way people communicate, work, live and play in these rapidly changing economies. For an interactive version of this report go to: tmtgenerationnext.com

5 8 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Next generation broadband 9 Next generation broadband: getting on the broad-bandwagon $193bn Next generation broadband revenues from emerging markets will double to $193bn by Figure 1: Next generation broadband in emerging markets: TMT market growth forecast Country focus: 0 Broadband presents the greatest TMT revenue growth opportunity in emerging markets for the next five years. Demand for bigger-capacity Internet connections in order to attain faster speeds and richer data services, plus the increasing availability of lowercost, smarter devices, are leading to double-digit broadband growth in both connections and revenue. Increased domestic and international cable capacity and more sophisticated wireless networks will provide rapid, cost-effective broadband network coverage for billions of users for the first time, and will act as the innovation platform for a multitude of content and applications services. Next generation broadband (NGB) projects are widely supported by governments in emerging markets which acknowledge that their citizens and businesses need access to high-speed broadband services in order to be economically competitive in global markets. However, TMT companies will need to align their strategies with each local government broadband policy in order to benefit from the incentives and resources made available, as well as to ensure that their supply of new network infrastructure tracks local demand for Internet connections. This will help ensure that shareholders achieve an appropriate return on their investment. Introduction The market for communications services is evolving rapidly across emerging markets. Larger, higher-definition screens, faster processing power and the declining price of mobile devices are raising consumer awareness and appetite for content, data and social networking services. This is creating a surge in demand for the faster broadband and data connectivity required to make the experience of these services truly compelling. Broadband infrastructure and Internet access are also critical for economic development, with much of an emerging nation s future competitiveness reliant on the robustness of its technology infrastructure, a factor which can be magnified in countries where technology can offset some of the challenges of poor physical and transport infrastructure. Indeed, the International Telecommunication Union 2012 report suggests that a 10% growth in broadband penetration can yield about 1% incremental growth in GDP. As a result, many governments are actively promoting policies to boost broadband penetration, which in many cases is accelerating market development, but this may also distort the competitive landscape. For example, the Russian government s decision to award its 4G spectrum on a fee-free basis, but exclusively to domestic players, has forced European player Tele2 to exit the market. While the broadband opportunity for TMT players in emerging markets is significant, tapping into it profitably will pose considerable challenges for service providers and their vendors, who will need to scale up their broadband access services with the right local mix of technologies, commercial packages and partners in order to maximise adoption Broadband connections in 2012 (bn) Forecast broadband connections in 2017 (bn) Broadband revenues in 2012 ($bn) Forecast broadband revenues in 2017 ($bn) Market size and growth The opportunity presented by new broadband infrastructure is unsurprisingly the number one focus area for most telecoms operators and equipment vendors who participated in this study. As a strategy director of a leading mobile network operator told us: Data access is the key strategic growth area for us. Indeed, emerging market broadband connections will grow from 1.3 billion in 2012 to 3.7 billion by the end of 2017, a sizeable 22% compounded annual growth rate (CAGR), while total retail revenues for broadband services are set to grow to $193bn over the same period, as outlined in Figure 1. The pent-up demand for broadband services in emerging markets is a reflection of the under-development of the market and the strong desire for Internet connectivity by their populations. While connection growth will outstrip revenue growth as the revenue per customer is generally lower in these markets, the broadband revenue opportunity is still immense due to the sheer scale of the growth. Broadband in In 2012, overtook the US as the country with the most broadband connections in the world. therefore presents by far the biggest broadband opportunity in the emerging markets. As a senior leader from a leading global vendor told us: Opportunities abound in and we expect the country to be our key growth driver in the next months. By 2017, will have close to 900 million fixed and mobile broadband connections, with almost three-quarters of these over mobile (3G or 4G) broadband. However, the unique nature of the Chinese telecoms market means this broadband opportunity is only open to a few select players. The market is mainly dominated by the three government-owned domestic players Mobile, Unicom and Telecom whose activities are expected to align with government plans for the country s broadband future. The 2008 restructuring of the industry has further entrenched the position of these three players, albeit while making them more competitive against each other. For example, although Mobile remains a behemoth in the mobile market, controlling about 65% of the market in 2012, its fixed division ( Tietong) has not dented the dominance of Unicom and Telecom, which controlled more than 90% of the retail fixed broadband market in Accordingly, jostling for market share among the three state-owned giants will dominate the competitive landscape over the next five years. The key to the future success of these domestic players will be their ability to integrate and coordinate their mobile and fixed broadband roll-out plans. This will require the alignment of LTE and fibre plans and the development of partnerships to address distinct opportunities in regional markets and in the enterprise space. Both of s two major domestic equipment vendors Huawei and ZTE have benefitted from the boom in the market and have solutions to cater for the integrated approach of the telecoms operators. But there are also opportunities for foreign equipment-makers to grab a slice of the market in the country. Despite opportunities in the market, uncertainties remain, especially about the evolution of the 4G (LTE) landscape. Two major concerns are relevant here. First, the future policy approach of the national telecommunications authority in relation to LTE licence and spectrum auctions is unclear. Secondly, as with the Chinese 3G variant (TD-SCDMA), there are concerns about the technical maturity of the TDD-based LTE technology that is favoured by, but which has little adoption elsewhere. Industry executives expect the TDD-LTE device ecosystem to be ready by but worry that they may struggle to support the commercial pickup of LTE in the market.

6 10 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Next generation broadband 11 Next generation broadband: getting on the broad-bandwagon Table 1: Risk forecast for foreign investors Next generation broadband: top five emerging markets Market Key risks Risk outline Risk forecast Indonesia Brazil Russia Source: Ovum/Linklaters. Political Finance Tax Infrastructure Skills Economic Infrastructure Skills Economic Finance Infrastructure Skills Finance Skills : Uncertainties over licensing of LTE spectrum and the mandate forcing some players to accept the locally-supported TD-LTE standard could derail NGB developments in the next 24 months. Political: Government intervention in the telecoms sector is common and access for international players is very restricted. Finance: The pegging of the yuan necessitates more complex financing structures for inbound/outbound Chinese investment. : The regional licensing structure, coupled with the recent spectrum licence scandals and threats of widespread regulatory reform provide significant concerns for potential investors. Tax: The government s attempts to extract significant taxes out of Vodafone have concerned potential investors. Infrastructure: remains plagued by infrastructure problems, especially in the transportation and energy sectors. Skills: recognises its skills gap in the industry, especially the manufacturing of telecoms equipment. : The government is the largest shareholder of the market leader, potentially leading to concerns about the independence of the regulator. Economic: Average monthly revenue per user for mobile telecoms services is very low (below $3), giving very little cushion to telecoms players in a downturn. Infrastructure: Indonesia s multitude of islands poses a gigantic challenge to transportation and logistics infrastructure in the country. Skills: Indonesia faces a skills shortage as it is failing to train enough technical graduates. Economic: Since 2008, lax fiscal targets, growing public debt, rising inflation and government intervention in investment decisions have become major concerns for investors in Brazil. Finance: Fluctuations in exchange rates and taxes on capital inflows and foreign products may constrain international TMT investment. Infrastructure: The forthcoming World Cup and Olympics should improve Brazil s infrastructure, but the level of investment is leading to civil unrest. This may impact the national NGB roll-out. Skills: The lack of a skilled and globally mobile workforce fluent in Portuguese is a source of concern. : The lack of effective separation between executive and regulator has raised concerns about politically motivated decisions, such as recent Russian-only spectrum auctions. Finance: Reliance on commodities prices and fluctuations in exchange rates represent a major risk for players in the market requiring finance. Skills: Continued emigration of skilled personnel and decline in the overall population pose a concern for recruiting skilled staff. Rainy High risk Rainy High risk Active network sharing provides great opportunities to increase costefficiencies and minimise the cost of future network expansion and upgrades. However, operators need to consider the robustness of their partner s infrastructure and put in place a framework with appropriate service levels and a well thought-out exit strategy. Julian Cunningham-Day Telecommunications, Media and Technology Global Sector Co-leader Mobile broadband will be the most effective and affordable means of providing Internet access across many emerging markets. In geographies where there is no fixed access infrastructure in place, it is usually not economical to build one now. For many low income, low population areas, mobile is the only economical solution. In places like Myanmar, which are just opening up their telecoms markets, the new entrants are well positioned to build a next generation broadband mobile network from the start, in addition to meeting the huge demand for voice services. As a result, 3.2 billion connections, or 87% of all emerging market broadband connections, will be over wireless technology. Today, 3G technologies account for most of the mobile broadband connections across emerging markets. While 4G technologies will grow, 3G will remain the dominant mobile technology across the emerging markets in the medium term. The greatest mobile broadband opportunities are to be found in the largest emerging markets. will account for 14% of all mobile broadband connections by As data traffic grows, LTE s capability to support an even more efficient, and cost-effective, data traffic infrastructure will encourage many emerging market players to launch more advanced LTE networks. This will drive rapid growth in emerging market LTE connections, reaching 352 million connections by 2017, or approximately one-tenth of all mobile broadband connections in the emerging markets. Despite the dominance of mobile broadband, fixed broadband will also continue to grow across emerging markets. The explosion in video traffic from websites such as YouTube, Youku and PPTV in, Next generation broadband: top five emerging markets Source: Ovum/Linklaters. All figures projected for Brazil 4 247m Broadband connections (85% mobile) $31bn Broadband revenues (38% mobile) as well as Internet-delivered TV services, will continue to provide a strong business case for the roll-out of fixed broadband infrastructure, particularly in fibre. By 2017, fixed broadband connections across emerging markets will reach 520 million connections. This will represent a small but important share of the total, accounting for 14% of total connections by 2017, yet generating 56% of the total revenue. This reflects the fact that fixed broadband connections will tend to serve the highestincome, trend-setting users at the top of the socio-economic pyramid. In contrast, mobile broadband connections are often the only option for the poorer sections of the population in emerging markets. High risk Russia 2 425m Broadband connections (91% mobile) The five largest broadband revenue opportunities in emerging markets are presented by,, Russia, Brazil and Mexico. These markets, and in particular Russia and, pose considerable regulatory and policy risks. Given the volume of lower-income customers in these markets, operators will also be forced to price their services to ensure affordability for customers while trying to maintain margins to deliver appropriate return on investment risk. Indeed, our research consistently shows that attempts to charge a price premium for FTTx and LTE usually dampen demand and adoption in both mature and emerging markets m Broadband connections (87% mobile) $10bn Broadband revenues (57% mobile) 1 894m Broadband connections (72% mobile) $53bn Broadband revenues (50% mobile) $17bn Broadband revenues (21% mobile) 3 Indonesia 259m Broadband connections (97% mobile) $4bn Broadband revenues (46% mobile)

7 12 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Next generation broadband 13 Next generation broadband: getting on the broad-bandwagon Many emerging market governments are prepared to offer incentives to those who participate in national broadband plans. Telecoms operators and vendors should carefully assess evolving government policy in target markets in order to position themselves to benefit from the resources that governments are making available, and avoid the local protectionism that has harmed new entrants in some emerging broadband markets. Operators will also need to develop infrastructure, strategy and pricing with an eye on the future for the next big bet: M2M the much vaunted Internet of Things. Sophie Mathur Partner Corporate Go-to-market strategies: multi-stakeholder engagement holds the key to success Capitalising on the opportunities presented by the broadband market will require a multi-stakeholder approach in order to deliver the required geographical coverage and economies of scale. Our research has identified six key go-to-market strategies for next generation broadband: 1. Align broadband roll-out with government development strategies: With governments eager to drive investment in broadband infrastructure, telecoms operators and vendors can benefit from the resources and incentives that emerging market governments can make available. Example inducements include amenable spectrum policies (e.g. the fee-free LTE spectrum awarded by Russia); subsidising network roll-out to economically unviable customers (e.g. the Colombian government s plan to use funds from the ICT Fund to provide broadband access to 69,000 underprivileged households); or direct investment by governments in broadbandrelated assets (e.g. South Africa s April 2013 National Broadband Plan which calls for the government to provide necessary funding for broadband initiatives). 2. Embrace a wireless-first network strategy: TMT players in most emerging markets should assume that they will need to provide comprehensive wireless-first broadband access by default, and add wired access incrementally in areas of high demand and where it is economic to do so. Kenya s proposed plan for a single LTE network is a key example of government support for a holistic, wireless-first strategy. 3. Leverage network sharing partnerships: Given the level of resources required to achieve nationwide coverage, operators should consider entering into bilateral and multilateral network sharing agreements to share their costs. This method is already well developed for wireless technologies, where sharing of masts, ducts and power supplies is widespread. Bigger gains, however, will come from active network sharing, where operators share their radio access networks and spectrum. Ovum forecasts that by 2017 at least 50% of all LTE networks in the world will involve some form of active network sharing, and this figure is likely to be significantly higher in emerging markets. 4. Roll-out innovative data pricing strategies: For data consumption to reach its full potential, telecoms operators need to develop new tariffs to make data access affordable to the bulk of their customers. A tariff that includes complimentary access to regularly used content (e.g. access to social networking sites) is a simple strategy to improve the appeal of data access. For example, Google, Facebook and Twitter have signed deals with numerous emerging market operators to offer such plans. The continued fall in smartphone prices has reduced barriers to entry for many bottom-of-pyramid consumers, but operators will need to shift to higher volume/ lower-margin plans in order to reach out to these customers. 5. Drive data consumption with content: TMT players in emerging markets are well positioned to spur creation of local content in their markets in order to drive data consumption on their networks. Offering such content may help the operators enhance customer loyalty and defend against becoming a dumb pipe for other companies content and services, and it can also generate new revenue streams and increase appetite. While a business model based on a limited walled-garden of available content is less secure in today s open Internet ecosystem, many operators can still benefit from providing their customers with access to exclusive curated content. Strategies range from full vertical integration (e.g. DTAC s Farmer s Information Gateway in Thailand) to simple sponsorship deals (e.g. Tigo s service which uses a series of SMS questionnaires to help customers recognise the onset of kidney diseases in Tanzania). With a fully integrated service, operators gain assets and capabilities that can enable them to compete in other areas of the TMT ecosystem. Sport and entertainment content is often a major attraction. As a former executive at a successful media company told us: The most profitable genre is sport, especially football. Globacom, for example, has a deal with Manchester United granting it exclusive rights to video highlights, match images and footage in Nigeria, Ghana and the Republic of Benin. Beyond sport, operators are also offering other types of content such as hosting app stores (e.g. Maxis in Malaysia) and websites (e.g. Safaricom Kenya s classified website). These additional content propositions serve to enhance the operator s core next generation broadband offering. 6. Future-proof your infrastructure for the Internet of Things : While today s focus is on connecting people, operators and vendors and other TMT players must position themselves to capitalise on machine-to-machine (M2M) connections. The hotly anticipated Internet of Things will enable us to connect gadgets from TVs and fridges to cars and houses. A senior executive at a leading global ICT vendor told us: 99% of the things that can be connected are not connected. Between now and 2020, this represents a business opportunity of more than $14trn. Given that most emerging markets do not have an extensive fixed telecoms infrastructure, M2M mobile connections will represent the first opportunity to connect many gadgets across emerging markets. TMT players need to lay the groundwork for M2M now, future-proofing their strategy, infrastructure and pricing models to ensure that partnerships with M2M providers can be industrialised to capture value from new opportunities quickly.

8 14 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Content and applications 15 Content and applications: Country focus: the big emerging appetite for data As consumers continue to seek out smart experiences in the most affordable and immediate ways, the biggest opportunities in content and applications in emerging markets over the next few years will come from value-added services (VAS) such as mobile money, with gaming, music and video playing an increasingly key role. This increase in demand will propel the mobile content market to revenues of $30bn by 2017, almost double its current size. To realise these opportunities, TMT players must orientate their strategies to take advantage of a mobile-led culture in emerging markets. Introduction Digital content in emerging markets has long been the near exclusive preserve of the wealthiest consumers who have access to the same smart devices, broadband connections, purchasing power and payment methods used by consumers in mature markets to enjoy digital content. The growth of mobile data access combined with the decreasing cost of larger-screen smart devices in emerging markets is driving mass access to content and applications for billions of new users. As growth in the number of mobile users decelerates, mobile operators are looking beyond basic VAS such as ringtones and logos, to increasing investment in content and applications to drive mobile data revenue. New 3G and LTE networks and the rising ownership of smart devices are together boosting data revenues in the form of increased usage of mobile broadband. The shift to mobile broadband is coming largely at the expense of VAS, as consumers with smart devices are increasingly finding ways to bypass the traditional operator-led content model. The industry must focus more closely on the affordability of smartphones and broadband data plans, the growing fragmentation of smartphone platforms, and the fine-tuning of monetisation models. Addressing these challenges will require customer-led innovation, as well as strong and equitable partnerships with a mix of local and global content partners. Monetising and paying for content remains a key challenge for the industry, which is fuelling the growth of ad-sponsored and freemium business models. While operator billing is an expensive but effective option for reaching unbanked users, the growth of mobile payment services is changing not only the way users pay for content, but the broader mobile financial services landscape. Market size and growth Mobile will represent 49% of all global Internet traffic by 2017 and, with the vast majority of emerging market broadband connections over wireless technology, mobile Internet traffic is increasing rapidly in emerging markets, providing an opportunity for content creators to access new consumers like never before. In, search giant Baidu, microblogging player Sina Weibo and online video player Youku Tudou, are all reporting that between 15% and 20% of their traffic comes from mobile devices. In, online travel booking company Cleartrip reports that nearly 28% of its traffic is already coming from mobile, much of it over its Android app. More interestingly, mobile also accounts for nearly 8% of its transactions. The adoption of cloud-accelerated (proxy) browsers is opening mobile browsers to the mass market segment, with more devices featuring browsers at increasingly more affordable prices. These lower prices will contribute to persuading the long tail of basic phone users to switch to smart phones and to access the Internet via their mobiles. The potential market is enormous when one measures rising browser usage data from major vendors. Opera Mini claims over 200 million users globally; UC Browser over 400 million; and Nokia announced it has over 80 million users of its Xpress Browser. In the short term, the greatest traction comes from messaging apps, particularly in the social category. This is because the future of messaging will be centred on IP-based messaging and social messaging apps. This is particularly true in Asia, where messaging apps are very popular. The stickiness of social messaging services for customers makes them the ideal platform from which to launch complementary, more monetisable services. For example, Figure 2: Content and applications in emerging markets: TMT market growth forecast Mobile VAS revenues Mobile music revenues Content and app revenues in 2012 ($bn) Mobile gaming revenues Forecast content and app revenues in 2017 ($bn) Late starter rising fast is a great example of an emerging market in terms of its opportunities for revenues from mobile content and apps. Much smaller than, it has also lagged behind Brazil in its overall pace of development, particularly with respect to the deployment of mobile broadband. This slow adoption of mobile broadband has been particularly striking given the negligible fixed Internet penetration in the country. However, a number of factors are converging at the right time to position as the next big growth story in content and apps. While basic mobile connection growth is slowing down, many users are adding mobile broadband plans to their voice and SMS services. As a result, mobile broadband users are projected to grow rapidly, rising from around 60 million connections today to more than 350 million by In parallel, there is rapid growth in smartphone shipments, which are projected to rise rapidly from barely 20 million in 2012 to more than 160 million in This rapid pace of smartphone adoption will swell the installed base to nearly 500 million devices in the country, representing a tremendous addressable market for the consumption of digital content and apps over mobile devices. The single biggest driver of this growth is the availability of the affordable, featurerich Android smartphones that are being imported from. Among all the content categories in, the most popular are messaging apps and mobile video. Like most other Asian countries, messaging, especially social messaging, is very popular in. There is no single dominant player in and usage is currently spread over several apps, including home grown apps from the likes of GupShup, Hike and Nimbuzz. Mobile video is also gaining in popularity, with services from the likes of VuClip gaining significant traction. Mobile operators have also developed their own proprietary or white label services, and are marketing these services heavily. For example, Bharti Airtel has launched a new One Rupee plan for mobile videos. Priced at 1 n Rupee (around 2 US cents), prepaid users can dial a short code to gain access to Airtel s portal, from which they can choose their video clips. Alternatively, they can go straight to the page from a mobile browser. has an overwhelming proportion of prepaid users, accounting for nearly 97% of the total base of connections, making it difficult for operators to profitably market mobile data. However, the launch of 3G networks and the impending launch of LTE are providing a much-needed bandwidth boost to new owners of smartphones. Today, mobile operators are offering very attractive data packages to their prepaid user base and are gaining increasing traction as they replicate the strategies that were successful in the voice market. Until recently, a lack of adequate payment mechanisms was also holding back market development. Now, the availability of app stores like the Nokia Store, with its extensive operator billing arrangements, has made payment for content and apps much easier for the mass market. This reduced friction is manifesting in increased downloads, even from lower income segments. For the small but high-spending postpaid user base in, app stores like itunes and Google Play have all rolled out local versions for the n market allowing these subscribers to pay for content and apps with their credit and/or debit cards.

9 16 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Content and applications 17 Content and applications: top five emerging markets Source: Ovum/Linklaters. All figures projected for Content and applications: the big emerging appetite for data High risk $30bn Content and apps revenues from emerging markets will almost double to $30bn by Mexico 5 $635m Content and apps revenues 2 $2.29bn Content and apps revenues 1 $11.2bn Content and apps revenues Table 2: Risk forecast for foreign investors Content and applications: top five emerging markets Market Key risks Risk outline Risk forecast Brazil South Africa Mexico Piracy Privacy Piracy Privacy Piracy Privacy Piracy Privacy Source: Ovum/Linklaters. Piracy Piracy: Continues to be a major issue in. However, the government is taking steps to combat piracy under its commitments to the WTO. Privacy: Service providers and content publishers required to comply with the government s censorship and monitoring requirements. : Potentially significant changes in relation to the licensing of MVNOs and the restrictions on foreign investment. : There has been significant turmoil on the regulatory front in the wake of the 2G licensing scandal, the delay to the New Telecom Policy (NTP) and uncertainty over foreign investment rules. Piracy: Piracy of music and video content is common, but less so in gaming. Privacy: Government surveillance is an increasing concern, with requirements to establish local offices and servers. Piracy: Despite increasing availability of legitimate content services, piracy is a big issue. Copyright laws in Brazil are not currently strong enough to curb this problem. Privacy: There is no specific law governing digital privacy rights in Brazil, but there are stringent data rights for employees which can limit enterprise services. Piracy: An underdeveloped retail sector contributes to higher prices, exacerbating the sales of pirated content enforcement is low. Privacy: The Protection of Personal Information Bill will import an EU-style privacy law which may prove difficult to implement and restrict certain services. : Recent high-profile money laundering cases have damaged the credibility of the regulatory regime and may lead to more assertive regulation. Piracy: Piracy is prevalent in Mexico and enforcement has been low. However, the government has upped its penalties and fines. Sunny app developer LINE generated approximately $30m in 2012 from the sale of premium emoticons alone. As services like LINE expand to emerging markets, there are numerous opportunities to monetise social messaging. Mobile gaming is growing in nearly every emerging market, notably in Indonesia, Brazil, and Nigeria. These are relatively high-growth markets both in terms of data and device penetration. However, they are also low-income markets, which makes the free-to-play (F2P) gaming model (games are free, and revenue is generated by the purchase of virtual goods) key to the development of mobile gaming. F2P and the in-game purchase of virtual goods and services is fast becoming the business model of choice for digital game platforms. The F2P model is lowering barriers for entry for new users and increasing the user base in the region. Mobile music will grow rapidly both in terms of digital downloads and retail revenue in most emerging markets., in particular, is ahead of the pack, with revenue from digital music reaching $704m in 2017, with more than half of that coming from mobile downloads. will better leverage its already large and growing broadband subscriber base. will perform well with Brazil new mobile music platforms and services, but the overall market for digital music will not be as big as. A lot of this has to do with the lack of market control in terms of piracy. is also highly mobile-centric, which means consumers will lean towards single track downloads or streaming music, thereby putting it on a lower growth trajectory than. s prospects for mobile music can be attributed to growing mobile penetration, easy availability of song downloads via mobile, and a large amount of locally available content. Mobile video and TV, currently restricted to a small proportion of users, will evolve rapidly towards video streaming. Today, most emerging markets are simply not ready for mobile TV, or even mobile video. 3 $2.21bn Content and apps revenues South Africa 4 $2.18bn Content and apps revenues This is due to gaps in the infrastructure in terms of network capacity, device capability and a lack of consumer understanding of the services available. The current market is based on video clips that can be downloaded through content providers and MMS. Regional movie clips, songs, and sporting video clips are the most popular types of video content consumed. Device manufacturers such as Nokia and RIM are already fuelling the video market by offering users capability to upload and share content on social networks and messenger groups as soon as it has been captured. Social networks in particular are encouraging the consumption of video clips. The growth in the usage of YouTube globally and more regionally popular platforms has fuelled the movement towards a larger audience consuming video over mobile devices. All of this is gradually encouraging the uptake of mobile TV and video services in emerging markets.,, Brazil, South Africa and Mexico are the countries where mobile content and applications are most likely to see the largest growth in emerging markets. However, these markets, and in particular and Mexico, pose considerable piracy risks, as well as being subject to the constraints of extensive privacy regulation.

10 18 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Content and applications 19 Content and applications: the big emerging appetite for data Go-to-market strategies: towards a smarter future Service and content providers will focus their strategies on effective models to facilitate consumers progression from basic communications services, such as voice and SMS, all the way through to smart experiences on the mobile Internet, as outlined in Figure 3. Consumers in emerging markets care even less than their mature-market peers about the underlying technology, and are focused on the experiences and benefits of different services. While many consumers would undoubtedly like to experiment and browse casually, they are currently more inclined to seek out customised app-like experiences on their mobiles due to time and disposable income constraints. Figure 3: Emerging market consumers progression to smart experiences High Device IQ and cost Low Productivity Interact Search, discover and consume The basics Ringtones Proxy browser Voice SMS Ring back tones Our research has identified six key go-tomarket strategies with the first three strategies based on the need for mobile network operators to deliver affordability and work in tandem with content partners. The next three are based on the need for content providers to develop more innovative business models. Mobile network operators need to broaden affordability and partnerships Mobile operators faced with the strategic imperative to monetise large investments in data networks need to improve the affordability and attractiveness of their data services in a bid to seed the market and spur adoption. The three key strategies to achieve this are: News FM radio Internet radio Google search MMS E-books/ magazines Photo apps Web apps Utility of the device VoIP Location apps Video/ music Video streaming Mobile gaming Sharing apps Social messaging Mobile wallet E- commerce High 1. Simplify data access pricing: Consumers need simplicity and look for unlimited, time-based and content-based packages. This greatly reduces entry barriers such as affordability and bill shock, but the extra complexity of plans may turn off potential mobile Internet users. 2. Embrace the prepaid user base: Operators must also embrace the prepaid segment for mobile broadband, shifting to high-volume, low-margin data plans that will drive mobile Internet usage at the mass market level. Sachet pricing, similar to that adopted for voice services, is now critical for data. This process has already begun. Airtel in is offering shared data plans and mobile videos for 1 n Rupee and Smart in the Philippines is experimenting with unlimited plans that allow free surfing but have a cap (15 MB) on daily downloads. 3. Partner with over the top (OTT) players: Telcos looking to respond to the onslaught of OTT services should increasingly look to partner with OTT service providers. Such partnerships are contractually based, with some mutual marketing and/or commercial benefit to the parties involved. There is increasing evidence of such win-win partnerships being struck. For example, Reliance Communications in is partnering with WhatsApp and Facebook for unlimited packages. Operators are also working with major OTT and content players to offer zero-rate plans, which typically offer free access to content with a minimalistic user experience. More than the corporate social responsibility benefits, these zero-rate plans are essentially a downstream investment in that the people who get to access digital content early are more likely to pay when they can afford it. Content providers must develop more innovative monetisation models While business models and success rates will vary across markets and content categories, the following three universal strategies can be adopted to drive growth for content providers: 4. Go freemium: The stark reality of the mobile Internet is that encouraging people to pay for content and services is difficult. This has led to a growing dominance of the freemium model, where ad-supported free services are offered to drive adoption and traffic, while in-app purchases for more advanced services drive additional revenue. Ad-supported services are encouraging new consumers to download apps and content. The best example of this is the Google Play app store for Android. Rising sales of smartphones and app downloads mask the fact that most of these downloads are ad-supported and free. 5. Focus resources on the app stores with highest ROI: The mobile Internet offers a wealth of distribution mechanisms, primarily over numerous app stores and, to a lesser extent, browsers. Too many options have arisen due to the lack of a standardised framework for the mobile Internet. The result is increasing fragmentation among app stores, especially for the Android platform which is driving most smartphone growth. For developers and content providers, the high degree of fragmentation means that they must focus limited resources on those app stores that generate the best return on investment. 6. Drive monetisation by supporting operator billing: While app stores and browsers will remain the fastest growing distribution mechanisms for content and app developers, the dominant prepaid user base is also typically inversely correlated with credit and debit card penetration in emerging markets. In the absence of alternative payment mechanisms, cash is still king. While some markets are having success with or experimenting with mobile money, operator billing is a very effective and high conversion method of driving monetisation. Operator billing typically involves a high commission paid to the telco (up to 15 25% in some cases); however, this high commission can be worth it, as the addressable market is greatly increased.

11 20 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Mobile money 21 Mobile money: banking on partnership $29.8bn Revenues from mobile financial services in emerging markets will be worth $29.8bn to service providers by Country focus: Indonesia Explosive growth in mobile ownership over the last decade, combined with limited access to financial services, is fuelling rapid growth in mobile financial services (MFS) across emerging markets. In many emerging markets today there are more connected than banked people. As a result, mobile network operators (MNOs), payment processors, device vendors, independent players and financial institutions are increasingly playing a key role in the provision of basic financial services but this is only the start. By 2017, we estimate that the 876 million MFS users in the emerging markets will account for 86% of all MFS users globally, making this market worth $29.8bn to service providers. As no single player can successfully offer a full suite of mobile financial services on their own, strong partnerships are essential to establish an effective MFS ecosystem in each market. Equitable incentives and revenue sharing contracts for each MFS ecosystem player, including MNOs, banks and retailers are critical to the success of mobile money. Introduction Very limited access to bank branch and ATM networks means that the majority of emerging market consumers operate purely in the cash economy. The unbanked bear a huge cost and time burden in managing their finances. For many people in rural areas, paying their electricity bill or receiving a remittance from a relative working abroad requires a full day, including a return trip to the nearest town s bank branch, which can be 20 50km away. Sending cash is expensive and unreliable: bus or taxi drivers are the only option for many, and they often demand 10 20% commission on the amount, with few guarantees that the cash will reach its intended destination. By comparison, mobile transfers command a commission of approximately 5%. The mechanics of emerging market MFS are designed to be simple at a basic level: a user registers with a service provider for their mobile money service, and a simple SIM-based application is downloaded to their device that contains their account, which works even with most basic phones. Then they can go to an agent with cash to credit their mobile money account. From there, should a user decide to send money to someone or pay their electricity bill, they simply select an option on their phone menu. The recipient of the funds receives an SMS to advise them of the funds arrival in their account, which they can then withdraw from their local agent. The MFS provider, in partnership with a bank, does the clearing and settlement of transactions for the accounts of both end-users and individual agents. Figure 4: Mobile financial services in emerging markets: TMT market growth forecast MFS revenues in 2012 ($bn) Forecast MFS revenues in 2017 ($bn) In the context of the under-development of the banking and payments value chains in emerging economies, there is an opportunity for non-banking players to take a prominent role in the MFS market. MNOs are key new entrants, with strong brand awareness, network infrastructure and distribution capability. However, there are significant challenges to realising these opportunities for both MNOs and financial institutions. Some are risks applicable to entering new geographic or product markets, and others are specific to mobile payments, as financial institutions need to up-skill to understand the mobile space and MNOs need to understand the payment infrastructure and prudential regulatory frameworks. Other players, such as handset manufacturers with extensive retail and distribution networks, have also looked to slot into the MFS value chain, with mixed success. Due to the lack of an existing payments value chain, some mobile operators with sufficient market share have been able to create effective payment networks in emerging markets with comparatively little partnering. As these operators diversify into new products, regulation catches up, and new entrants try to gain a foothold in these markets, cooperation among competitors, banks and retailers will be key to secure continued growth. Julian Cunningham-Day Telecommunications, Media and Technology Global Sector Co-leader Interoperability in action After market leader Kenya, Indonesia has one of the most vibrant mobile money markets in the world, with services in operation since 2007, when Telkomsel launched Tcash. Since then Indosat launched Dompetku, and XL (Axiata) launched XL Tunai services. More importantly, non-telco players have entered the market, led by Bank Andara s AndaraLink service, which is a B2B service aimed at micro-finance institutions (MFIs). Bank Andara s aim is to provide mobile payment services to the country s 50,000 credit union co-operatives and around 2,000 rural community banks. In February 2013, BlackBerry, in partnership with Monitise and Bank Permata, launched a commercial pilot of BlackBerry Messenger Money (BBM). BBM is popular in Indonesia, and BBM aims to facilitate peer-to-peer payments between BBM users who often trade goods using its messaging platform. Indonesia has more than 1 million active mobile money users currently, the majority on Telkomsel s Tcash platform. Although each player has a much larger number of registered users, activity has been low. Telkomsel s CEO recently indicated that only 6% of the 12 million customers registered for the Tcash service are active users. Lack of interoperability, combined with a fragmented mobile market, has been a key reason behind the low activity in the user base. In this context, the May 2013 announcement that Telkomsel, Indosat and XL are moving to offer interoperability, so that users of individual services can send and receive money to any service, is hugely significant. Interoperability arrangements are set to give a massive boost to an already vibrant supply side, and tap into the huge latent demand from a population where just one in five adults has a bank account. In addition, a facilitating regulatory regime led by Bank Indonesia, which brokered the interoperability agreement, is another positive factor for future market developments. This fertile context will lead to a rapid growth of mobile money adoption in the next five years, with users reaching 52 million and transaction volumes reaching $42bn, generating service revenues of almost $2bn by With the major factors that are holding back other markets addressed effectively, operational execution is the key risk for Indonesia in the future. While Telkomsel, Indosat, XL, BlackBerry and others now have many of the pieces necessary for success in place, they still need disciplined execution to ensure this fledgling market evolves to its full potential.

12 22 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Mobile money 23 Mobile money: banking on partnership Mobile money: top five emerging markets Source: Ovum/Linklaters. All figures projected for % of the world s MFS users in 2017 will come from emerging Asia-Pacific regions. Market size and growth We forecast explosive growth in MFS over the next five years, with MFS transaction values reaching $623bn by With typical MFS commissions of up to 5% of transaction value, the market will be worth $30bn to TMT service providers by Brazil m Mobile money users High risk m Mobile money users $5.72bn Mobile money revenues m Mobile money users $5.82bn Mobile money revenues Table 3: Risk forecast for foreign investors Mobile money: top five emerging markets Market Key risks Risk outline Risk forecast Indonesia Brazil Kenya Source: Ovum/Linklaters. Interoperability Operational execution Interoperability Operational execution Operational execution Interoperability Operational execution Service quality Interoperability: Without a dominant bank or MNO, market share is fragmented and uptake is limited. Operational execution: Managing the network of mobile money agents requires a new skill set for operators. : Restrictive regulatory regimes that constrain non-banking models by requiring partnerships with banks and restricting service offering. Interoperability: Without a dominant bank or MNO, market share is fragmented and uptake is limited. Operational execution: Managing the network of mobile money agents requires a new skill set for operators. Operational execution: Managing the network of mobile money agents requires a new skill set for operators. Interoperability: Without a dominant bank or MNO, market share is fragmented and uptake is limited. Operational execution: Managing the network of mobile money agents requires a new skill set for operators. Service quality: Significant service outages have impacted customer confidence. Moderately rainy Medium to high risk Sunny Sunny /sunny Low to medium risk 57% of the world s MFS users in 2017 will come from emerging Asia-Pacific, led by, and Indonesia. This will be followed by Africa with 20% of MFS users, where we expect Kenya to be joined by Nigeria, South Africa and Tanzania as major MFS markets. Led by Brazil, Latin America will be the next largest region with 11% of mobile money users, followed by Eastern Europe with 7%, and the Middle East with 5% of the total MFS users. Operational execution presents a significant risk across all markets, with s financial services regulatory framework proving challenging as well as general interoperability issues across, and Brazil. There are currently 167 live mobile money services in the emerging markets, with another 107 announced and set to launch this year. However, we are at an embryonic stage of adoption, with only a handful of countries that can be considered established successes for mobile money services, including Kenya, Madagascar, Uganda, Paraguay, Philippines, Tanzania and Thailand. We estimate that there were only 70m active mobile money users in the emerging markets at the end of Of those, Kenya accounted for more than a fifth. MNOs dominate the supply-side field, accounting for more than two-thirds of the current deployments, with growing $981m Mobile money revenues competition from services led by banks (e.g. Bank Andarra in Indonesia), device vendors (RIM and, until recently, Nokia) and independent players (e.g. Wizzit in South Africa). Vendors such as Comviva, Ericsson, Fundamo, Monitise and Obopay are key providers of mobile money platform solutions to these groups. Retailers will be a critical supply-side constituent going forward, and in emerging markets many will take on the dual role of both mobile money agent (performing cash in/out and banking transactions) and accepting payments for their goods and services from end-users. Senior TMT leaders who participated in this study expect mobile money to account for 5 12% of their total revenues in five Kenya m Mobile money users $880m Mobile money revenues years. However, the margins on mobile money services are currently thin, and will remain lower than core telecoms services for some time. This is a result of current low transaction volumes, as well as the fact that the bulk of the revenues on payments and transfers are paid to agents as commissions. Margins will grow as transaction volumes grow, and players layer additional payment, savings, loans and insurance products on top of basic services. The biggest jump in margins will come from the reduction in cash in/cash out activity (i.e. lower agent commissions), when users become accustomed to receiving funds directly into their mobile money account, as well as paying retailers directly. 3 Indonesia 51.8m Mobile money users $1.99bn Mobile money revenues Financial services providers ambitions are less defined in financial and more in strategic terms. Their objective is to ensure lower cost expansion into the currently unbanked segment, as well as removing the threat of being disintermediated from the newly emerging mobile money ecosystem. Indeed, as one financial services leader revealed: There is no money in payments for us but we need them in order to sell other higher-margin savings and loans products.

13 24 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Mobile money 25 Mobile money: banking on partnership $623bn is the predicted value of mobile financial services transactions by For financial institutions and payment processors, the penetration of mobile phone use provides an opportunity to access markets which would have been uneconomic to address, but it also means that these players are facing competition in products which they would traditionally be able to dominate. Sarah Parkhouse Partner Financial Go-to-market strategies: monetising mobile money Despite tremendous untapped demand from the mass unbanked, success for service providers is far from a given. Only a small fraction of the mobile money services available today are achieving meaningful adoption. We have identified three key elements for TMT players to consider, which we believe are the keys to successful market entry and service growth: 1. Use partnerships to bridge expertise gaps: All market entrants lack the ability to offer a comprehensive mobile money service on their own. The emergence of mobile financial services has forced key players into unfamiliar waters. Telcos are learning about financial services; banks have a lot to learn about mobile devices and services; and both players are being drawn deeper into retail services. Strong collaborative partnerships are therefore essential to the success of every player. To address their inevitable expertise gaps, as well as gain critical local knowledge, telcos need the banks to provide the financial services expertise, payment clearing and settlement services and, as the service evolves, bring highermargin savings, loans and insurance product expertise. Banks need telcos communication and distribution networks, particularly in rural areas. Partnerships, however, do not come naturally to either telcos or banks, with both sectors accustomed to dominating their respective communications and banking value chains. As a global MNO leader told us: Partnership mentality is not in our DNA, and we have lots to learn in this respect. Hence there have been a number of African and Asian telco-bank partnerships that have come under pressure over issues such as customer control, revenue share and future service evolution. 2. Get localisation right and keep it simple: A key criterion when choosing a partner is whether they can bring local knowledge. This not only helps with navigating the local regulatory space but also with bringing appropriate products to market and gaining essential information on critical issues such as: local income distribution, major remittance corridors, bank network reach and effectiveness, and retail market dynamics. There is growing market acceptance that initial mobile money services have to be simple to understand. Only once users get comfortable with these foundation features, are they ready to consider more advanced payment and banking features, as illustrated in Figure Balance competitive customer fees with appropriate agent commission: An effective network of mobile money agents able to process cash in/out functions and other mobile money transactions is emerging as one of the key elements of players go-to-market strategies. Building, incentivising and managing a network of motivated agents is the foundation of customer growth until the services mature and all transactions are done with few or no cash in/out transactions, which is currently the most expensive element of the mobile money value chain. This point is still some time away for many services, and until then, as one MNO told us: It s essential to consider how you keep both the end-users and the agents happy at the same time. Setting the right level of customer fees, and the resulting cut for agent commissions, is a critical balancing act for mobile money players. Low commissions are great for users, but offer little incentive for agents, and the flipside is true for consumers, as some mobile money pioneers have discovered to their cost. For example, this lack of commission incentive led to fading interest in promoting Smart Money by agents, and Smart s service adoption began to stagnate. In late 2012 Smart Money raised its commissions in order to redress this issue. Meanwhile, Orange Ivory Coast found that fees of up to 8% kept agents very happy with potential commissions (in addition to offering healthy margins to Orange) but users considered them too high, and ultimately demand was muted until it reduced its fees. Figure 5: Mobile money product evolution strategies Evolution features > Merchant payments > Bank account access & transfers > International money transfers > Salary transfers > Government transfers Foundation features > M-cash account > Cash in/out > Airtime top-up & transfer > Domestic P2P money transfers > Bill payments Maturity features > Credit/loan origination > Savings > Insurance > Proximity (NFC) payments Customer confidence and trust Only a small fraction of the mobile money services available today are achieving meaningful adoption.

14 26 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / The Cloud 27 The Cloud: building castles in the air Cloud services, with their promise of always-on, cheaper, more flexible and highly standardised ICT services, will have a profound impact on emerging markets over the next five years. Rapidly growing demand for new ICT capacity, combined with the underdevelopment of current ICT infrastructure, will drive dramatic cloud service adoption across the emerging markets. While cloud is revolutionising IT service delivery in developed markets, emerging markets expect to bypass traditional IT infrastructure by adopting straight-to-cloud strategies and accessing world-class ICT services on a level playing field with their developed market counterparts. Initial TMT revenue growth will come from Infrastructure as a Service (IaaS), but as broadband infrastructure improves, the Software as a Service (SaaS) market will increase significantly. Achieving this growth will require a supportive policy and regulatory context, but also significant TMT player solutions, contract and execution innovation to address local market complexities. Introduction The rise of enterprise cloud ICT services in mature markets over the last decade has been a game-changer for technology providers as well as enterprises. Cloud services, which foster the transformation of the Internet from a content delivery platform to a software and service delivery platform, are now set to do the same for emerging markets. The first iteration of cloud ICT has been in IaaS: the virtualisation, consolidation, and centralisation of servers and IT operating systems in data centres. This has enabled organisations in emerging markets to access a range of on-demand ICT in cloud hubs like Hong Kong, Johannesburg, Rio and Singapore, provided they have good network access. Platform as a Service (PaaS) adds a new layer of software services on top of IaaS to make it easier for enterprises and web players to develop and/or run applications. As local content development communities grow, demand for PaaS in emerging markets will accelerate. SaaS best exemplified by Salesforce.com s delivery of customer relationship management software via the cloud combines the delivery of application functionality via a web browser with data access, encryption, transmission and storage services. The innate characteristics of IaaS, PaaS and SaaS make these services highly attractive in an emerging market context. They do not require ownership or management of hardware or software, other than the access device. They offer standardised, always-on services from centralised large data centres that employ virtualisation and automated Compliance with data protection regulations is key to the widespread adoption of Cloud services. Third-country law enforcement presents a risk to Cloud service providers who must give access to user data, which may potentially be at odds with local data protection requirements. As data protection enforcement is determined on a jurisdiction-by-jurisdiction basis, players need to make sure the local legal regime provides the necessary protection. This is particularly important when data is stored across many countries as it is likely to add to the complexity of contracts and compliance requirements. Tanguy Van Overstraeten Telecommunications, Media and Technology Global Sector Co-leader system management technologies to deliver significant economies of scale and consequently lower costs. They also enable vendors to centrally evolve the service and upgrade all users based on customer feedback, as well as actual user behaviour data. Cloud services open opportunities for telco networks, together with IT systems integrators and software vendors, to provide the full range of infrastructure, middleware platforms and software applications that are required for on-demand cloud ICT services. Enterprises in turn are able to take advantage of best practice technologies previously unavailable to them and capitalise on local or regional vertical developments, for example media technologies in South Africa or social network applications development in Turkey. Market size and growth Cloud ICT services spend by enterprises in emerging markets was $2.2bn in 2012, and is set to grow to $10.4bn by This will represent a significant transformation in the way companies buy and use ICT in these regions, with much of this comprising new revenue streams, rather than cannibalising existing spend. Both telco and IT service providers are well positioned to tap into this market. To do so, they need to ensure they identify and address the requirements of new business customers looking for ICT services many for the first time. Cloud ICT will be supplementary to existing legacy enterprise IT and communications services, as the migration to cloud ICT services requires a strategic rethink and Figure 6: Cloud ICT services spend in emerging markets: TMT market growth forecast IaaS PaaS SaaS Cloud ICT services spend in 2012 ($bn) Cloud ICT services spend in 2017 ($bn) adoption of different approaches in procurement, operations and user management for enterprises. This is a major reason why enterprises will move their budgets into cloud ICT, and in the meantime adopt cloud ICT services on an ad hoc basis where there is a business case. In the near future, cloud ICT will become a set of managed services. Above all, businesses want standardisation in order to simplify operations and manage costs. For emerging enterprises and multinational companies building supply chains into adjacent and developed markets, this is best done in a managed services arrangement. Nonetheless, the rates of growth in cloud ICT in emerging regions will far outstrip those for existing managed services. The compound annual growth rate (CAGR) for emerging markets for Cloud ICT between 2012 and 2017 will be 37%, compared with typically single-digit CAGR for established managed network and IT services. Country focus: South Africa Reaching for the Clouds Despite being behind the curve in cloud adoption in a global context, South Africa represents one of the biggest market opportunities for cloud ICT providers in the Middle East and Africa regions. Software as a Service (SaaS) is the biggest cloud ICT segment in South Africa today. Enterprise spend in customer data analytics (i.e. Big Data ) has passed the early-adopter phase among large Internet and media companies in South Africa, and in 2013 it will enter the early-adopter phase for mainstream enterprises. The CIOs of large enterprises require more bandwidth, but they are already looking to extend cloud ICT into business intelligence and knowledge management, which therefore means significant opportunities for services providers. Sectors such as mining and banking are fast moving to enterprise resource planning in the cloud, to support operations management in adjacent markets in Asia and Latin America, as well as to voice-over IP. SMEs have crossed the chasm with public SaaS cloud adoption, and will continue to lead migration into the cloud at SaaS and Platform as a Service (PaaS) levels. As a CEO of a start-up company in South Africa told us: The cloud enables us to get operational quickly and cost-effectively without incurring significant capex or operational expenses. Pay-as-you-grow is the way to go. Enterprise CIOs are mostly still exploring hosting and/or Infrastructure as a Service, but cloud ICT service providers need to provision PaaS and Unified Communications as a Service for these growth industries. One reason for South Africa s slow adoption of Cloud ICT Services to date is the generally poor level of cloud provision in the public sector, which has not updated its Information Society Programme, that set out the country s ICT strategy. However, this is changing, and there are some world-class exemplars in government departments that could help to inspire demand for cloud services. South Africa Revenue Services (SARS), which encourages online filing of tax returns, has automated the assessment of citizens returns and responds to users within a few hours with the amount owed by the citizen or the state. Completing a tax return takes less than 15 minutes. The service is also usable on mobile devices. As a result, SARS receives more than 90% of its returns electronically. South Africa has the potential to be a top-five cloud ICT emerging market with a CAGR of 35%. This will take the cloud ICT market to at least $215m by 2017, with the healthy economic backdrop providing support to enterprise IT budget growth and cloud adoption. There are risks, however. While South African legislation with respect to data location, backup requirements and archiving is favourable, the Protection of Personal Information (POPI) bill, requiring information belonging to an individual to be encrypted and confined within the borders of South Africa, could hamper the strategies of global players and increase costs by requiring them to invest in local data centres.

15 28 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / The Cloud 29 The Cloud: building castles in the air $10.4bn Enterprise adoption of cloud ICT services will create a market worth $10.4bn to TMT players by The Cloud: top five emerging markets Source: Ovum/Linklaters. All figures projected for High risk 4 Russia 1 $390m Cloud ICT revenues $2.06bn Cloud ICT revenues 3 2 Table 4: Risk forecast for foreign investors The Cloud: top five emerging markets Market Key risks Risk outline Risk forecast Brazil Russia Malaysia Source: Ovum/Linklaters. Infrastructure Censorship Infrastructure Connectivity Operational Risks Interoperability Piracy Connectivity Infrastructure: Under-investment in required technology infrastructure, adherence to home-grown technical standards and incentives that favour local firms may isolate s cloud providers. : Investment rules limit foreign owner participation in infrastructure. Censorship: Censorship and interception fears are likely to impact cloud adoption. Infrastructure: Low internet adoption and unreliable supply of power and other utilities are likely to delay adoption of cloud services. : Uncertainty on mobile licensing, where 2G licenses have been cancelled and 3G license coverage rights are poorly defined, is acting as a brake on investment. Connectivity: Network provisioning times are slowly improving, thanks to licensing of foreign telcos and IT providers, but local partners are in short supply. : The regulatory environment for cloud is not defined in detail outside VoIP services, and net neutrality rules should be clarified. Operational Risks: Concerns remain about security of infrastructure and assets, with perceived risks of interception and government intervention. Interoperability: The restriction of LTE licences to local operators is likely to delay innovation and prevent the roll-out of a national LTE plan. Piracy: Intellectual property rights protection. Connectivity: Weak international connectivity may hamper Malaysia s ambitions to provide international cloud services. Rainy High risk Rainy High risk Sunny Cloud services will enable technology vendors like Amazon, Google, IBM and Unisys to quickly reach potential customers in emerging markets with services that offer simplicity and lower cost. However, data governance is a universal concern, with data sovereignty becoming a significant issue in many countries, which threatens to hamper the adoption of global solutions. In this context, local telco-based data management and security services can be positioned as a strong solution to protect revenues and grow new ones. Currently, more than 90% of cloud ICT spend is on SaaS by companies taking advantage of public cloud service offers that mainly use the Internet to allow multiple customers to access a common resource and establish new channels for their customers such as social media marketing. Public IaaS resources that can host IT operating systems are currently limited mainly to test and development applications, but as private secure IaaS offers mature, these will be used more to host whole IT production systems for business operations. By 2017, SaaS will have been reduced proportionately to two-thirds of cloud ICT by spending volumes, as vendor offers in IaaS and PaaS mature, service providers develop end-to-end service level agreements, and enterprises adopt a more hybrid approach, incorporating more private cloud as well as public cloud provisioning in their overall ICT strategies. Brazil $623m Cloud ICT revenues During this phase, telcos and their partners in IT software and systems design and integration are in a stronger position to demonstrate the effectiveness of their combination of network service delivery, hosting and data management, together with account support and professional services. This ecosystem approach will enable vendors to drive the greater innovation in solutions, delivery and pricing that will be required to profitably meet the cloud service needs of smaller enterprises sitting below the tier of large established national champions and large government departments. Economic growth will be the key driver behind enterprise activity and the geographic scope of demand for cloud service delivery. In this context, and will be joined by Indonesia, Malaysia $1.14bn Cloud ICT revenues and Thailand (Emerging Asia) as increasingly important markets for global and regional enterprises and multinational companies. Ovum s recent CIO research 1 shows that CIOs in multinational companies expect to be increasing their ICT spending fastest in Asia-Pacific and Latin America over the next two years, followed by the Middle East. More than 50% of multinational CIOs say they will give priority to cloud ICT investments in Asia-Pacific throughout Africa is fast becoming a market where main buyers of ICT reside and therefore the communications and IT requirements are the greatest. This is particularly true of South African and West African-based companies requiring connectivity across sub-saharan Africa. South Africa houses 70% of Africa s major companies. At the 5 Malaysia $225m Cloud ICT revenues same time, VPN connections in Africa are increasingly important parts of multinational companies global networks. We re now seeing as many as 68% of IP VPN endpoints in Africa being provisioned as satellite markets for European companies. It is not unusual for an enterprise to want to network 20 countries in Africa today, or countries across MEA. To address such a diverse context, global vendors and service providers need to have a product roll-out plan and a services organisation that can support locally emergent business customers as well as existing western business customers expanding into emerging markets. This will require accelerating recruitment of skilled local staff in sales and marketing, as well as service centres at regional and national levels. 1 Ovum CIO 2012 Study based on interviews with CIOs from 120 multinational corporations.

16 30 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / The Cloud 31 The Cloud: building castles in the air 37% The CAGR for emerging markets cloud ICT between 2012 and 2017 will be 37%. Go-to-market strategies: the only way is up Service providers have made a series of investments in new infrastructures which represent the first stage in the development of future cloud ICT services. But the development of cloud ICT will depend even more on how well telcos and technology vendors can help develop the service offers that enterprises will require. To grow the market, meet enterprise business requirements and build a successful revenue model, TMT players will need to address five key strategic priorities: 1. Make infrastructure investments with future cloud ICT services in mind: Cloud services can only work with robust data network connectivity in place. Global telcos including BT, France Telecom and Vodafone have announced regional investments for Africa and the Middle East, Latin America, and Asia-Pacific. These have included MPLS (multiprotocol label switching) network and Ethernet access, data and services centres, as well as local IP technology and professional services. These networks can be leveraged into cloud ICT services. Therefore while connectivity is still the main priority, both service providers and users need to think ahead to cloud ICT services, including multichannel contact centre solutions and virtual data centre requirements. 2. Develop new types of contracts: Cloud services offer the prospect that enterprises can pay only for the ICT they consume, under a set-period agreement. Services providers are offering pay-as-you-go contracts, but these might not guarantee income from new capital investments in data centres or service centres. Some service providers are testing the market with contracts that commit the customer to use their services but still benefit from usage-based rates. For example, T-Systems has signed a 21-year contract with a health management agency operating in southeast Asia. New types of contracts will also need to include the required provisions to address cross-border data flows cloud systems disperse data and compromise governance, the number one concern for CIOs and TMT players alike. Successful service providers will offer contracts that acknowledge national sovereignty requirements affecting a cloud operation, as well as provision options to meet them. 3. Implement robust service level agreements: Cloud ecosystems do not easily permit full management controls, making service levels harder to guarantee. Private cloud systems are more secure, but the successful telco will negotiate with public cloud vendors to improve SLAs across the cloud. Emerging multinational companies like Brazil s Vale (mining) and s Ping An (insurance) are already major buyers of the new telecoms and IT services. These customers will often go to their local supplier first, but will also need global service support, network performance, account management and product expertise that few local providers can offer. Emerging operators need to move quickly towards processes for consistent service delivery excellence an area where developed market players have much to offer. Some local players can deliver great network quality, some can deliver value for money, but none is consistent across all the criteria. Nevertheless, there are a number of success stories. Tata Communications was a stand-out among the emerging markets operators in a recent multinational company study by Ovum, with good ratings across key performance criteria. Other regional providers like Telstra and SingTel also score well in enterprise sourcing experience. 4. Partner with regional players: There s an outstanding opportunity for regional operators in emerging markets to take advantage of the services being demanded by new regional companies and large enterprises. Five years ago there were no more than 10 major network operators that were players in regional-to-global services. Today there are 20 operators that can claim a credible offer, with half of new entrants coming from the emerging markets themselves. Within five years this number will double, as more emerging market operators build multinational and cloud ICT service capability including service providers like Citic Telecom CPC in, Embratel in Brazil, and Telkom SA. Regional telcos in emerging markets already have cloud ICT systems of their own, and established B2B telco providers should consider partnering with them, as well as following their examples for establishing cloud ICT sources in-region. Telstra, for example, has developed its network computing service (NCS) and network applications service (NAS) with Accenture and Microsoft over five years. 5. Develop a software and technology roadmap: If they are to develop a full cloud ICT offer, TMT service providers need to have a roadmap to develop true SaaS. This will require agreements with vendors like Oracle and SAP for applications, database management interface, dedicated security, applications management and modernisation, and systems integration. Service providers that partner with these and other vendors like Cisco and Microsoft in the US and T-systems in Europe are extending these arrangements to MEA and Asia-Pac. They also need to combine their services with vendors investing directly in their own regional or municipal cloud data centres, as Microsoft has done recently in Shanghai. For example, NTT Communications has acquired global systems integrator Dimension Data so that it can support Cisco and other cloud ICT from Dimension Data s service centres worldwide. The key strategic position of the telco puts them in an excellent position to manage the commercial and technical partnerships needed for sustained development of cloud ICT revenues. Telco operators may be working in a complex stakeholder environment, but their longevity and track record in serving enterprises with network services gives them the trust of the CIO the trump card they need to win against SaaS players, many of which are new entrants in this market. There are many territories where it is extremely difficult for service providers to invest due to lack of infrastructure, geographic or political challenges, local competition, complex infrastructure planning and licence regulations. But key investments in fixed and mobile broadband, VPN and subsea cables are generating hotspots which are leading to further investment in territories from Asia-Pacific (cloud services centres) to sub-saharan Africa (ICT operations centres, multimedia contact centres). Where infrastructure starts, investment follows, and we expect to see more specialist investment clusters as emerging markets develop their cloud ICT services strategies. Niranjan Arasaratnam Partner at Allens Telecommunications, Media and Technology

17 32 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Mobile health 33 Mobile health: scaling the value chain $8.8bn Mobile health is set to generate around $8.8bn of annual revenues for TMT providers by Mobile health is set to generate around $8.8bn of annual revenues for TMT providers in emerging markets by 2017, as governments in emerging economies seek to address poor health outcomes and limited healthcare resources. Services based on the simplest and most commonly used mobile phone features, such as SMS-based medication compliance services or health information call centres, hold the greatest commercial opportunities for telcos in the near term. As governments continue to invest in health systems, more advanced services like remote monitoring will start to gain more traction. Introduction Emerging markets must address the significant health inequalities that act as a major barrier to economic development and the welfare of their populations. There are unacceptably high levels of communicable diseases in a number of countries, with particularly acute challenges in the lowerincome countries of Africa and Asia. Despite significant government and NGO aid, healthcare infrastructure and resources remain inadequate, as systems have developed from a very low base. While healthcare spend in the vast majority of emerging markets has grown substantially in recent years, this growth in expenditure is not sustainable. Healthcare funding and financing mechanisms are changing significantly and often more rapidly than in developed markets, particularly in more stable and advanced emerging economies like and Brazil. This is important for those involved in mobile health, as preventative care early diagnosis, medication compliance, regular doctor consultation is a major selling point for mobile health adoption. This is one reason why the emerging markets that have the infrastructure in place are increasingly turning to technology, both to improve healthcare access and to help moderate overall healthcare spend. However, despite evident demand, players within the mobile health ecosystem, ranging from mobile network operators (MNOs) to device vendors and systems integrators, face significant challenges in scaling up mobile health services to a level where they will start to significantly impact health outcomes and generate substantial revenue. The GSM Association (a trade group that represents network operators that use GSM) indicates that there are around 950 mobile health initiatives among its members, ranging from wellness and prevention initiatives to those targeting various elements of health systems. However, the vast majority of these are at pilot stage, demonstrating the uncertainty and immaturity of commercialising and transitioning mobile health into the mainstream. Figure 7: Mobile health in emerging markets: TMT market growth forecast Mobile health revenues in 2012 ($bn) Forecast mobile health revenues in 2017 ($bn) Country focus: Nigeria Aligning market opportunity, government support and consumer demand Nigeria is a good example of the key role governments can play in supporting mobile health development with an intelligent partnership-led strategy. Mobile penetration in Nigeria was 64% at the end of 2012 and is forecast to grow to 73% by Healthcare spend was around $1.6bn at the end of 2009, a seven-fold increase from The Nigerian government has taken an active role in the Commodities Commission, which was created in response to the UN Secretary General s call to increase access to medicines, devices and supplies that address avoidable causes of death during pregnancy, childbirth and childhood. The government has set up the National Primary Healthcare Development Agency to help reform and improve healthcare. The significance of this for TMT players is that the government views mobile health as key to transforming healthcare. The country s Saving One Million Lives programme (which aims to improve access to primary health services and commodities by 2015) is incorporating mobile channels and technologies as a key mechanism to achieving this. In December 2012, the mhealth Alliance announced a new partnership with the Nigerian Federal Ministry of Health, GSMA and Intel to leverage mobile computing and telecommunications technologies to support the initiative. This has opened up opportunities for the country s telcos. For example, MTN is playing an important role in developing services in the three main categories of mobile health services outlined by the government: prevention, health system strengthening and health worker empowerment. Etisalat is also active in developing innovative health services. For example its Mobile Baby application has trained more than 500 birth attendants and midwives and registered more than 10,000 pregnant women in the programme. Sproxil s SMS-based drug verification system, launched in 2010, has also benefited from government support.

18 34 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Mobile health 35 Mobile health: top five emerging markets Source: Ovum/Linklaters. All figures projected for Mobile health: High risk scaling the value chain 5 Russia 1 Table 5: Risk forecast for foreign investors Mobile health: top five emerging markets Market Key risks Risk outline Risk forecast Brazil Nigeria Russia Source: Ovum/Linklaters. Literacy Affordability Tax Privacy Literacy Affordability Infrastructure Literacy Affordability Bureaucracy : A lack of policy framework and facilitating regulation may hinder information sharing and public/private partnerships and prolong fragmentation in m-health. Literacy: Mass market growth will be hampered by low literacy and health awareness levels. Affordability: Governments with healthcare budgets strained by existing problems may not manage to direct sufficient resources to mobile opportunities. : A lack of policy framework and facilitating regulation may hinder information sharing and public/private partnerships and prolong fragmentation in m-health. Tax: High tax on mobile operators and their customers stifles adoption of mobile health tax incentives may be required. Privacy: Legal constraints on the sharing of medical data may hamper innovation. : A lack of policy framework and facilitating regulation may hinder information sharing and public/private partnerships and prolong fragmentation in m-health. Literacy: Mass market growth will be hampered by low literacy and health awareness levels. Affordability: Governments with healthcare budgets strained by existing problems may not manage to direct sufficient resources to mobile opportunities. Infrastructure: As mobile penetration is not predicted to rise materially during the next five years, this will limit the potential reach of certain mobile health services. Literacy: Mass market growth will be hampered by low literacy and health awareness levels. Affordability: Governments with healthcare budgets strained by existing problems may not manage to direct sufficient resources to mobile opportunities. Bureaucracy: High levels of bureaucracy and a lack of transparency can hinder mobile technology from getting integrated into care pathways. Sunny Sunny Sunny Market size and growth The long-term prospects for mobile health are bright. Many emerging markets are embarking on substantial healthcare infrastructure projects. Green-field investment in hospitals and wider healthcare system re-design increasingly involves the deployment of mobile health services as a standard component of healthcare delivery. However, growth prospects vary substantially between markets and service categories and, overall, mobile health development is slow in coming. Mobile health encompasses a broad range of services, which break down into three main categories. The most ubiquitous mobile health services in emerging markets which leverage basic functionality (i.e. voice or SMS) are available to all mobile phone users (not just smartphone owners) and are often paid for directly by consumers. For example, Mexico s Medical Home health information phone service has more than 1 million subscribers paying a fixed fee of $5 per month (charged via their mobile phone bill). The second group consists of more advanced services such as remote monitoring services, which generally involve a medical professional and are often delivered in partnership with healthcare providers, vendors and medical institutions. Vivacell in Armenia is a player that offers this type of service. The final category is made up of services which leverage sophisticated functionalities such as advanced analytics, for example the use of Android-based geographic applications to map polio risk areas and track the routes covered by polio immunisation teams in Nigeria, a service provided by Etisalat in partnership with Brazil Nigeria s Economic and Social Research Institute. This is the most embryonic category, although in larger and wealthier emerging economies like and Brazil this category of services is growing faster in green-field healthcare system deployments. There are two key revenue streams to consider in evaluating the growth prospects for mobile health. One is spend by healthcare organisations (public providers, private hospitals, health insurers and other primary and secondary care organisations) and the other is direct spend by consumers. In emerging markets, consumers will be an important revenue stream for service providers, particularly in markets where progress in building mobile health into mainstream care is slow and consumer demand and ability to pay for better healthcare is higher. 2 $734m Mobile health revenues Nigeria 4 $185m Mobile health revenues 3 $602m Mobile health revenues Fifty percent of the 950 mobile health services tracked by the GSMA have been launched in Africa. We believe there are significant opportunities in the longer term, particularly as the use of mobile health is seen as intrinsic to African countries achieving their health Millennium Development Goals (MDGs). However, according to a 2010 World Health Organization assessment, it is African countries which have made the least progress towards meeting the MDGs. As a result, the GSMA recently launched the Pan-African mobile health initiative, which aims to help develop a sustainable business framework, reduce fragmentation, align health and mobile industry goals and support the implementation of scalable services. $162m Mobile health revenues $3.86bn Mobile health revenues It will take some time for this initiative to show concrete results, but this kind of collaborative working across the mobile health ecosystem is a prerequisite to overcoming the barriers to mobile health adoption, particularly in markets with weak healthcare systems. Challenges include proving the value of mobile health itself, for example achieving a sufficiently robust evidence base to convince health providers and governments to prioritise mobile health over other investments. Other barriers to growth include punitive tax systems or the lack of effective payment models to reimburse and/ or incentivise the use of mobile health technologies and services.

19 36 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Mobile health 37 Mobile health: scaling the value chain 50% of the 950 mobile health services tracked by the GSMA have been launched in Africa. Mobile health is growing rapidly. It has huge potential, economically and in terms of improved health. But that potential will be realised only if effective scaling can be achieved in moving from simple to complex services and engaging with governments and regulators. Nigel Jones Healthcare Global Sector Co-leader Go-to-market strategies: addressing the integration challenge The major challenge facing TMT players in mobile health is integrating services into mainstream care delivery to gain scale. Four key strategies to achieving this are as follows: 1. Develop simple and affordable services: The majority of mobile health services are based on information, advice and simple reminders, which cater to local health needs. This is the quickest win for telcos, as services can be developed and priced as value-adds for existing subscribers and/or co-marketed with partners to the wider population. In Kenya, Safaricom has partnered with Call a Doc to launch Daktari, a hotline number providing medical advice on topics such as first-aid and medication guidance. This 24 7 service is charged at $0.22 per minute. 2. Roll-out risk/revenue-sharing business models: Partnerships and effective business models between MNOs and healthcare providers are crucial to building momentum for mobile health. This is key to achieving scale and in starting to ramp up service sophistication. For example, s Apollo Hospitals Group has partnered with Aircel for its triaged health information and advice service from its medical contact centres. SUGAR, Apollo s diabetes management programme, enables patients to send their blood sugar count to the clinician through SMS and mobile applications. An SMS text will then be delivered back to the patient explaining the readings and advising whether further action is required. 3. Leverage the identity and security capabilities of the SIM: One of the major cards telcos hold is their control of the SIM and their expertise in leveraging SIM capabilities for identity, privacy, billing and storage. Some telcos have made a good start down this road. Orange has been a leader in the use of SIM card authentication for healthcare applications and its integration into mobile devices and solutions. For example, it has created an SMS-based service to battle counterfeit drugs in Africa. 4. Consider strategic acquisition of adjacent healthcare organisations: It makes sense for TMT players to acquire expertise in areas that are aligned to their capabilities, such as using the mobile channel for the provision of information, advice and tele-monitoring services. Telefónica s recent investment in chronic care management firm Axismed (which handles 180,000 patients) is a good example of the kind of strategic investment in providers by operators we can expect to see on a more frequent basis.

20 38 Linklaters / Generation Next: Five pathways to TMT growth in emerging markets / Pathways to growth 39 Pathways to growth: Critical success factors for TMT growth in emerging markets Partnerships are key to the success of TMT players in emerging markets. While M&A remains an attractive option to scale up quickly where players are underweight, revenue-sharing commercial arrangements and JVs provide local knowledge and in some highly-regulated markets, are the only option for market entry. These structures can also help bridge the buyer-seller valuation gap by allowing the local partner to benefit from future upside and reducing the other party s capital commitments. Key contacts Roger Barron Telecommunications, Media and Technology Global Sector Co-leader Emerging markets hold the key to elusive growth for the embattled TMT industry. Next generation broadband, content and applications, mobile money, cloud ICT services and mobile health all promise substantial new revenue streams for the industry across a range of products, services and geographies. What is common to all of these opportunities is the need for a new ecosystem-led approach the days when the whole value chain was managed by one or two dominant players are long gone. Each of these new opportunities requires MNOs and vendors to collaborate with partners in the content, media, financial services, and technology sectors. This will require creating equitable partnership frameworks, via either a contract, JV, or in some cases an M&A framework that will work for all parties. Our study also reveals that, now that the low-hanging fruit represented by the delivery of basic services to the most accessible consumers has been exhausted, innovation not just in technology but in business model, pricing and customer service will grow in importance. As many of the examples cited in this study illustrate, the most successful innovation will usually start from the emerging market customer, their environment and their needs, and then work backwards to consider the available technologies to deliver that experience. Service providers and vendors are well-versed in the inside-out innovation of creating new technologies and products. To succeed in emerging markets they will need to balance this with the outside-in innovation that starts with the customer experience first, before considering product elements, core and partner competencies and the broader ecosystem that supports it. Finally, if players could simply add the contribution from all of these new revenue streams to their existing revenue mix, the future would be straightforward. However, this study underlines the fact that every player will have to perform a delicate balancing act of defending existing revenues from core services such as voice, SMS and basic content services, while investing in the future growth led by these five core growth areas. The most successful players will be those that minimise revenue erosion from legacy services and maximise growth in new-wave services while retaining or growing their existing margins. Delivering this new wave of services requires radical go-to-market strategies and a reshaping of business models. Our study of the five big bets for TMT growth in emerging markets and TMT power players market strategies revealed a set of five critical success factors common across all emerging economies: 1. Build profitable and sustainable partnerships: From broadband network sharing to the alliance of operators and financial services providers required to deliver mobile money to the mass unbanked, serious strategic collaboration is needed to maximise the chances of success in emerging markets. Developing strong partnerships, supported by effective revenue-sharing models, is critical. Partnering can solve problems of scale and resources, while also bringing essential local, sector or product knowledge. Even the Goliaths of TMT will find it challenging to succeed alone in emerging markets. Choose the right partners, make sure it s worth their while to collaborate with you over the long term, and ensure you have in place appropriate safeguards to protect you if the relationship sours or on exit. 2. Adapt to regulation: Immature regulatory regimes are a characteristic of almost all emerging markets (to a lesser or greater extent). One certainty is that regulation will develop and could, in some cases, seriously impact on the margins of emerging market TMT players, which are already under pressure. There is a regulatory lag effect as regulators seek to catch up with new products and services, and governments often see these as a potential source of tax revenue, especially when budgets come under pressure. Understanding key local and regional regulatory trends is vital for any TMT player analysing the risk profile of an emerging market and planning on how to ensure compliance. 3. Align with government strategies: Many emerging market governments are actively promoting policies with the effect of boosting TMT markets from national broadband policies to investment in mobile health initiatives. Telecoms operators and vendors should assess carefully evolving government policy in target markets in order to position themselves to benefit from the resources that governments are making available, and avoid the local protectionism that has harmed new entrants in some emerging broadband markets. 4. De-risk diversification: Diversification offers TMT players tremendous opportunities to access higher-growth, higher-margin revenue opportunities. However, diversification at speed and with scale without sufficient expert knowledge of a new product, service or industry presents huge operational risks. Effective partnering (for example, with financial services providers to develop mobile money services) or strategic acquisitions (for example, of healthcare providers to support the provision of mobile health) can bring much-needed expertise in unfamiliar products or services, and in how the industry operates and its attendant opportunities, risks and regulatory frameworks. 5. Start with the customer: Customercentricity understanding how local customs and culture influence how people interact with technology and content is critical to business decision-making, market strategy and product and service development. It s not enough to understand the dynamics of a market. In order to place big bets, TMT players need to understand the diversity of the customers and their basic needs across emerging markets. In placing its bets on these five pathways to growth, the TMT industry will shape all our futures. We hope you enjoyed our report. This study is part of Linklaters TMT Sector Programme. If you d like to find out more please get in touch. Linklaters Telecommunications, Media and Technology Global Sector Leadership Roger Barron Partner Tel: (+44) Mob: (+44) roger.barron@linklaters.com Julian Cunningham-Day Partner Tel: (+44) Mob: (+44) julian.cunningham-day@linklaters.com Scott Campbell Partner Tel: (+9) Mob: (+9) scott.campbell@linklaters.com Florian Drinhausen Partner Tel: (+49) Mob: (+49) florian.drinhausen@linklaters.com Elisabet Lundgren Partner Tel: (+46) Mob: (+46) elisabet.lundgren@linklaters.com Samantha Thompson Partner Tel: (+852) samantha.thompson@linklaters.com Tanguy Van Overstraeten Partner Tel: (+32) Mob: (+32) tanguy.van_overstraeten@linklaters.com