PROPOSAL SUMMARY:THE ‘PERCEPTION GAP’AND A NEW DISRUPTIVE‘QUALITY ARBITRAGE’BUSINESS UNIT

Globaltelco,2nd July 2015

MARTIN GEDDESFOUNDER & PRINCIPALMARTIN GEDDES CONSULTING LTD

EXECUTIVE SUMMARY

The Network Innovation Council process faces both serious challenges and a remarkable opportunity:• Moving from voice to data, changing copper to fibre, and trying to move “up the stack” are incremental

and create a culture of improvement through good execution, not disruptive change.• Fortunately, we see a huge gap between what Globaltelco currently believes can be done, and the

reality: that highly differentiated new services can be delivered, and at a far lower cost base.• This new demand-led approach is set to disrupt markets that Globaltelco has been slowly developing. It

requires an opportunistic mind-set, more like an OTT player (if you don’t want to be disrupted yourself).• You can either become a commodity component of a new supply chain, or you can manage the change

by becoming the ‘resource trading’ broker function. That is the BIG choice facing Globaltelco right now.

So what does senior management need to do in order to engage with the change in business model?• The first step is to assess the potential for a demand-led approach, given Globaltelco’s scale and

structure. We propose sizing the ‘quality arbitrage’ opportunity inherent in IP networks.• The next step is to attack the market incrementally, and prove the effectiveness and scalability of the

new approach. We describe specific new services, which offer clear and measurable of success criteria.• To execute this successfully requires a new business unit that can develop the demand-led ‘dynamic

trading’ approach. This learning can then be transferred into the more transactional group companies.

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3Globaltelco is following an incremental course

The Network Innovation Council is tasked with boosting Globaltelco’s ability to meet and exceed its promises to investors. We have engaged with this process, with a view to initiating disruptive change based on network performance science. This has surfaced a deep difference in perception between us as to what is possible. We see Globaltelco’s implicit position to be that only incremental improvements can be made, led by existing equipment vendors. Why so?

The recent investor update states that the improvements planned largely involve catching up with competitors and matching general industry innovation trends. Examples include the shift from voice to data, LTE, FTTH, leveraging ‘full stack’, and optimising legacy networks. As a result, both internal and external expectations in terms of disruption have been set low (at least when compared to what we know to be possible).

From our perspective, the current approach (and hence attitudes and behaviour of the technology teams) are summed up by the limited ambition of a ‘steady roll out of a differential future proof network’. While this may be a sensible approach to implementation, it is not disruptive.

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4We believe Globaltelco can succeed

with a bold and disruptive alternative

The problem is that differentiation does not exist in the network per se; it is just a costly means to an end. Real market differentiation requires a different service to be provided to the end user, ideally one which cannot be replicated by competitors, and which has a fundamentally different cost structure to today’s services.

The current technology and commercial trajectory does not offer this. We feel that at best it will lift Globaltelco’s position a few places in the rankings of international operators. It reinforces the commodity nature of the service, rather than reinventing it for a more Google-like model of matching buyers and sellers.

As a result, we believe the senior management should embrace a bold ‘break out’ approach that will create a new kind of network that can supply genuinely differentiated services. Yet this must be implemented in an organisation with huge inertia, as is the norm with any large institution.

This means overcoming the ‘perception gap’ between what we know is achievable, and what Globaltelcocompany culture currently believes is the case. A by-product of achieving this goal is a huge opportunity to reduce capex and opex within the existing business by applying new skills, processes and mechanisms.

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5The ‘perception gap’ that we see

as network performance scientists

State ofplay

State of theart

State of the possible

State ofplay

State of theart

Globaltelco’sperception

of what’s possible

Our perception

Huge untappedscope fordisruption

State of the possible

GAP!

6We propose a switch from a

supply-centric to a demand-centric model

A demand aware network is one that both creates genuine quality of experience differentiation for users, and also maximises the use of the underlying network resources, hence making it cost effective. (SDN/NFV is an early and incomplete step in this direction.)

The challenge is that our industry as a whole is supply-centric, with ‘one size fits all’ products characterised by ‘bandwidth’. There is a widespread implicit belief that network service quality is a matter of a lack of capacity of the ‘pipes’, and hence detecting and rectifying ‘faults’. This limits the sense of possibility of where profit opportunities lie. For instance, by their actions, operators show that they believe the delivery mechanisms can only be highly profitable if they can also get revenue from the applications being delivered (e.g. IPTV, UC, VoLTE, RCS).

There is an alternative paradigm, which is to see networks as application performance delivery platforms(just like so-called ‘OTT’ players do). This requires treating networks as resource trading platforms, not ‘pipes’. They match supply to demand for ‘quantities of quality’ of information delivery.

When you take this alternative viewpoint, new business opportunities open up.

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Efficiencysaving

worth €bns

Polyservice

Po

lyse

rvic

e

Monoservicecapacity

Today’s networks must over-deliver quality:this creates a valuable arbitrage opportunity

Throughput

Qu

alit

y

ThroughputQ

ua

lity

Applicationrequirements

Different quality needs, but all

delivered at high cost

Efficiently tailor services to

requirements

Cost aligned to demand for

quality

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8A polyservice network exploits the arbitrage

Monoservicenetwork

Polyservicenetwork

Efficiency

Eff

ect

ive

ne

ss

GoodΔQ

PoorΔQ

Highcost

Lowcost Efficiency

Eff

ect

ive

ne

ss

GoodΔQ

PoorΔQ

Highcost

Lowcost

Hard to improve‘state of play’

Economy classfor bulk data

Superior classfor real-time

Standard classfor interactive use

9The immediate threat and

opportunity is ‘quality arbitrage’

There is massive value to be gained from a ‘quality arbitrage’ that exists, but is not visible to you yet. This arbitrage opportunity typically exists in all IP networks. It is typically possible to extract a 100% improvement in value from the assets, with 500% (or more) possible over time as all available optimisations are understood and exploited.

By quantifying demand for quality, and managing the QoE risks better, a new revenue model can be created. It also allows more intensive resource usage. This is a new ‘polyservice’ form of supply that better exploits the ‘network resource trades’, and is itself highly disruptive.

Globaltelco faces the risk that others will exploit the arbitrage opportunity, to your serious commercial disadvantage. (This has happened before, e.g. with TDM and the rise of ISPs, and happening right now with OTT players.)

We are proposing a process for Globaltelco to proactively initiate the disruption. The resulting resource trading capability is also a prerequisite for a ‘digital telco’ transformation, and captures a valuable position in the new supply chain.

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10Our recommended course of action10

Why act now?This gives rapid and

commercially valuable learning of the size and

‘first mover’ worth of the quality arbitrage threat

and opportunity

Why is it important?It starts a process of

repositioning Globaltelco in the supply chain using a disruptive

demand-led model that is key to ‘digital telco’

success

Why nothing else?It is the only viable

route that we see to radically shift the

cost/revenue balanceon Globaltelco’s

transmission assets

Globaltelco should evaluate the costs and benefits of creatinga new ‘digital telco’ global business unit

with radical new data transport productsfocused on exploiting ‘quality arbitrage’ (both on and off network)

by using polyservice network technology

The first step: size the opportunity

Our proposal is to evaluate the exposure and the costs and benefits of exploiting the quality arbitrage:• (Assess) Evaluate the exposure of current mainstream products to quality arbitrage; and• (Attack) Create an initiative to exploit the quality arbitrage, potentially against your rivals’ networks.

The assessment is done by exploiting your advantage as an incumbent operator, so you can measure the size and worth as if you were an ‘attacker’ against your own business. The first step is to measure ΔQ on existing networks and the resulting QoE being (under or over) delivered.

We think there is a strong case for creating a new global business unit to execute the ‘attack’. It will have the freedom to think and act differently, and to incubate the disruptive change away from the mainstream. The data from the full assessment phase provides the detailed business case to proceed.

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12The next step: seize the opportunity

This proposed new business unit’s commercial objective is to address new uncontested markets and allow trials of new ‘digital telco’ business models. To achieve this it will construct and sell new data transport products that are (at present) ‘unthinkable’ in terms of cost and performance. Its technical role will be to develop skills in network performance science and the profitable trading of resources (in time and space).

We feel that mainstream disruption in Globaltelco requires first creating in-house exemplars of ‘success’via such a non-standard route. These exemplars stimulate acceptance of the inevitable need for change and create credibility for adoption.

This ‘prototype’ business unit also helps to bridge the current ‘perception gap’ (between you and us) of what is possible. The main proposal document offer a longer justification for such a new business unit and the process to develop the detailed business case for its creation.

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13

Transfer to mainstream

Establish new ‘prototype’ business unit

‘DIGITAL TELCO’ BUSINESS TRANSFORMATION:

DEMAND-LED MODEL &REPOSITIONED IN SUPPLY CHAIN

Rest of scoping andvalidation phase

Initial commitment

DISRUPTIVE NEW PRODUCTS

Measuring the arbitrage is the first stepon a ‘digital telco’ business transformation

BUSINESSCASESTRATEGIC

DECISIONDATA

Measure ΔQ and model

QoE

14A ‘digital telco’ transformation

demands a bold bet on the future

Over time I've learned, surprisingly, that it's tremendously hard to get teams to be super ambitious. They tend to assume things are impossible, rather than starting from real-world physics and figuring out what's actually possible.

Because if you hire the right people and have big enough dreams, you’ll usually get there. And even if you fail, you’ll probably learn something important.

It’s also true that many companies get comfortable doing what they have always done, with a few incremental changes. This kind of incrementalism leads to irrelevance over time, especially in technology, because change tends to be revolutionary not evolutionary.

So you need to force yourself to place big bets on the future.

— from ‘How Google Works’ (edited for brevity)

Eric SchmidtExecutive Chairman

Google

“

”

15If you do not change direction,you may end up whereyou are heading.―Lao Tzu

Martin Geddesmail@martingeddes.com