Telstra launches apps unit, but faces challenges in Asia

OVUM VIEW

Summary

Telstra has announced that it will launch the Global Applications and Platforms (GAP) unit in February 2013. The unit will develop enterprise app solutions for the Australian market, with a view to exporting them to Asia. According to Telstra, GAP will improve time-to-market and the operator’s competitiveness with over-the-top (OTT) players.

There is nothing revolutionary or particularly innovative about Telstra’s announcement, with several other Asian and European telcos already having launched similar software units. The main issue for Telstra is that it does not have a large footprint of Asian affiliates (it only owns Hong Kong mobile operator CSL) to export its content to. It will also be difficult to develop apps that have widespread appeal across Asia. Telstra recognizes that it needs to collaborate more, but it will require astute execution to ensure that the correct opportunities are targeted.

GAP is an apps play aimed at enterprises

While GAP is essentially an apps-centric business unit, Telstra does not plan to develop the apps internally. Instead, the operator intends to partner with app providers and possibly acquire them. Telstra’s existing Applications and Venture Group will make any acquisitions, while GAP will be responsible for taking the services to market.

GAP has a two-pronged strategy. Firstly, it plans to acquire or partner with developers to create apps for the leading industry verticals in Australia, such as the media or mining industries. As part of this strategy, Telstra will focus on the enterprise and government sectors rather than the fickle consumer market. Secondly, the apps that have global appeal will be exported to Asia.

We agree that the consumer market should not be a priority for GAP as it would struggle to make a return on in its investments given the strong competition from OTT players. The key challenge for GAP will be identifying and meeting unmet demand in industry verticals. Telstra will need to be aware of the fact that content from some smaller verticals in Australia may not be transferrable to businesses in Asia. The operator’s view is that if an app does not have potential to scale in the Asian market, then it should not be considered as viable for export. Kate McKenzie, Telstra’s Group Managing Director for Innovation, Products, and Marketing, states that GAP will need to be “quite mindful” of what the value of a service is, and will source very “targeted opportunities”.

Selling in Asia will be difficult

Telstra is one of a number of operators – including Telefonica, Orange, Telenor, SingTel, AT&T, and Verizon – that have launched digital app/content units. South Korean and Japanese operators treat the app/content export business opportunity as a top priority. For example, KT states that “virtual goods trading” – the purchase of non-material services such as apps – currently makes up 8% of its total revenues. KT forecasts that revenues from virtual goods trading will increase to 20% of its total revenues by 2015. Similarly, NTT DoCoMo is aggressively exporting its aggregation/platform business as part of its “new market creation” strategy.

During its March 2012 group restructure, SingTel created a new digital unit to better leverage the group’s scale. SingTel has more than 500 million mobile customers across its operations, which companies within the group (such as Optus) can tap to sell their developed or acquired software.

A key challenge for Telstra compared to the other operators in the market is that it does not have significant scale in Australia or stakes in Asian mobile operators (apart from Hong Kong’s CSL) that it can use as a channel to market. From a purely apps perspective, it also has no brand positioning in Asia. Telstra envisages selling GAP products through third parties or its own integrated sales force, but it does not plan to build a separate sales force for the unit. As a result of these factors, Ovum believes that GAP will find it difficult to export apps to Asia.

Medium-scale players need to compete and collaborate

Operators such as SKT, KT, NTT DoCoMo, and KDDI have the resources and scale to face OTT competitors on two fronts – compete and collaborate. These operators continue to make considerable investments in creating their own content and apps, but are also extremely efficient in collaborating with content providers and OTT players. Japan, South Korea, and China are examples of markets where leading operators can both compete and collaborate as scale is achievable within their own value-added service platforms.

However, where does this leave Telstra, a medium-scale global player with Asian ambitions? Ovum believes that a realistic content strategy for Telstra is “compete less and collaborate”, which is a step up from the “collaborate only” strategy that small operators with customer bases unwilling to pay for value-added services have been forced to adopt. The new GAP unit should go a long way towards furthering Telstra’s collaboration efforts, which will be extremely important considering that it operates in a small, English-speaking market where it is difficult to achieve value-added services scale against global OTT players.

APPENDIX

Author

Nicole McCormick, Senior Analyst, Telco Strategy

nicole.mccormick@ovum.com

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