Cartesian Coordinates Newsletter - Autumn 2016 1

COORDINATES

Cartesian Newsletter December 2016

2016 Year-End Review andIndustry Predictions for 2017 Insights on the Telecoms, Media, and

Technology Sector

2 Cartesian Coordinates Newsletter - Autumn 2016

Opening remarks

For our Winter edition of Coordinates, I am pleased to bring you our annual year-end letter for the telecoms, media, and technology sector. In keeping with our tradition, we examine key events in the TMT sector over the last 12 months, evaluate our predictions from last year, and offer 10 predictions for the coming year. We hope you enjoy reading through our review and welcome your thoughts. From all of us at Cartesian, I send you greetings for the season and wish you a prosperous new year ahead.

Peter Woodward CEO, Cartesian

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Coming Soon in Q1:

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This in-depth analysis will look into current and future trends for mobile video, including:

• Usage on smartphones and other devices

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Cartesian Coordinates - Winter 2016 3

Dear Colleague,

In a year where headlines were filled with political upheavals in the US and Europe, the TMT industry (mostly) quietly evolved. Players jockeyed for position in a fast-changing landscape where the lines between wireline and wireless, web and TV, and hardware and software are becoming increasingly blurred. With 5G, artificial intelligence and virtual reality on the horizon, 2017 may have even bigger changes in store.

2016: The Year That Was Broadband is becoming the focal point of the triple play

Operators throughout the world made major investments to offer customers ever-faster broadband speeds, as Pay TV economics become more challenging and landline phone continues its long-term decline. In the UK, Virgin Media announced plans to add another four million homes to its cable network, only to be one-upped by BT’s announcement that it will enable Gigabit speeds to 12 million homes by 2020 using a mix of G.fast and fiber-to-the-home (FTTH). In the US, Cablevision’s new owner Altice announced an intention to overbuild Cablevision’s entire cable footprint with FTTH. In France, Orange exceeded one million customers for its fiber services and set a target of 12 million connectable homes by 2018. But scale remained a prerequisite for success: the best-funded start-up ISP in the world, Access (formerly Google Fiber) announced layoffs, a freeze in FTTH expansion, and the exploration of lower-cost wireless access through its recent acquisition of Webpass.

Everyone was talking about 5G, but it’s hard to separate the substance from the hype

Official standards for 5G have yet to be decided but that didn’t stop a host of operators like Verizon, Telstra, and SK Telecom from announcing ultra-high-speed wireless trials. More substantively, the US assigned 11 GHz of millimetre-

FEATURING: 2016 Year-End Review andIndustry Predictions for 2017

Some years, events in telecom, IT, and digital media are among the year’s biggest news stories, like the iPhone in 2007, or the Netflix revolution in 2013. This was not one of those years.

4 Cartesian Coordinates Newsletter - Winter 2016

by Guan Yeap

2016 Year-End Review and Industry Predictions for 2017

wave spectrum for future mobile broadband use, while the UK’s Ofcom sought comments on using the 3.4-3.8GHz band for 5G. The underwhelming response to the 600MHz broadcast incentive auction in the US may indicate that operators are looking to save some powder for blockbuster 5G auctions in the coming years. Meanwhile, 4G LTE remained the aspirational technology in the developing world, as India’s Reliance Jio went from zero subscribers to 50 million in three months on the back of a $24B LTE network, enticing customers with three months of free high speed data, voice calls, and select TV and movies.

Smartphones hit global saturation but the next big consumer device has yet to arrive

The workhorse of the 3G/4G mobile data revolution, the smartphone, finally reached near-saturation, as global smartphone shipments declined for the first time, according to IDC. Even the almighty Apple was not immune to this trend, as iPhone sales dropped year-on-year for the first time. The end of the smartphone golden age was even less kind to rivals: Microsoft finally sold its faltering Nokia phone unit, and Blackberry exited the hardware business for good. But hope springs eternal for new challengers, as Google launched the high-end Pixel and Indian value smartphone makers saw huge sales growth in the last big untapped market. Previous year’s “next big things” in consumer devices didn’t live up to expectations, as smartwatches remained a niche proposition, leading to the merger of Fit and Pebble, and GoPro sales (and shares) fell dramatically. Future hopes rest in AI-enabled home assistants (Amazon Echo, Google Home), virtual reality headsets (Oculus Rift, Samsung Gear VR, Sony PlayStation VR) and even goofy-looking glasses with embedded fish-eye cameras (Snap Spectacles).

In cloud, the rich got richer — and everyone else got out

Amazon Web Services and Microsoft Azure maintained their lead in the cloud infrastructure-as-a-service (IaaS) market, together accounting for 42% global market share in 2016. Their multibillion investments in data center space helped to drive wholesale data center providers’ stock prices to all-time highs. While IBM/Softlayer and Google Compute Engine continue to compete, a host of former challengers exited the business: Rackspace, already pivoting towards providing third-party management of others’ clouds, went private; VMware announced a partnership with AWS, possibly ending its dreams for vCloudAir; HP shut down the HP Cloud in January and sold off its OpenStack business; Cisco announced it

was shuttering its Intercloud cross-service provider platform; Verizon shuttered its public cloud; Joyent, a small player to begin with, got gobbled up by Samsung to support its internal IoT business; and Verizon and CenturyLink sold off most of their data centers to players likely uninterested in offering IaaS. The only markets yet to submit to AWS and Azure dominance are in Asia, where Alibaba (China), Fujitsu (Japan) and NTT (Japan, Singapore and Australia) remain competitive—and where AWS and Microsoft have not built out a significant data center presence… yet.

Content drives consolidation

Two of the biggest deals in telecom in 2016 were driven by a desire to combine distribution and

Elsewhere in the TMT universe:

• Telecom mergers in Europe were stymied by regulators: Despite a constant drumbeat from investors and CEOs of the need for consolidation, both the Bouygues-Orange deal in France and the O2-Three merger in the UK were killed by regulators fearing reduced competition. Liberty Global’s and Ziggo’s merger of their Dutch cable operations had better luck.

• Continued weakness in the network equipment market: Following the ousting of its CEO, Ericsson announced layoffs, as did Cisco, and Nokia, after its deal for Alcatel closed.

• The Trump effect: In the US, one of the most proactive FCC administrations in recent memory pursued major regulatory disruptions of the business data services industry (so-called “Special Access”), set-top boxes (“Unlock the Box”), and net neutrality… which all came to an abrupt end with the surprise election of Donald Trump and his light touch regulatory agenda. (Although he said on the campaign trail that he would block the AT&T-Time Warner merger, so who can say?)

• Random stuff: Pokémon Go blew up (figuratively), the Samsung Galaxy Note 7 blew up (literally) and Microsoft’s chatbot Tay screwed up, when it “learned” too well from trolling users who fed it racist language to communicate with beta testers not in on the joke.

2016 Year-End Review

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2016 Year-End Review and Industry Predictions for 2017

2016 Prediction Scoring

Cartesian Predictions for 2016 Did It Happen?

Pay TV providers follow Comcast’s lead with their ‘Stream’ product and offer slim content packages over the top

In the US, only AT&T took to the web with its $35-a-month DirecTV Now product. In Europe, Sky is planning to extend its OTT service Now TV to Spain before offering the service to other parts of Europe where the company doesn’t offer satellite TV.

As OTT and TVE services mature, Pay TV providers begin to crack down on password sharing

No major OTT provider or Pay TV operator offering TVE made a significant change to their password-sharing policy, as both groups continue to see unauthorized viewing by friends and family members as a worthwhile trade-off for increased visibility for their platforms.

Traditional broadcasters continue to resist the urge to embrace third-party OTT TV platforms

DirecTV Now overcame hurdles that other former aspirants to the live streaming crown could not overcome, signing up most major networks, although CBS remains the big outlier. Sling TV offers ABC, Fox and NBC broadcast affiliates only in select markets. But CBS’s satisfaction with its standalone streaming service All Access provides an enticing template for broadcasters considering going to direct-to-consumer.

Despite pressure from Netflix and the EC (through AVMSD reform), who both love the idea of a “borderless” content rights ecosystem in the EU, no progress is made on this front

No changes to existing AVMSD regulation have yet been passed. The debate goes on regarding the trade-offs that video-on-demand and online streaming distributors need to take in order to achieve a single digital European market. A fixed quota for distribution of European content and financing of the production of European original content are key elements of a new proposal under revision since May.

SDN will continue to gain traction with more enterprise services being developed around the technology

AT&T expanded availability of its “Network on Demand” service, announcing availability in 76 countries, while CenturyLink started trialing SD-WAN services with multi-site business customers. In Europe, BT launched a new customer-facing “intelligent WAN” service that automatically routes and optimize network traffic.

Higher participation in crowdfunding will lead to more funding for sharing economy platforms, since small investors will have vested interest in sharing economy companies

In 2016, crowdfunding nearly equaled (or possibly surpassed) venture capital as a source of start-up funding, with more than $60 billion expected to flow through crowdfunding sites, due to the US JOBS Act of 2013. Meanwhile, private money continued pouring into the top sharing-economy platforms, with Uber getting $3.7B and Airbnb getting $555M, and China’s Didi Chuxing netting $4.7B from Apple and Foxconn.

More partnerships will be formed between sharing economy companies and traditional businesses

There have been a number of partnerships between sharing economy companies and traditional businesses that have been either forged or expanded in 2016. Airbnb has partnered with major travel management companies; Uber have continued to forge a number of new partnerships with hotel chains, retail companies and car manufacturers.

Following the successes of industry frontrunners, more network operators get serious about decommissioning their legacy voice switches and moving to IP

Early in the year in North America, Verizon petitioned the FCC to permit termination of postpaid calling cards and personal 800 services. AT&T announced that they aim to have less than 10% of wireline customers on TDM-based voice services by the end of the year and requested permission to retire 13 legacy bridging and multiplexing services.

Global interest in the shut-down of 2G (GSM) networks grows as we approach the end of 2016 when the first networks are due to close

There has been a large focus on the shutdown of 2G networks across North America and Asia-Pacific. Major wireless operators such as AT&T and Telstra are due to shut down GSM networks by the end of 2016. In addition, a significant number of operators in both regions have announced plans to pursue this target in subsequent years.

In the mobile sector, WiFi first business models grow in popularity

The growth of WiFi first business models has been slower than anticipated in 2016. Google Project Fi remains a niche proposition, while Comcast’s new MVNO is not expected to leverage the cable provider’s 10 million-plus hotspots, at least at first.

In December 2015 we made 10 predictions for 2016 – here’s how we did:

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2016 Year-End Review and Industry Predictions for 2017

content: AT&T’s $85B bid for Time Warner and Fox’s £11.2B ($14.1B) bid for the rest of Sky. Analysts forecast a coming wave of vertical integration but we’ve been here before – Comcast buying NBC-Universal, Liberty Global buying ITV and Lion’s Gate – and it hasn’t transformed business models or led to a massive wave of vertical consolidation. As Verizon’s ad-centric acquisitions of AOL (2015) and Yahoo (announced 2016) demonstrate, there’s more than one way to skin a cat.

Traditional Pay TV is dying. Long live traditional Pay TV* (*over the Internet)

Pay TV proved a continuing challenge in developed markets, as subscriber declines continued in the US, while Western Europe eked out minimal growth. Live sports, the supposed “killer app” of traditional TV, showed weakness for the first time, as the Summer Olympics, National Football League and Premier League all saw ratings declines. The stocks of all TV-centric content creators took a sharp dip this spring when Disney announced big subscriber losses at ESPN due to cord-shaving. Hoping to buck the trend, AT&T launched its over-the-top multichannel service DirecTV Now – following in the footsteps of DISH Network and Sky – with the added perk for AT&T wireless subscribers of zero-rated data when watching DirecTV. Meanwhile, the two leaders in subscription video-on-demand, Netflix and Amazon, continued investing heavily in content and expanding internationally, announcing expansions to more than 100 countries each. For consumers, it’s never been better: the “peak TV” era saw 455 scripted shows in the US in 2016, more than double the number from 2010.

In North America, there was a fiber feeding frenzy to compete with AT&T and Verizon

Competitive providers and smaller incumbent telcos bulked up to better compete against the two giants of the US telecom business services market, Verizon and AT&T, while interest rates are still low. The biggest deal was CenturyLink’s $34B acquisition of Level 3, putting the combined company at near-parity with Verizon and AT&T for metro and long-haul depth. The theme in other deals was long-rumoured targets that had yet to be consolidated either because of patient owners (Crown Castle’s $1.5B acquisition of FPL FiberNet), a target’s challenging mix of legacy and next-gen assets (Zayo’s $1.4B acquisition of Electric Lightwave, Windstream’s $1.1B ingestion of Earthlink, Birch’s buy of Canada’s Primus) or because everyone is reluctant to buy an incumbent (Consolidated Communications’

$1.5B fetch of Fairpoint, Canada’s BCE’s C$3.9B acquisition of Manitoba’s MTS). 2016 also saw a few deals that didn’t fit the typical empire-building mold: while Uniti Fiber (formerly Consolidated Sales & Leasing) picked up PEG Bandwidth to beef up its fiber footprint, it also followed the Crown Castle model by building a synergistic fiber and tower-sharing business through its acquisitions of TowerCloud and Network Management Holdings’ 359 Latin American masts. Verizon—which has no need to get bigger—extracted XO Communications for $1.8B from Carl Icahn probably less for its enterprise fiber business than its ability to enable 5G through metro dark fiber backhaul and leasing rights to high-frequency LMDS spectrum. Europe, on the other hand, saw almost no competitive fiber consolidation of note, as there are few targets of comparable scale and the investment community remains sceptical of the synergies of cross-border deals.

Companies made IoT investments for the future, as nobody quite knows how the prophesized trillion-dollar-plus market will be monetized

You weren’t in the telecom business in 2016 if you weren’t pondering the massive coming Internet of Things opportunity. But the ecosystem remains fragmented, as a word-salad of cellular and proprietary standards like LTE Cat M, LoRa and Ingenu jockey for leadership. In the telecom world, Verizon beefed up what used to be called its M2M business with its $2.4B acquisition of Fleetmatics, a fleet management and asset tracking firm. In manufacturing, the battle was on to build the de facto IoT platform (à la AWS in cloud), with Cisco buying the cellular IoT enabler Jasper for $1.4B and Siemens opening up its Mindsphere platform to developers, following GE’s lead with its Predix platform in 4Q15. <>

Sources: IDC, Synergy Research, SNL Kagan, Ovum, FierceWireless,

FierceTelecom, FierceCable, Reuters, FCC, Ofcom, Crunchbase, Forbes,

Ericsson, National Venture Capital Association, operator websites

2016 Year-End Review

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2016 Year-End Review and Industry Predictions for 2017

1. 5G will come early—in the form of ultra-fast fixed wireless. The future of 5G will become a little bit clearer, as a major communications service provider will announce an urban build-out of a 5G network with commercial availability in 2018. But with a twist: it will be using high spectrum bands for fixed wireless, so as to provide 100 Mbps+ broadband speeds to homes at a fraction of the capital cost of fiber-to-the-home.

2. Partnerships and white-labeled platforms will be the path forward for most Pay TV providers. Providers facing major investment decisions for their Pay TV platforms will increasingly look to third parties to provide an end-to-end TV offering, whether via white-labeled IPTV platforms like Comcast’s X1 or partnerships with over-the-top multichannel offerings like DirecTV Now. Only providers with massive national or international scale will continue to invest heavily in their own platforms, while subscale providers will seek to minimize their exposure to Pay TV’s deteriorating economics.

3. Major sports will go over-the-top.The unbundling and OTT migration of traditional Pay TV content will reach the next milestone in its evolution in 2017 when one or more major US or international sports leagues will announce the launch of a subscription-based OTT channel with premium content, likely in partnership with one of their rights partners—as both parties try to maintain ad rates in the face of ratings slides that started with the 2016 Summer Olympics.

4. Operators with a traditionally conservative view towards fiber build-out will get more aggressive. A few incumbent telcos and cable providers in the US, Europe and Asia will announce new large scale fiber build-outs, as they take a page from alt-nets like Zayo and embrace probability-based (vs. success-based) demand models and also better integrate fiber planning between their residential, enterprise and wholesale business units.

5. Expect super-sized consolidation in the network equipment market. Two of the big non-Chinese network vendors (Ericsson? Nokia? Cisco?) will pursue a mega-merger to increase

bargaining power and fight competition from the duo of Huawei and ZTE. Regulatory approval will prove a slog.

6. Augmented reality, not virtual reality, takes off. One or more “killer apps” that have clear value (entertainment or otherwise) for consumers will take off like Pokémon Go did in 2016—but with more staying power. Meanwhile, another year will pass without widespread VR adoption, as device manufacturers continue to work out the kinks and game and movie studios hesitate to invest heavily in what will remain a small install base.

7. Wholesale data centers will consolidate in response to the growing buying power of hyperscale providers. Two unrelated trends will lead to consolidation in the wholesale data center market: a shrinking number of massive buyers (Amazon, Microsoft, Google, Facebook) will motivate data center operators to increase their supplier power; and the share prices of red-hot dividend-generating data center REITs will cool in the face of rising interest rates, making acquisition targets more affordable.

8. IoT-based cyber-attacks will lead to calls to regulate. More wide-scale cyber-attacks using botnets of poorly secured IoT devices (WiFi routers, smart thermostats, cameras, toys) will lead to calls to regulate—and scrambling by consumer device manufacturers and software vendors to demonstrate to consumers their devices are secure.

9. Home WiFi mesh will be commercialized. While fixed-line operators in the US are just beginning to seek control of the home WiFi experience, European operators will start pushing WiFi mesh solutions to provide high bandwidth WiFi coverage throughout the home to enable high quality video streaming.

10. Software-Defined Networking (SDN) and Network Function Virtualization (NFV) will grow… slowly. Business services providers will continue to make announcements about new customer-facing services leveraging SDN and NFV, but the vast majority will be in trial/proof-of-concept stage. Widespread commercial availability with robust SLAs will be a year or two away.

Predictions for 2017

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Cartesian(R) is a specialist provider of consulting services and managed solutions to leaders in the global telecoms, media and technology industries. For 25 years,

we have advised clients worldwide in strategy development and assisted them in execution against their goals. Our unique portfolio of consulting services and

managed solutions are tailored to the specific challenges faced by executives in these fast-moving industries. Combining strategic thinking, robust analytics, and

practical experience, Cartesian delivers superior results.

Copyright 2016

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