Change is on the Telefónica horizon with towers and workforce restructure

Telefónica has announced plans to accelerate the strategy of monetizing its tower assets after getting the green light from the Board of Directors.

The woes of Telefónica have been quite apparent in recent years. Despite owning regionalised businesses which are either market leaders or at the top-end of the scale, the firm has been drowning in debt. In bygone years, it was rumoured the firm was struggling with €53 billion debts, though it does seem to have gotten a handle on things.

At the end of 2018, thanks to several cost saving initiatives, debt had been reduced to €41.785 billion. During this period the firm did toy with a number of divestments (O2 UK) and an IPO of the tower infrastructure business, Telxius. This IPO fell through, but the business unit does present a new opportunity.

Following the Board Meeting, the team is pushing forward with plans to generate more profits through monetizing both passive and active telecoms equipment. And it does appear there are profits to be made.

Telefónica currently claims to own roughly 68,000 sites globally, either directly or through subsidiaries. Of those 68,000, tower infrastructure business Telxius owns approximately 18,000, with the remaining 50,000 owned by other units within the group. 60% of these assets are located within the four major markets (Spain, UK, Germany and Brazil).

By comparing the value of these assets with market benchmarks, Telefónica believes it can generate €830 million in revenues and €360 million in OIBDA. Another attractive component is the belief these sites would only require €25 million in maintenance capital expenditure across the year.

While this strategy might be considered as a means to aid rivals, the numbers are attractive to a business which is facing financial and competitive strain. Aside from the debt which is still looming above the heads of executives, subscriptions data is not the most attractive either as you can see from the table below:

Total access (connections/subscribers on network) in millions
Year Spain Germany UK Brazil South HISPAN North HISPAN
2015 41.97 48.36 25.29 96.92
2016 41.23 49.35 25.76 97.22
2017 40.99 47.6 25.31 97.91 58.45 72.57
2018 41.55 47.09 32.98 95.3 56.91 73.56

What is worth noting is that ‘total access’ accounts for everything which is running across one of the Telefónica networks in that region. That could mean mobile, wholesale, MVNOs, TV or broadband. That said, the numbers tell a story for themselves; Telefónica isn’t really going up or down, just hovering around.

If the traditional means of making money, attracting more subscribers, isn’t necessarily paying off the debtors, Telefónica needs to think about new strategies. Monetizing the tower infrastructure assets is certainly one way to go, and restructuring the workforce is another idea which might save money across the year.

Alongside the tower monetization announcement, Telefónica Spain has also said it is currently in negotiations with trade unions concerning its workforce. In short, that means some will be retrained, some will be encouraged into retirement and others will be shown the way to the door.

“The collective agreement we signed four years ago has enabled us to make great advances and has provided us with social and labour stability during this period,” said Emilio Gayo, Chairman of Telefónica Spain.

“Now we have to be more ambitious and evolve into a more digital company that is ready for the challenges ahead.”

Although Telefónica Spain is not putting any numbers out into the public domain, reports have emerged that the workforce will be trimmed by roughly 5,000. Those over the age of 53 will be offered a ‘voluntary individual suspension plan’, while the plan is to double the training budget to reskill staff members.

With an eye on the horizon, Telefónica is seemingly preparing to future-proof its largest expense; employees. The management team anticipates more than half of sales will be through digital channels in a few years’ time, while legacy fixed and mobile networks will be shut down during the ‘modernisation’ period. This will make a number of people redundant.

In fairness to Telefónica , it is creating plans to help evolve the skill sets of employees, but with any business evolution there will always be the messy job of headcount reduction.

O2 starts making progress in the enterprise services world

O2 might be an ‘also ran’ in the enterprise services world to date, but in being named a supplier on the Crown Commercial Service’s (CCS) new Network Services 2 framework, it is taking a step in the right direction.

As the Government agency tasked with improving government commercial and procurement activity, gaining recognition from the CCS is a notable win for O2. The Network Services 2 framework is effectively the list of suppliers public sector bodies and organizations can work with for telco services such as networks, voice and data provision, internet access and wifi.

“We know that making services easy to procure is a major priority for our public sector customers – so the news that we have been named as a supplier on the new Network Services 2 framework is a huge milestone for all of us at O2,” said Matthew Spencer, Head of Public Sector Sales at O2. “It means we can offer our entire product range of ICT services to public sector and non-profit organisations.

“Today’s announcement opens the door to all sorts of new projects and better integration for customers. As technology evolves, there is enormous potential for improved connectivity, productivity and savings across the public sector – and O2 is here to work with organisations as a digital partner, helping them reach their connectivity goals, faster.”

Originally formed in 1991 under a different name, the CCS is part of the Cabinet Office and negotiates preferred supplier lists for Government departments, agencies and non-profits. It you aren’t on the list, you will find it almost impossible to do business in the public sector.

The ‘Frameworks’ are effectively pre-negotiated template contracts for public sector organizations to use when engaging with potential suppliers for a variety of different services. In this case its telecommunications, but it could be anything from office supplies to payroll management software.

Within each of the frameworks, there are designated ‘Lots’. O2 has been named as a supplier for Lots 1-4 and 6-8, allowing it to offer services such as data access; local connectivity, traditional telephony, inbound telephony, mobile voice and data, paging and alerting and video conferencing. The suppliers for Lots 5, 10 and 13 will be decided in the near future, though we were not able to figure out what these Lots cover.

The supplier lists for Lots 9, 11 and 12 have also been drawn up, though O2 does not feature on these. Services covered here are audio conferencing, radio and surveillance.

At O2, this is a big step forward. The CCS has effectively given the telco its seal of approval, allowing the team to expand in the enterprise services arena.

To date, the enterprise market has been largely dominated by Vodafone and EE. O2 has been operating in the private space for some time, though it has been regularly highlighted by the management team as a significant growth area moving forward. This ambition seems to have been compounded with the looming introduction of 5G.

5G offers the telcos new avenues to work with enterprise customers above and beyond the traditional means of connectivity. With digital transformation a buzzword of yesteryear, enterprise organizations and public sector agencies are increasingly looking to technology to enhance operations. There is an opportunity for the telcos to secure a more valued position in the digital ecosystem, as well as the increased profits, if the proposition is right.

Over the last 12-18 months, O2 has been working alongside a number of the FTSE100 firms to trial usecases ahead of the 5G boom. Although details of the activities are relatively thin, the management team has boasted of its success to date.

Entry onto the preferred suppliers list might seem like little more than a box ticking exercise for some, this is a very important step forward from O2. The inclusion in the framework adds validity and credibility to the O2 enterprise services case, offering a much greater opportunity for the team to carve out market share in a, potentially, very profitable segment of the telco industry.

O2 and Vodafone double down on network sharing deal for 5G

Network sharing deals are not new in the UK, but with O2 and Vodafone evolving their existing relationship to active infrastructure, the partnership certainly has a new mission.

Announced today, O2 and Vodafone have agreed to share 5G active equipment, such as radio antennas, on joint network sites across the UK. The approach should accelerate 5G deployments in the areas where infrastructure investments are not as commercially attractive, though the 23 largest cities have been excluded from the deal.

“Today is an important step in demonstrating our commitment to invest for the future, with mobile connectivity one of the UK’s most powerful opportunities to strengthen the economy and improve the lives of British people,” said O2 CEO Mark Evans. “This agreement will enable us to roll-out 5G faster and more efficiently, benefiting customers while delivering value for our business.  It also importantly allows us to utilise the spectrum we acquired in the last auction very effectively.”

“We’re driving our 5G roll-out forward with this agreement, and taking our customers, our business and the whole of the UK with us,” said Vodafone CEO Nick Jeffrey. “Greater autonomy in major cities will allow us to accelerate deployment, and together with active network sharing, ensures that our customers will get super-fast 5G in even more places more quickly, using fewer masts. We can boost capacity where our customers need it most so they can take full advantage of our new unlimited plans.”

Prior to this announcement, the duo were already in partnership through the Cornerstone Telecommunications Infrastructure (CTIL) joint-venture. This company effectively acquires and manages passive infrastructure across the country, enabling the pair to share costs on some of the most expensive aspects of network deployment; site acquisition, local government bureaucracy and civil engineering.

This new agreement takes the relationship one step further. Although many telcos around the world believe active equipment is a means to differentiate experience, the pair are putting aside their squabbles to grow the network across all regions in the UK. For those areas where ROI is more difficult to realise, spectrum assets will be the only differentiating factor.

In the larger, more densely populated environments, the duo will remain competitive. In 23 large cities, covering 16% of combined cell sites, all assets will be separate. In cities such as London, Manchester or Liverpool, profitability has not been difficult to demonstrate through network expansion, such is the number of subscribers in such a small geographical zone.

Although we are slightly surprised by the concept of sharing active equipment, it is a logical path for the two telcos to take. Spectrum assets should be enough to deliver some sort of differentiated experience, and if the telcos want to move up the value chain, they will need to reconsider their thoughts on the delivery of data.

Connectivity revenues will remain the core business, but 5G presents an opportunity to create a new role in the ecosystem and deliver more value-added services. To enable this, a new mindset to network infrastructure has to be acquired to free up revenues for other areas. This is not the only advantage of network sharing deals, but the intelligent reallocation of funds could allow MNOs to transform from ‘Communications Service Providers’ to ‘Digital Service Providers’.

Telefonica pairs up with Santander for banking 5G usecase

Telefonica Spain has announced a tie-up with Santander to launch a joint-innovation project to test out 5G applications in the banking sector.

The project will focus on three different usecases, 4K video conferencing, low latency cloud storage and virtual reality. The hope is to more readily engage customers and adapt their financial products to meet the new demands of the digital economy.

“The initiative with Santander Spain is the result of the collaboration with our corporate customers to ensure that 5G technology is deployed in a way that fully meets their needs, prioritizing the development of the most demanded capacities,” said Emilio Gayo, CEO of Telefónica Spain. “With initiatives like this we also ensure the early adoption of 5G and the positive impact on the Spanish industrial network.”

“This agreement with Telefónica responds to Santander’s commitment to innovation and to accompanying our customers in the transformation process towards the new generation of 5G communications,” said Rami Aboukhair, CEO of Santander Spain. “The new technology will allow us to have a better connectivity and faster speed of response in transactions and to offer all our customers the best experience and the best possible solutions.”

Starting with the video application, a 4K video conferencing link will be set up between two bank branches to offer ultra-high-resolution image, 4096×2160, and natural motion with zero delay. Secondly, a low latency cloud storage solution will be provided by Telefónica, based on the Hitachi Content Platform Anywhere Edge solution embedded on Telefónica’s edge computing infrastructure.

Finally, the pair will introduce co-working spaces developed in collaboration with Idronia that use Virtual Reality, 360 video and Edge Computing technologies. The aim is to offer an immersive reality service allows customers to remotely visit co-working spaces such as the Santander Work Cafe located at the Santander banking office in the centre of Madrid.

5G is being switched on in numerous locations and now it is the time to focus more heavily on the commercial side of telco. There might be some gain in offering eMBB products to both consumer and enterprise customers, but to see the promised value the telcos will have to explore new areas. European telcos might be behind other regions when it comes to engaging the verticals, but progress is being made.

Telcos complain about auction as German regulator bags €6.5bn

With 41 blocks available in the 2 GHz and 3.6 GHz bands, this spectrum auction has proved to be a busy one for Germany, but it certainly is a profitable one also.

Lasted 52 days and consisting of hundreds of different bids in what appeared to be a frustrating process, the German regulator will pocket €6.5 billion. It seems Deutsche Telekom and Vodafone were having the biggest feud, sending the total expenditure considerably north of the €3-5 billion expectation.

Sitting at the top of the pile, Deutsche Telekom spent €2.2 billion, while Vodafone contributed €1.9 billion. Telefonica spent €1.4 billion and up-start Drillisch wrote a cheque for €1.1 billion as it searches for a means to break the dominance of the three MNOs.

“Vodafone is committed to bring the full benefits of a digital society to Germany through our gigabit network including 5G,” said Vodafone Group CEO Nick Read. “We believe it is important to have a balance between the price paid for spectrum and our strong desire to create an inclusive society through investment in mobile network coverage.”

And while Read’s comments are as bland as you would expect for a press statement, there have been grumblings elsewhere over price. Deutsche Telekom has said the process has left a ‘bitter taste’.

“The network rollout in Germany has suffered a significant setback. The price could have been much lower,” said Dirk Wössner, Member of the Board of Management of Telekom Deutschland.

“Once again, the spectrum in Germany is much more expensive than in other countries. Network operators now lack the money to expand their networks. With the auction proceeds one could have built approximately 50,000 new mobile sites and close many white spots.”

Deutsche Telekom has secured 4 frequency blocks in the 2 GHz band and 9 frequency packages in the 3.6 GHz band. Vodafone on the other hand has purchased four different blocks in 2 GHz, and one continuous block of 90 MHz in the 3.6 GHz spectrum band. Telefonica collected two paired blocks in the 2 GHz band and seven unpaired blocks in 3.6 GHz.

Although Telefonica feels it can maintain its market share leadership position in mobile following this auction, it also felt the need to vent over a frustrating couple of months.

“We remain convinced that frequency allocation via auction was counterproductive for the expansion of mobile communications in Germany,” said Valentina Daiber, Chief Officer for Legal & Corporate Affairs at Telefónica Deutschland.

“The course of the auction showed that the design as well as the insufficient amount of available frequencies drove up the costs. From the consumer’s point of view and for Germany as a business location, these investment funds would be much better spent on network expansion.”

The telcos will certainly be glad they have a bit of breathing room from the auction process now, though the relationship between the regulator and industry seems to be turning very sour.

UK and Latin America gave Telefónica a steady Q1

Telefónica’s otherwise flat quarter was bolstered by strong performance in its UK and Latin America South units, which delivered 5.3% and 15.2% organic growth rates, taking the group level growth rate to 3.8%.

Telefónica reported its first-quarter results, with the total revenue at €12.611 billion, an increase of 3.8% in organic terms. This means adjustments were made to the reported numbers considering impacts of exchange rate moves, regulation and reporting standard changes, and special factors, for example adjustment made to the Argentina numbers on account of the hyper-inflation. Otherwise, the total revenue would have reported at € 11.979, or a 1.7% decline from a year ago. The quarterly operating income before depreciation and amortisation (OIBDA) reached €4.264 billion, up by 10.3%; and the net income grew by 10.6% to reach €926 million.

The Telefónica group is now serving a total of 332 million subscriber accounts (“accesses”), 6 million less than a year ago. The total mobile accesses by the end of the quarter stood at 267 million, down by 4 million from a year ago. But the good news for Telefónica is that it actually grew the contract customer base by 7.5 million over Q1 last year, meaning the loss is mainly on the pre-paid market, down by 11.5 million. It also grew its fixed broadband (including FTTx and cable) customer base by 2.1 million over the course of the year.

“The first quarter results showed a significant improvement in revenue growth trends and double-digit growth in net income and earnings per share. Strong cash generation, which was three times higher than the figure reported in the first quarter of the previous year, allowed for an acceleration in debt reduction, for the 8th consecutive quarter, further strengthening our balance sheet,” commented José María Álvarez-Pallete, Chairman and CEO of Telefónica. “We have started the year by extending our leadership in fibre and 4G deployment, testing new 5G capabilities and making progress in the UNICA virtualisation programme, allowing us to continue gaining customer relevance through better experience and higher average lifetime.”

Ángel Vilá, Chief Operating Officer of Telefónica, introduced the Q1 results and its outlook to 2019 annual outlook in more detail in the video clip at the bottom (in Spanish, with English subtitle).

While the its two biggest markets, Spain and Brazil, managed to stay stable, delivering modest organic growth of 0.3% and 1.7% respective (+0.3% and -5.2% in reported terms), Telefónica’s UK business registered a strong 5.3% organic growth to reach €1.67 billion (£1.47 billion). Excluding the exchange rate impact, the UK business would have reported a 6.6% revenue growth to reach €1.691 billion (£1.488 billion). The company is now serving 32.7 million mobile subscribers, up 2.3% over Q1 last year, which includes both customers on O2 (25.1 million) and those on the MVNOs using Telefónica networks (Sky Mobile, giffgaff, Lycamobile, and Tesco Mobile).

“This is another good set of results building on our momentum from 2018. We have delivered further revenue and customer growth underpinned by our award-winning network and market-leading loyalty,” commented Mark Evans, CEO of Telefónica UK. “We are committed to making every day better, providing customers with compelling reasons to join and stay with us through attractive propositions such as O2 Custom Plans.”

Looking across all the Telefónica markets, the UK registered the lowest churn rate of 0.9% among in its postpaid customers. In comparison, in Telefónica’s other European markets, the churn rate of contract customers was 1.6% in Germany and 1.7% in Spain. Comparable churn rates in markets like Chile and Mexico ran around 3%.

Telefónica attributed high customer loyalty, among other things, to its aggressive investment to improve its networks. The company claims it is investing equivalent to £2 million a day to strengthen its network and increase its reach.

One of O2’s focus investment areas in 2019, in addition to the planned launch of 5G, will be high density venues, including sports arenas, shopping centres, hotels, and conference centres. Already serving the Anfield Stadium in Liverpool and the Lord’s cricket ground in London with improved networks, in collaboration with the Wireless Infrastructure Group (WIG), an infrastructure company, O2 is planning to upgrade and improve its coverage and capacities in other high usage venues.

“While we look ahead to 5G we also continue to focus on our existing network capability. We strive to deliver a great network experience to all our customers, including some of the UK’s busiest locations where network demand is at its peak,” said Brendan O’Reilly, O2’s Chief Technology Officer. “Our multi-million pound investment with our partners at WIG should provide O2 customers with even better connectivity in the places they love to visit.”

Here’s more commentary from COO Ángel Vilá.

Vodafone Germany tries to placate regulators via wholesale cable deal with Telefónica

Telefónica Deutschland will be able to sell services that run on the combined Vodafone and Unitymedia cable network in Germany, as a remedy measure taken by Vodafone to satisfy EU’s competition concern over its proposed acquisition of Liberty Global.

The two companies announced that they have entered into a definite “cable wholesale agreement” in Germany, whereby Telefónica Deutschland will offer its customers broadband services that use both the Vodafone fixed network and that of Unitymedia. The combined networks cover 23.7 million households and represent a significant upgrade to whatever Telefónica Deutschland customers are currently getting.

“The cable agreement will enable us to connect millions of additional households in Germany with high-speed internet in the future,” said Markus Haas, CEO of Telefónica Deutschland. “By adding fast cable connections, we now have access to an extensive infrastructure portfolio and can offer to even more O2 customers attractive broadband products – including internet-based TV with O2 TV – for better value for money.”

Vodafone’s plan to acquire Liberty Global in Germany (where it trades under the brand Unitymedia), the Czech Republic, Hungary, and Romania, has run into difficulty at the European Union, which raised competition concerns at the end of last year. The Commission was particularly worried that the combined business would deprive the consumers in Germany of access to high speed internet access, and the OTT services carried over it. Vodafone expressed its confidence that it would be able to satisfy the Commission’s demand. Opening its fixed internet access to its competitor is clearly one of the remedies. Also included in the remedy package Vodafone submitted to the Commission was its commitment to ensure sufficient capacity is available for OTT TV distribution.

“Our deal with Liberty Global is transformational in many ways. It is a significant step towards a Gigabit society, which will enable consumers & businesses to access the world of content & digital services at high speeds. It also creates a converged national challenger in four important European countries, bringing innovation & greater choice,” said Nick Read, CEO of Vodafone Group. “We are very pleased to announce today our cable wholesale access agreement with Telefonica DE, enabling them to bring faster broadband speeds to their customers and further enhancing infrastructure competition across Germany.”

Vodafone believed the remedial measures it put in place should sufficiently reassure the Commission that competitions will not suffer after its acquisition of Liberty Global. The company now expects the Commission to undertake market testing of the remedy package it submitted, and to give the greenlight to the acquisition deal covering the four countries by July 2019. It plans to complete the transaction by the end of July. The merger between Vodafone’s and Liberty Global’s operation in The Netherlands was approved by the EU in 2016.

América Móvil strengthens its position in Brazil with Nextel acquisition

The Latin American mobile heavyweight América Móvil has agreed to acquire its competitor Nextel in the Brazilian market for $905 million.

Shortly after the deal was announced by América Móvil on Monday, and the board of NII Holdings, which owns 70% of Nextel, announced that it would propose to the shareholders to accept the offer. The other 30% of Nextel is owned by AI Brazil Holdings, the local operation of Access Industries, an American private company whose portfolio includes natural resources, telecoms, internet services, as well as Warner Music, among other media interests.

The nature of the deal, “cash free / debt free”, will let NII and AI Brazil keep all the cash while América Móvil will not assume Nextel’s debts. Although the total transaction value is less than 1.5 times of Nextel’s annual revenues in 2018 ($621 million), it represents almost four times NII’s market capitalisation on its latest trading day on NASDAQ ($229 million), indicating the buyer’s relatively strong confidence in the business prospect.

Brazil is a highly competitive market. According to research by Ovum, by Q4 2018, Vivo (owned by Telefónica) led with one third of the total mobile market, while TIM and Claro (América Móvil’s existing operation in Brazil) were vying for the second place, each serving about a quarter of the total mobile subscribers. Nextel had slightly over 1% market share. The rest of the market is served by Oi (a JV between Altice Portugal, formerly Portugal Telecom, and Telemar, Brazil’s largest integrated telecom operator).

After the acquisition, América Móvil plans to combine Nextel with Claro to “consolidate its position as one of the leading telecommunication service providers in Brazil, strengthening itsmobile network capacity, spectrum portfolio, subscriber base, coverage and quality, particularly in the cities of São Paulo and Rio de Janeiro, the main markets in Brazil.”

For NII, selling Nextel in Brazil represents the end of an era. The company once operated mobile services in multiple North and Latin American markets, including the eponymous professional radio service in the US, which was later acquired by Sprint. Brazil is its last operation, where it has been struggling in a classic four-operator market. Not only has it not been able to break into the leader group, but also seen business declining fast. The revenues in 2018 were a 29% decline from 2017 ($871 million), which itself was a 12% decline from 2016 ($985 million).

“The announcement of this transaction marks the culmination of an extensive multi-year process to pursue a strategic path for Nextel Brazil and provides our best opportunity to monetize our remaining operating assets in light of the competitive landscape in Brazil and long-term need to raise significant capital to fund business operations, debt service and capital expenditures necessary to remain competitive in the future,” said Dan Freiman, NII’s CFO. Earlier potential buyers included Telefónica Brasil, Access Industries (NII’s JV partner), though the most concrete case was TIM, which, according to Reuters, approved a non-binding offer in November last year. None of these negotiations has come to fruition.

“Management and our Board of Directors believe the transaction is in the best interest of NII’s stockholders,” Freiman added.

UK and Germany are a bit rubbish at mobile – Opensignal

A new study from mobile analytics company Opensignal notes the UK and Germany are falling behind in terms of mobile performance.

It took a look at the two operator groups that have networks in both countries and found they all deliver relatively low mobile broadband speeds in those two countries. As you can see in the charts below, Telefónica does a fair bit worse in the UK and Germany than in Spain, but maybe that’s to be expected since it’s a Spanish company. However the trend continues with Vodafone, for which the UK and Germany are two of its worst performers.

opensignal telefonica

opensignal vodafone

“So what’s the reason for these relatively poor mobile broadband speeds in Germany and the U.K.?” said Opensignal Analyst Peter Boyland. “It certainly isn’t market maturity or competition, as both countries have had mobile networks for decades and levels of competition, numbers of operators, etc. are comparable with their neighbours.

“Topographically, both countries have challenges in terms of size and population density, but no more than, say, Italy or Spain. It would be easy to blame poor performance on underinvestment in network infrastructure, but the reality is a combination of many factors including regulation, availability of spectrum, and mergers and acquisitions among network operators.

“The fact remains that Germany and the U.K. are punching well under their weight in terms of mobile network speeds. Both countries are on the verge of 5G launches, but it is likely to be some years before the benefits of these new networks are felt by most mobile users. And there is growing discontent among the business community in Germany, with claims that poor broadband speeds are hindering economic growth. Germany and the U.K. may not be able to wait for the 5G opportunity, as their operators urgently need to make improvements in their mobile network experience today.”

Something’s certainly going on when two major operator groups can only manage around half the performance in the UK and Germany as they can in their leading markets. As Boyland said this situation will be the product of a number of factors, but our gut-feel is that regulation and spectrum availability are probably the most significant of them.

Telefónica and Microsoft team-up to own connected ecosystem

Every telco is attempting to figure out how to survive in the newly-defined digital world and Telefónica’s approach looks to be one of the most interesting attempts yet.

Speaking at Mobile World Congress in Barcelona, Telefónica CEO Jose Maria Alvarez-Pallete was joined on stage by Microsoft CEO Satya Nadella to preach the promise of its ‘fourth platform’ and the power of digital assistant ‘Aura’ as a play to capture the fortunes of tomorrow’s digital ecosystem. Many are attempting to realise the glories of the connected economy, but this approach, leaning on the ‘gated community’ lessons of the OTTs looks to be one of the most encouraging yet.

“We decided cognitive intelligence was an amazing new opportunity,” said Alvarez-Pallete. “It is a new wave of interaction with our customers.”

The idea, which has been in the making for the last two years, is a relatively simple one on the surface. Build an effective digital assistant (tick), an intuitive interface (tick), a network designed for intelligence (tick) and open all this up to third parties (the next tick). It is remarkably similar to the ‘gated community’ model which has been championed by the likes of Facebook.

Although there are services and products which will be designed by Telefónica, there are more intelligent ways to monetize the consumer. The digital assistant and ‘Movistar Living App’ help Telefónica own the relationship with the consumer, but by opening the gates of this cultivated community Telefónica can monetize the relationships and (in-directly) the services which are build on top of its own intelligent network.

rhdr

However, for this idea to work the services have to be captivating and innovative. Telefonica must give customers a reason to use ‘Aura’ and the ‘Movistar Living App’ as the focal point of their own connected world. Effectively, Telefonica will have to go head-to-head with the likes of AWS and Google who are also trying to own this relationship with their own digital assistants. This is where Microsoft will be able to help.

Under Nadella, Microsoft has been reborn as a new company. After a brief fall from grace, the now cloud-defined business is fast becoming one of the most innovative players in the market, and part of this is built on its own AI platform and cognitive intelligence offerings. If Telefonica is going to go toe-to-toe with some very innovative players and own the connected ecosystem, the power of Azure (machine learning research, speech recognition etc.) will be critical to this success.

Another crucially important factor to success here will be earning, and maintaining, customer trust. Facebook succeeded so forcefully in the first few years because no-one questioned the data-sharing business model. Perhaps this was because no-one could understand these concepts, but the world has changed. Privacy is a priority for consumers, and Telefonica will have to prove it is serious about keeping personal information safe and managing the relationships with third-parties responsibly. Without this trust, Telefonica’s drive towards evolution with fail and the business will be nothing more than a dumb pipe.

rhdr

What is worth noting is that the strategy is off to the best possible start. Aura has been launched in six different countries, across 30 channels and has developed more than 1000 different usecases. By the end of 2019, these numbers will have improved to 9, 50 and 1500 respectively. The ambition and the growth potential is certainly there.

Owning the ecosystem which is fast developing behind the connected economy, including the smart home, is an opportunity which looked to be lost for the telcos. With the likes of AWS and Google seemingly wrestling control away with their own smart speakers and integrated personal assistants, it might have been a case of another missed opportunity due to inaction. Telefonica is looking to right this wrong however.