THE DELTA PARTNERS PERSPECTIVE

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1 Keeping your enemies close: Telecom operator partnerships with mobile instant messengers Marc Van den Broucque - Director Feroz Khan - Analyst

2 Keeping your enemies close: Telecom operator partnerships with mobile instant messengers Authors: Marc Van den Broucque - Director Feroz Khan - Analyst Instant messaging ( IM ) applications such as WhatsApp, Facebook Messenger and Line have had a turbulent relationship with telecom operators and are widely blamed for the decline in operators revenue over recent years. However, recent trends show an increase in partnerships between the two which begs the question, why telecom operators are now choosing to embrace their former enemies? The best of enemies Instant messaging has arguably been the most significant evolution of consumer behaviour since mobile telephony began. The popularity of IM platforms is phenomenal - Line was able to register over 600m users within three years of launch. IM has been the killer use case that has integrated the Internet into peoples everyday lives. In doing so, it has decimated SMS traffic. Furthermore, as IM players expand their offering, they are increasingly posing a threat to voice traffic, particularly higher 2

3 revenue international traffic. Ovum estimates that over the next three years alone over $180m of voice revenues will be lost to OTT VoIP platforms, much of this to IM platforms that have transitioned into voice (e.g. WhatsApp). Once at the epicentre of subscribers social lives, telecom operators are increasingly finding themselves circumvented by instant messaging and social media applications. Operators and regulators reactions to this have generally been negative. Some have banned certain instant messaging services on their networks (e.g. Etisalat and du) while others have called for equal regulation and the ability to charge platforms for access to consumers via the abolishment of net neutrality. On the whole, IM players are value destructive to the communications value chain, taking more revenues away from MNOs than they are able to capture for themselves. to the best of friends In contrast to some aggressive operators responses above, other operators have adopted a more welcoming approach by seeking to actively partner with IM platforms, such as those depicted below. Inception Partnership Description Rationale August 2012 KDDI and Line have signed and agreement which will see the app added to the operator's "au Smart Pass" app promotion service which has over 2 million subscribers Increase Line's subscriber base in Japan KDDI benefits by offering subscription plans or bundled social messaging services, or by facilitating content purchases through carrier billing December 2012 Hike Messenger Instant messaging chat service which started in 2012 funded by the joint venture between Bharti and Softbank. Majority of its user base is in India Bharti and Softbank beachhead into the digital space Hike uses Bharti's mobile platform to attract subscribers gained 35m users in 2 years February 2013 Multiple operators Facebook has tied up with more than 18 operators in 14 countries including Airtel and Reliance in India, through which it will offer free or discounted data access on Messenger Promotion of Facebook's mobile messaging service Subscribers get a Facebook price plan, reduces churn on Operator's network Millicom Paraguay increased mobile data users by 30% based on its Facebook Messenger plans July 2013 Unicom's partnership with WeChat takes the form of a customised SIM card which is targeted at students. Different packages offering free voice calls and data China Unicom can access the student market, which start off as low ARPU customers and eventually grow in to high ARPU once they enter the work force WeChat can grow their subscriber base February 2014 Source: Press clippings, Delta Partners analysis Telefónica has announced a partnership with Line. The deal is a first with an overseas carrier and gives Telefónica exclusive access to the new Line for Firefox OS app Line gains entry into the South American market Telefónica attracts customers to its Firefox OS phones by offering free VoIP and messaging on the Line app Is partnership an appropriate response to the threat IMs pose? We argue that, if correctly executed, a partnership with an IM platform makes sense for operators for a number of reasons: 1. Staying relevant in a constantly evolving connectivity environment While there is no doubt that data usage is growing, consumers increasingly have alternatives to relying on their mobile data connection. Free Wi-Fi hotspots at shopping centres, cafés and restaurants have reduced the marginal benefit of a mobile internet subscription and for some consumers this will inevitably decrease usage. By partnering with IM applications and offering bundled packages, operators ensure subscribers keep 3

4 THE DELTA using their IM services via the MNO. These subscribers are in turn more likely to use data for non-im activities. 2. Keeping the connection between operator and subscriber alive Until the advent of social media, operators were unrivalled in the knowledge they had of their customers. In fact, this information is so vast that companies such as Cash Credit have utilised this data to assess telecom customers for financial loan eligibility. With the advent of IM platforms and social media, the MNOs no longer have the best view of their subscribers and hence the opportunity to capture advertising dollars and sell market intelligence has bypassed them in favour of these new entrants. 3. A meaningful opportunity to increase a MNO s ARPU It requires a somewhat rare set of circumstances for a MNO to realise the benefit of traffic derived from IM platforms. Where operators have blocked IM platforms and then enabled access as part of data packages for example, they have been able to realise an increase in their ARPU. On the whole though, IM platforms present a threat that MNOs are unable to respond to effectively due to net neutrality or other regulations tying their hands. In the face of declining revenues due to the emergence of IM services, some MNOs have tried to launch their own platforms in order to recapture the initiative. These players are, however, unable to compete effectively with the fast moving pace of newer entrants. Given this inability to compete, a partnering strategy remains a MNO s best option to respond to this competitive threat. Within the scope of all potential digital investments, an investment in an IM platform has the further benefit of providing exposure to a broad digital ecosystem. This is increasingly the case as IM service providers have expanded from pure communications into online shopping, taxi ordering and other ancillary services. This is attractive to operators, allowing them to form fewer, but more meaningful partnerships providing a wide exposure to digital trends. 4. Potential for churn reduction Subscribers tend to show high loyalty to their preferred IM platforms given the network effects implicit in each ecosystem. Furthermore, dwell time on instant messengers is considerably higher than for other online services. According to the TNS Arab Social Media report, 45% of social media users in the Middle East spend around minutes per session on social media with more than 50% using social media for instant messaging. By offering bundled or discounted access to these platforms, operators are able to create a differentiated offering for their subscribers, thus reducing churn. Mutually beneficial relationships Relationships between operators and IMs can endure as value accrues to both parties. While we have examined the value that accrues to MNOs so far in this article, it is important to realise that the IM platforms also have much to gain. For them, a local mobile operator: 4

5 Will provide access to their subscriber base and beachhead in to a new market Possesses regional experience/expertise Will provide access to their established network and infrastructure Is able to provide assistance with any regulatory hurdles Opportunity still untapped With the right execution, MNOs can use the growth of instant messaging for their benefit to supplement and strengthen their core business. MNOs who have executed effectively are already reaping these benefits. It is increasingly clear that MNOs should not expect a strong regulatory response to their new IM competitors, and therefore learning to embrace their former enemies is more important than ever. We expect potential IM partnerships to attract further attention from mobile operators in the future, in spite of the threat that IMs continue to pose to the established status quo in the telecommunications industry. 5

6 THE DELTA Marc Van den Broucque is a Director in Delta Partners Corporate Finance business in Dubai. Marc has over 10 years of corporate finance experience, both as advisor and principal, working across Europe, the Middle East and Africa, where he has executed in excess of US$50 billion in M&A and capital markets transactions. Marc holds a first class honours degree in Accounting and Finance from the London School of Economics. Feroz Khan is a Senior Analyst at Delta Partners where he works on Corporate Finance and M&A engagements. Feroz has over four years of corporate finance experience focusing on the TMD industry specifically within emerging markets. Prior to joining Delta Partners, Feroz worked at Macquarie Investment Bank as well as Standard Chartered in their M&A practice. If you would like to contact the author to further discuss this topic, you can to mvdb@deltapartnersgroup.com Delta Partners is the leading Advisory and Investment firm specialised in Telecoms, Media and Digital with offices in the Middle East, Africa, Europe, Asia, Latin America and the United States of America. We partner with global and regional telecom providers, digital players, other TMD clients and our investors to help them address their most challenging strategic issues. Our unique combination of Management Consulting, Corporate Finance1 and Investments2 creates unparalleled value for our clients, investors and business partners. For more information, please visit and follow us on Delta Partners Corporate Finance1 Limited and Delta Partners Capital2 Limited are members of the Delta Partners Group of companies and are authorised and regulated by the DFSA. TMD Advisory and Investment