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Telcos’ Role in the Advertising Value Chain Market Study – Executive Summary www.stlpartners.com/telco2_research-analysis_ad-funded.php Chris Barraclough, STL Partners with support from Alan Patrick, Broadsight March 2007 Chris Barraclough [email_address] +44 (0)7932 043 808; +44 (0)207 193 9585; Skype:chrisbarraclough

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About STL: Driving Innovation & Growth in TMT 1. Events Research Training Ventures Consulting 1. Telco, Media, Technology ABOUT STL www.stlpartners.com/ www.stlpartners.com/telco2_research-analysis.php www.stlpartners.com/telco2_workshops.php www.telco2.net/event/index.php Supported by our free blog: www.telco2.net/blog

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STL Consulting Services <ul><ul><li>Industry developments – Telco 2.0 </li></ul></ul><ul><ul><li>New: </li></ul></ul><ul><ul><ul><li>Technologies </li></ul></ul></ul><ul><ul><ul><li>Competitors </li></ul></ul></ul><ul><ul><ul><li>Products </li></ul></ul></ul><ul><ul><ul><li>Markets </li></ul></ul></ul><ul><ul><ul><li>Business Models </li></ul></ul></ul><ul><ul><li>Strategy & Marketing implications </li></ul></ul>Education & Training Strategy Development New Proposition Devt Business Case Development Project Management Support Frontline GTM support STL’s ‘ Mindshare’ tools and techniques for value innovation <ul><ul><li>Market Analysis </li></ul></ul><ul><ul><li>Customer Analysis (VOC) </li></ul></ul><ul><ul><li>Competitors Analysis </li></ul></ul><ul><ul><li>Core Assets & Competencies </li></ul></ul><ul><ul><li>Strategic Option Evaluation </li></ul></ul><ul><ul><li>Implementation Planning </li></ul></ul><ul><ul><li>Opportunity Scoping </li></ul></ul><ul><ul><li>Concept Development </li></ul></ul><ul><ul><li>Customer segmentation </li></ul></ul><ul><ul><li>Proposition Development </li></ul></ul><ul><ul><li>POC Planning & Pilot Development </li></ul></ul><ul><ul><li>Pricing Strategy </li></ul></ul><ul><ul><li>Partner Strategy </li></ul></ul><ul><ul><li>Financial Analysis </li></ul></ul><ul><ul><li>Strategic Alignment </li></ul></ul><ul><ul><li>Action Planning & Management </li></ul></ul><ul><ul><li>Stakeholder Analysis & Management </li></ul></ul><ul><ul><li>Deliverables Management </li></ul></ul><ul><ul><li>Sales Training </li></ul></ul><ul><ul><li>Account Planning </li></ul></ul><ul><ul><li>Consultative Sales Engagement </li></ul></ul><ul><ul><li>White Papers and Sales & Marketing Collateral </li></ul></ul><ul><ul><li>Partner Programmes </li></ul></ul><ul><ul><li>Joint Proposition Development </li></ul></ul>ABOUT STL

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About Broadsight <ul><li>Transforming Business for a Networked Century </li></ul><ul><li>Broadsight's mission is to help companies take advantage of the dislocation and disruption these shifts will cause - and manage the risks involved. We are a strategic consultancy and system house specialising in broadband digital media. </li></ul><ul><li>We have served large companies, startups, academic and government bodies in areas including: </li></ul><ul><li>Interactive Advertising Media – Fixed and Mobile </li></ul><ul><li>Multimedia OSS / Service Management systems </li></ul><ul><li>IPTV, Web TV and Digital TV services </li></ul><ul><li>Web 2.0 based business transformation </li></ul><ul><li>New Media Business Strategy and launch </li></ul><ul><li>Digital Multimedia Systems Design </li></ul>Contact Alan Patrick www. broadsight.com [email_address] Weblog www.broadstuff.com ABOUT BROADSIGHT

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Contents I <ul><ul><li>Executive Summary: 9 </li></ul></ul><ul><ul><li>Background and Key Issues to Date: 14 </li></ul></ul><ul><ul><ul><li>Growing Pressure on the Existing Operator Business Model </li></ul></ul></ul><ul><ul><ul><li>Content Delivery: Not a Panacea </li></ul></ul></ul><ul><ul><ul><li>Advertising-Funded Services: Tried and Tested in Adjacent Markets </li></ul></ul></ul><ul><ul><ul><li>Telcos' Role in Advertising: Market Scope </li></ul></ul></ul><ul><ul><ul><li>Activity from Operators to Date </li></ul></ul></ul><ul><ul><li>Advertising-Funded Services – Threat or Opportunity?: 41 </li></ul></ul><ul><ul><ul><li>The risk of cannibalising existing revenues </li></ul></ul></ul><ul><ul><ul><li>Internet players – partner or competitor? </li></ul></ul></ul><ul><ul><ul><li>Show me the Money! – How big could the market be? </li></ul></ul></ul><ul><ul><li>Understanding the Advertising-Funded Value Chain: 52 </li></ul></ul><ul><ul><ul><li>Value Chain players in Internet Advertising </li></ul></ul></ul><ul><ul><ul><li>What do Advertisers *really* want? </li></ul></ul></ul><ul><ul><ul><li>Options for the Operator to add Value </li></ul></ul></ul><ul><ul><ul><li>Key Skills and Assets Required </li></ul></ul></ul>CONTENTS

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Contents II <ul><ul><li>Issues to resolve: 75 </li></ul></ul><ul><ul><ul><li>Operator role: The Devil in the Detail </li></ul></ul></ul><ul><ul><ul><li>Who to Partner with and How </li></ul></ul></ul><ul><ul><ul><li>Meeting Advertiser and Customer Needs: </li></ul></ul></ul><ul><ul><ul><ul><li>Return on Investment </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Customer attention & interaction </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Performance measurement </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Ubiquity </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Legal and Regulatory Issues </li></ul></ul></ul></ul><ul><ul><li>Learning from Web 2.0: 110 </li></ul></ul><ul><ul><ul><li>Content and Communications: Two sides of the same coin </li></ul></ul></ul><ul><ul><ul><li>Social Networking Communities and Advertising </li></ul></ul></ul><ul><ul><li>Case studies: 118 </li></ul></ul><ul><ul><ul><li>Learning from the Master: Google and the Art of Ad-Funding </li></ul></ul></ul><ul><ul><ul><li>Accelerating the need for Advertising Revenues: The X-Series from 3 </li></ul></ul></ul><ul><ul><ul><li>The Whole Hog: Blyk’s Advertising-Funded MVNO </li></ul></ul></ul><ul><ul><ul><li>Delivering an Open Platform: Amazon </li></ul></ul></ul>CONTENTS

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Contents III <ul><ul><li>Views from the Industry – new primary research by STL: 139 </li></ul></ul><ul><ul><li>Action steps & Conclusions: 147 </li></ul></ul>CONTENTS

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1. Executive Summary

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Advertising is seen as a future source of revenue growth for operators but ad-funded core services (voice & messaging, ringtones etc.) will not be attractive <ul><ul><li>The fixed and mobile telecoms markets for voice & messaging, broadband access and content services are becoming increasingly crowded and competitive, resulting in revenue and margin pressure for operators </li></ul></ul><ul><ul><li>The on-line and mobile advertising markets are increasingly seen as future sources of operator growth but, despite rapid expansion, they will remain relatively small and will predominantly rely on stealing share from other advertising channels, such as TV, Radio and Print (resulting in an potential price war) </li></ul></ul><ul><ul><li>Most operators are currently focused on offering advertising-funded Telco services (AFTS) – discounting their own services for consumers </li></ul></ul><ul><ul><li>However, the AFTS market is unlikely to be very attractive for operators for 4 reasons: </li></ul></ul><ul><ul><ul><li>1. AFTS risk cannibalising existing subscription revenues </li></ul></ul></ul><ul><ul><ul><li>2. The total advertising inventory available to Telcos for ad-funded services, relative to the wider web, is small </li></ul></ul></ul><ul><ul><ul><li>3. Most Telco customers want to keep their communications channels free from advertising </li></ul></ul></ul><ul><ul><ul><li>4. AFTS are difficult to price </li></ul></ul></ul><ul><ul><li>AFTS will be important to operators for growing premium rate content services such as IPTV and mobile TV by reducing end-user prices and increasing content volumes </li></ul></ul>2006 2010 Telecommunications vs Global Advertising vs On-line & Mobile Advertising ($billions) $2,000bn $2,490bn $425bn $533bn $30bn $62bn Fixed and Mobile Telecoms Global advertising On-line and mobile advertising Source: Telecoms Industry association, Datamonitor, Zenith Optimedia, Broadsight and STL Partners Analysis EXECUTIVE SUMMARY

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The big opportunity for operators is to develop a large-scale advertising enablement platform <ul><ul><li>In addition to their portals (and devices), Operators have several other assets that advertisers value : </li></ul></ul><ul><ul><ul><li>A large customer base </li></ul></ul></ul><ul><ul><ul><li>A huge amount of customer information (preferences, real-time usage, demographics/other data) </li></ul></ul></ul><ul><ul><ul><li>Billing and payment relationships and capabilities </li></ul></ul></ul><ul><ul><ul><li>In-store and call-centre customer service </li></ul></ul></ul>Source: STL Partners Analysis <ul><ul><li>These assets give operators the opportunity to add value to advertisers by helping them: </li></ul></ul><ul><ul><ul><li>Target advertising more effectively as customers roam the web </li></ul></ul></ul><ul><ul><ul><li>Track advertising performance </li></ul></ul></ul><ul><ul><ul><li>Provide a response channel for customers (including payments) </li></ul></ul></ul><ul><ul><ul><li>Support customers post-purchase </li></ul></ul></ul><ul><ul><li>To successfully grow this advertising enablement market, operators must develop an end-to-end advertising platform with scale: </li></ul></ul><ul><ul><ul><li>Which meets all the needs of advertisers not just ad distribution </li></ul></ul></ul><ul><ul><ul><li>The on-line and mobile advertising markets are likely to consolidate around one or two large platforms because scale provides value to advertisers (more consumers) and consumers (cheaper content and services) </li></ul></ul></ul>EXECUTIVE SUMMARY Telco Operators Consolidated/ Unified Fragmented Mobile Advertising: $0.8 billion Other ‘Platform’ Players* *Ad Servers, Website publishers, Search engines, Aggregators On-line Advertising: $24 billion Future Mobile & On-line Advertising? $100+ billion? Lots of operators & start-ups ‘testing’ market Google, Yahoo! and MSN dominate search, Aegis and DoubleClick dominate campaign management: little value to operators Consolidated/ Unified The On-line and Mobile Advertising Market Map

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To develop a large-scale platform and sustainable business model, operators must work together – success is dependent on industry-wide cooperation <ul><ul><li>Operators currently remain fragmented in the on-line and mobile advertising markets and are conducting discrete trials with separate partners: </li></ul></ul><ul><ul><ul><li>Vodafone with Yahoo!; O2 with ThirdScreenMedia; France Telecom with ScreenTonic, Orange with Amobee; 3 with Rhythm NewMedia </li></ul></ul></ul><ul><ul><ul><li>Several start-ups and established players are seeking a role in the advertising platform including, most recently, Nokia with its Advertising Service and Advertising Connector products which provide an ad management and serving capability for operators and a white-label solution for web publishers respectively </li></ul></ul></ul><ul><ul><li>For operators to develop a scale advertising platform, which provides ubiquitous access to Telco customers for advertisers, they need to work together to develop standards-based solutions for…: </li></ul></ul><ul><ul><ul><li>Ad formats (especially on the mobile); Campaign management; Ad metrics; Customer Profiling </li></ul></ul></ul><ul><ul><li>… as well as develop a simple and transparent business and pricing model for consumers (probably flat-rate) combined with value-based, variable pricing for content providers and advertisers (to ensure network costs are covered): </li></ul></ul>50p for Advertising £1 for Content Advertiser 20p wholesale data charge (based on VALUE of content/ad) Ad/Content Distributor Operator 10p Ad Share Customer/other data Discounted Content & Ad Potential Content & Ad Business Model: Flat-Rate Downstream, Variable & Value-based Upstream See page 98 for more details. Source: STL Partners & Andrew Bud, MBlox Consumer £1.50 for Content EXECUTIVE SUMMARY

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Telcos need to provide an end-to-end ad platform solution – this will require strong partnerships across the value chain and best-in-class CRM tools <ul><ul><li>Many operators’ advertising aspirations are currently too narrow: </li></ul></ul><ul><ul><ul><li>Focusing on providing advertisers with reach to their customer base, together with some customer profiling information to facilitate ad targeting </li></ul></ul></ul><ul><ul><li>Operators need to provide an end-to-end solution via partnerships based on open standards: </li></ul></ul><ul><ul><ul><li>Each operator’s ad platform may be different but they need to be open and interoperable (just as each fixed and mobile network is discrete but interoperable) </li></ul></ul></ul><ul><ul><li>For ad-enablement and provision of AFTS operators will need to develop their customer data mining and customer relationship management capabilities: </li></ul></ul><ul><ul><ul><li>To better understand the economics of advertising across each micro-segment and to provide targeted content and advertising offers </li></ul></ul></ul>Publishing Consumer Targeting Distribution Creation & Production Consumer Current Telco platform focus <ul><li>Location </li></ul><ul><li>Customer Profile </li></ul><ul><li>Real-time service usage </li></ul><ul><li>Campaign management </li></ul><ul><li>Metrics collection </li></ul><ul><li>Customer service </li></ul><ul><li>Ad distribution </li></ul><ul><li>Service usage data </li></ul><ul><li>Service hosting & support </li></ul><ul><li>Distribution service management </li></ul><ul><li>Billing & Collection </li></ul><ul><li>Ad service delivery </li></ul><ul><li>Service management </li></ul>Potential Telco platform focus How broad is your advertising platform? Source: Broadsight and STL Partners Analysis The new Telco 2.0/GSMA Market Study provides guidance on how to achieve this. Details: www.stlpartners.com/telco2_research-analysis_ad-funded.php [email_address] EXECUTIVE SUMMARY