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November 30, 2016

Powering New Digital Business Models in Banking

Posted by Sanat Rao (View Profile | View All Posts) at 12:35 PM

Powering New Digital Business Models in Banking

Innovative digital models are making their way into banking and the recently launched Marcus by Goldman Sachs is one such example. A subsidiary of the investment bank, Marcus will offer customers a fixed-rate, no-fee, unsecured personal loan, which enables customers to personalize monthly payments and thus better manage their finances.

Marcus marks Goldman Sachs's digital shift from Wall Street to Main Street, and is an example of how banks are rapidly adopting new technologies. Another example of progressive incumbent banks going digital is India's ICICI Bank which has continually transformed itself to keep pace with changing customer requirements. Since 2015, the Bank has refreshed its core banking platform, launched #icicibankpay - a comprehensive Twitter based banking service, Pockets - India's first Visa-based open digital wallet, iWear - the country's first multi-platform smartwatch app, SmartKeys - a smart keyboard for banking where one can chat and pay, and most recently, a pilot on Blockchain based remittances and trade finance. All these initiatives are designed to comprehensively transform the bank to fulfil emerging customer expectations.

Even banks with excess legacy and complexity are setting up distinct digital entities which are sometimes called 'Bank-in-a-bank' strategies. I believe this is a good strategy to leapfrog technology and operational complexities and create a value proposition which aligns to customer's expectations.

On the other hand, Fintech-led competition continues to grow. Fintech investment hit a new high of $12.7 billion in the first six months of 2016. Fintech expansion will continue so long as there are gaps between a customer's expectation and bank services - whether it is in lending, payments, wealth management or deposits. India's Paytm is a case in point. It aims to replicate its success in e-commerce and payments by growing into a bank that will challenge traditional financial institutions and has set a goal of enrolling 200 million customers in its first year of operation.

Then there are entities from other industries that are trying to establish a presence in banking. These organizations, such as a retailer like Tesco and mobile operator, Airtel, hold on to their original business models, and strategically use the strengths of their core business (reach, customer knowledge, brand and so on) to leverage opportunities to enter the digital financial space.

Clearly, these changes have large implications for partners of the financial services industry who also have to evolve in sync with their clients. Infosys Finacle, for instance, has been able to support changing business models of clients such as ICICI Bank, Airtel Money, Marcus and Paytm, by making relevant upgrades in its product portfolio.

Finacle continues to build on its successes by investing aggressively to expand its product offering. Its focus is on the four tenets of what is called 'Truly Digital Banking' - enabling frictionless banking experiences for end-consumers, helping clients build value-based ecosystems with a large number of partners, automating client operations extensively to improve efficiency and service, and equipping clients with advanced analytics capabilities that can be deployed to create personalized, relevant and enjoyable experiences for customers.

Given the dynamic environment, banks, non-bank providers, and their partners need to prepare to make many more changes in the future. That's the only way to succeed in an era of 'Truly Digital Banking.'

November 28, 2016

Bet You Won't Have Time To Read This Post Today

Posted by Madhu Janardan (View Profile | View All Posts) at 3:22 AM

Bet You Won't Have Time To Read This Post Today

Today is Cyber Monday here in the US, and we are inundated with steals and deals. These range from lunches to gaming consoles, furniture to holidays. As the energy of the day takes over, it's not uncommon to have family and friends glued to their mobiles, filling up their carts with stuff they have been coveting for weeks- even months perhaps.

But first there was only Black Friday- the day after Thanksgiving when American retailers officially kicked off the holiday shopping season. In the last decade - never to let a lucrative opportunity pass them by - retailers devoted the following Monday to their virtual shop, and Cyber Monday was born. But something else was born along with it: the special 'one-day event' in the retail scheme of things. Aren't we all familiar with the 'manic Monday', 'terrific Tuesday' and 'wacky Wednesday' offers? Ask any marketing expert and she'll tell you that creating a sense of urgency appeals to the human psychology and is a well-tested method to sell merchandise rapidly.

The one-day event is gradually becoming the favorite method of ensuring 'fast and furious' sales, and this internet phenomenon owes it entirely to advanced digital technologies. This is the opposite of Black Friday, which ushers in an entire season of shopping deals which ends only with Christmas. Cyber Monday capitalizes on the impulsive nature of consumers to shop on their smartphones and laptops.

Last year in the US, the total sales on internet retail sites on Cyber Monday was estimated at $3 billion. Compare that with this month's Singles Day (November 11th as known in China), which saw Alibaba alone rake in nearly $17.79 billion. You read that correct: A single Chinese online retailer's sales from a one-day event was almost six times greater than the sales of all American retail sites combined. What's more, Singles Day posted higher sales than all of last year's sales on America's Cyber Monday and Black Friday combined.

Chinese and American consumers- chalk and cheese?

The concept of Black Friday started decades ago when weary hosts of the Thanksgiving dinner wanted to get guests out of the house for a few hours. What better place to send them than to the shopping mall, right? More recently, Big Box retailers have been opening their stores in the evening of Thanksgiving. Inevitably, the 'one-day' frenzy often results in mobs of shoppers trampling each other as they run to grab their favorite things. It is however the reverse situation in China. Here, customers are more comfortable shopping online. This year, Alibaba and its rival JD.com reported that 80 percent of Singles Day sales took place over mobile devices.

I can just hear American retailers saying: Well, that's fine for Chinese consumers, but 71 percent of Americans still enjoy shopping in stores and examining the sale items up close. This is not a cogent argument anymore. Viewed from today's fast paced retail environment, omni-channel retailing is strongest when a consumer doesn't need to be near a brick-and-mortar store to fully experience the one-day event. The statistics from China should also be a wake-up call for retailers to make their online retail platforms robust enough to be engaging, experiential and real time.

In some ways, retailers from the West are already experimenting with mobile-savvy consumers. For example, this year 16,000 brands participated in the Singles Day event including brands such as Apple, Burberry, Victoria's Secret, and Gap. Who says the Chinese marketplace is tough to enter? You have to adopt a different approach from the one in the West.

One-day event- a game changer

In the rapidly transforming space that is omni-channel retailing, it pays to concentrate efforts on splashy one-day sales rather than usher in a shopping 'season,' which was more in tune with how traditional brick-and-mortar stores could sell their wares and keep inventory in neatly stacked racks. The digital world isn't measured in months or weeks but rather by minutes and seconds because retailers have the technology platforms to make inventory accessible, and customers happy down to these tiny fractions of time.

November 24, 2016

Have You Taken Robust Measures to Verify Data?

Posted by Srinivasa Gopal Sugavanam (View Profile | View All Posts) at 11:31 AM

What Makes a Human Click! [Source: https://www.youtube.com/watch?v=-Jy3IdLaZeA]

Have you ever wondered if the lion's share of data your organization collects is accurate and actionable? It's a question more and more executives are asking themselves as 'trend articles' on respected social media sites have turned out to be outright fabrications. With no supervision of human editors, the algorithms in charge of selecting news for the 'trending articles' have a field day.

I'm specifically referring to a recent investigation by Washington Post into Facebook's Trending news section. They discovered that over a three-week period beginning in late August, five news articles on Facebook were, 'indisputably fake.' Another three articles on Facebook's Trending news section were 'profoundly inaccurate'. My favorite fake yet trending article uncovered by the Post investigation? Apple CEO Tim Cook's announcement that consumers should prepare themselves for the release of the iPhone 8, which will include a feature that allows users to conjure up a physical Siri who comes out of the phone and helps with chores.

What this incident points out is that although machine learning is becoming sophisticated by the day, it still hasn't reached the point where algorithms can be completely free of human guidance and trusted to analyze and curate Big Data impeccably. To give you another example of the intelligent, analytical role that humans continue to play in data analysis, you can call to mind the rather common children's rhyme: "In fourteen hundred and ninety-two, Columbus sailed the ocean blue." In decades past, schoolchildren learned this rhyme as they studied the fundamentals of a sailor who thought he had crossed the ocean and found India. The problem with the rhyme is the data. It can't be trusted. What, for example, is fourteen hundred and ninety-two? It's a year, but only to a segment of the global population that follows the Gregorian calendar. And wasn't the name of the hero Cristoforo Colombo in his native Italy, and in Spain, from where he sailed, Cristobal Colón? And is the ocean blue? Not really. The colorless water simply reflects a blue sky.

My point here is that data that seems perfectly correct (and in this example, unquestioned for centuries) may not be all that it's made out to be, and only human intervention can point out these discrepancies. Now that enterprises operate in the world of big data, and much of this data is used to make decisions with extensive business impact, the question whether the data being accessed can be trusted becomes an important and expensive proposition.

My colleagues at Infosys created a video that innovatively addresses this very point. That is, if an enterprise relies solely on Artificial Intelligence algorithms, are they really getting the most out of their data? Can humans offer a facet to data analysis that only they are able to provide? You bet they can. Watch the video here. The first reaction I had when I watched the video is that without the right algorithm, a robot cannot detect the smudge on the face of a person. Then I realized the issue to be far more complex. Without a human element included in the data collection and analysis process, corporations might spend lots of resources trying to deal with erroneous pieces of information instead of enjoying machine learning's many efficiencies.

In an article in the Harvard Business Review, author and data expert Thomas Redman points out what should be obvious to large, data-focused enterprises (but is often not). He says, 'It doesn't matter how much data your organization collects but what matters is the accuracy of the answers it throws up, and how the data acts when it is combined with other data sets.' Indeed, flawed data can do a company more harm than the absence of a data collection and analysis program in the first place. This issue will only intensify as A.I. and Big Data become more sophisticated and ingrained in corporate culture.

Data should be your organization's most potent asset - not an expensive liability. Perhaps the time has come to evaluate what fail-safes and back-ups your enterprise has set up to maintain and protect data integrity. After all, sometimes even the smartest robot can't tell that a smudge is a smudge...

November 15, 2016

What the Infosys-ATP Partnership Taught Me About Business

Posted by Mohamed Anis (View Profile | View All Posts) at 9:01 AM

What the Infosys-ATP Partnership Taught Me About Business

A famed tennis instructor enjoyed telling those at his academy that no matter how many lessons they took and how much time they spent on the court practicing, the game finally came down to this: If your opponent returns your shot and the ball gets over the net, he's going to win. Plain and simple.

Tennis can be a lot like the competitive world of business, especially when you're on the technology side of things as I am. My clients naturally want to get started on their digital journey as fast as possible, because frankly, this journey involves wading through uncharted territory and often takes them out of their comfort zone and forces them to measure up against competition. Indeed, I am often in a situation where many of my clients demand massive cost savings or significant revenue uplifts (or both!) in short timeframes. I have grown accustomed to hearing comments like: "We need to be agile," "Our technology has to be transformative," "Bimodal is key," and "We need to bring in the A team," you get the drift?

But transformative digital journeys are hardly ever quick or comfortable. They are designed to strengthen an enterprise and enable it to transition to a new way of doing business. Yet at the end of the day, despite all the effort, if your competitor can out-maneuver your organization in the marketplace, it will win, very much like tennis. In fact, now that we have completed a year of successful partnership with the Association of Tennis Professionals (ATP), I've come to realize that any digital journey must have a component that simplifies, clarifies, and cuts to the chase. After all, all your opponent has to do is get the ball over the net. If your organization can't handle that simple scenario translated into a business one, you're going about things the wrong way.

At Infosys, we have developed a four-step approach not only for the game of tennis but for any enterprise client looking to supercharge its organization. It's simple to explain and understand, especially when you have tennis as a unifying theme.

Sensing and Gathering Data

At the match, the chair umpire sits atop his throne and keeps score. Sometimes he will even overrule a call, much to the disappointment of the player who thought the ball was inbound. But what about modern tennis fans? What do they want to know beyond the official score?

Thanks to our partnership with ATP, we went after what the fans want from the match, what sponsors want from the tournament, what coaches want for their players, and even what commentators and other stakeholders are looking for. Was there data to be sensed and gathered from all of these members of the tennis ecosystem?

If this can be applied to organizations, you could ask yourself, are you sensing and gathering data on all stakeholders who are engaging with you and your ecosystem? As we've done with the ATP, make sure you're gathering data from scoreboards to sensors. We are living in an era where digging for data is like digging for the new oil, not just the obvious ones like customer data, product data or order data. Dig around each stakeholder in the ecosystem, like in the case of ATP, we dug around sponsor engagement data, player data, coach data, commentator data, tournament data, media engagement data, data-driven stories, fan propensity data, 'fan click' data, and more.

Analyzing What We Gather

Machine learning-based algorithms can predict with an amazing level of accuracy what a player will do, and are creating a new paradigm for understanding the strategy being executed in a game. Perhaps it's the propensity of players to withstand 'under pressure' situations, or figure out where to serve in a 0-40 three break point situation. Machine learning now has the potential to identify which particular point cost the player the game and, more interestingly, which shot gave away that point. Apparently, it was not the last shot that lost the point. Some of the leading organizations have already been leveraging machine learning algorithms for driving significant benefits - from Google's search recommendations to Facebook's face recognition. Tasks like aircraft landing gear maintenance and predictive working capital optimization are also harnessing machine learning-based algorithms.

Engaging with Stakeholders

Fans of the ATP have taught me that in business as in tennis, it's very important that we look at the same data from many different delivery channels. That way, you will locate data that could potentially bring in the highest level of engagement with your stakeholders. Our real-time analytics help tennis fans decipher strategy, what strengths and weaknesses are being played out right in front of them, and patterns of why and when a player is hitting serves in excess of 130 miles per hour. That's well and good, but how can we enable fans to enjoy the game in new ways? I think it would be cool if we were able to introduce augmented reality to the action. I say watch the entire match through a VR headset, backed up by a mind-boggling 'highlights' package. How about asking 'Amazon Alexa' to tell you who has the best serve in 2016? Or who performs best under pressure against the Top 10 players? And thus continue an interesting conversation with Alexa while relaxing on your large comfortable sofa.

Maybe, coaches and players need extreme details and videos to extract insights. Sponsors need to quantitatively access the impact of their brand across the tournament for every engagement they had with fans and players, all the way to their clients. Perhaps commentators want social media analysis which they could discuss with fans. The possibilities of how data can be used to engage with different stakeholders are immense.


As players challenge each other for perfection and glory, tour, tournament and event organizers, sponsors and broadcasters are challenged by the need to ensure RoI. When we can sense, analyze and engage with each stakeholder in the tennis ecosystem, monetization will follow as a natural progression. Without creating this super stickiness with stakeholders, rushing to sell merchandise or constantly bombarding them with ads on mobile apps is a sure way to generate aversion.

Once again, a monetization strategy must first have products for each stakeholder. These products can be developed after you have dug around for data that will attract each stakeholder. We also need to make it super easy for each stakeholder to consume this information for free and charge only for premium content.

I recommend sending value-adding ads from sponsors in real-time. These would be based on targeted insights. These ads and offers should not be available to all and sundry. How about we create an ecosystem of sponsors and cross-pollinate ads across their consumer ecosystems? With predictive analytics and digital tools, it's rather clear what the monetization potential of a particular product is and what's its engagement success is likely to be. By the way, I'm still talking about a tennis match here. Now imagine what a retailer could do in a Big Box store with the same tools. Tennis, everyone?

November 14, 2016

How Marketers Can Make Their Game All About The Game

Posted by Sumit Virmani (View Profile | View All Posts) at 12:15 PM

At Barclays ATP World Tour Finals 2016, London: 'World First' Tennis Experience in Virtual Reality, powered by Infosys [Source: https://www.youtube.com/watch?v=WljstZA2ERk]

Every marketer dreams of getting the audience to root for a brand. And for those seeking to inspire such devotion in customers, the time has never been more conducive to find ways to achieve it through sports marketing, a channel that has often been envied for its reach, but also criticized for its relatively high entry barriers and uncertain ROI. Today, any popular sport commands the love and loyalty of millions, with pervasive digital connectedness only amplifying the phenomenon. Little wonder then that sports marketing is a popular strategy for global brands. Including our own.

But is sports marketing only for brands with deep pockets and a long-term horizon? Is 'logo sponsorship' the ultimate high point? What is the role of innovative experiments in sports marketing? Let's try and answer some of these questions as I share with you the experience of our 12-month journey with ATP World Tour, the governing body of men's professional tennis worldwide.

This journey also led us to deeply appreciate the passion, the deep emotional connect and the bonhomie that bind sports fans with each other and with the sport, and also why this is far too tempting for marketers to resist. That's also the reason why the marketing fraternity, it seems, has upped their own game in this space.

What began, for early adopters, with merely slapping a logo onto the experience of a fan - often relegating the brand to a 'blind spot' in a reverberating arena of high-octane emotions - has evolved into something so much more purposeful today. Today, brands like Coke (through NASCAR, Olympics, and the like) and PepsiCo (NFL, NBA, among others) are creating meaningful storytelling opportunities by building compelling connects between their values and the core values of the sports they sponsor. On the other hand, many technology brands are integrating their capabilities in a variety of ways to further elevate the experience of the sport itself - both for fans and for players.

When it came to what we are doing with ATP World Tour, we wondered if we could inspire and delight our audiences by telling our story - of how technology can amplify people to be more, let the world experience that story for itself, and then showcase to businesses our technology services and ways in which these can empower them.

As our technology (Infosys Information Platform) analyzes over 25 years of data, from 85,000+ tennis matches, it makes the game of tennis be more for fans and players. Fans receive in-the-moment insights while players and coaches have access to data-driven pre and post-match analyses that could help them understand their own and their opponent's games better.

With the excitement of another season-ending ATP World Tour finals in London underway until Sunday 20th November, tennis fans can experience the adrenalin-rush in a whole new way - in fact it's a 'world first'. Visitors to the O2 Fan Zone are immersing themselves in the matches by stepping into unique interactive pods, a virtual tennis world, and this experience is powered jointly by Infosys and Sony. Utilizing both headset tracking technology and physical controller interaction, fans are creating reactive and customizable virtual environments, where data insights and visualizations provide in-depth context as the match unfolds. And in surround sessions, our engineers and consultants are conducting immersive get-to-know-how-technology-can-work-for-you chats for businesses, so they can begin to imagine ways to leverage the right suite of technology services to similarly delight their own end-users.

This has been an incredible experience so far. And a big part of the excitement is from the learning. Learning that it is possible to drive both brand meaning and metrics simultaneously. We can spark the imagination of the masses - potential employees, investors, clients and also generate potential customer value in measurable terms. We can market both in sprints and in a marathon run at the same time. Riding on the social virality of the experience while also leveraging its enduring value to help businesses experience our brand promise. It's been an opportunity to build our brand experience, and also market to influence sales directly. And the quick prototyping of new and more effective tactics and the continuous improving - not unlike what sportspersons themselves do - has been the delightful extra.

If I had to sum up in a word - the opportunity sports marketing presents for brands, I'd say - incredible. And then I'd add the disclaimer that this opportunity is only as valuable as the credibility of the association between the brand and the sport - the congruence of the values they share. Because, as every good marketer knows, every logo derives its meaning from the quality of all the things and experiences it identifies, and therefore it's always worth one more closer look, one more time before taking that call-to-brand. Be it the next shiny object or sweaty sport.

Tennis and Technology: The Winning Duo

Posted by Rajesh K. Murthy (View Profile | View All Posts) at 5:52 AM

Tennis and Technology: The Winning Duo

The year: 1982. The place: Wimbledon's famed Centre Court. The match: the men's finals that pitted two former champions of the grass-court tournament against each other - John McEnroe and Jimmy Connors. After the match, which McEnroe won with a serve and volley delivered with almost surgical precision, a sportscaster asked Connors why he thought he had lost. 'Usually by the time the ball gets to me, it's the size of a basketball,' explained Connors, one of the game's best returner of serves, but this time, 'McEnroe's serves were so fast and precise that by the time the ball got to me, it was the size of a pea.'

What made McEnroe play what some fans think is his best match ever and one of the best in the history of tennis? And what made the tenacious Connors lose so decisively? In the 1980s, those questions were up to tennis analysts and fellow ATP professionals to discuss from their respective perspectives. A generation later, the players have changed but the grass court remains. So do matches that are filled with non-stop action.

Technology is omnipresent

What makes a Grand Slam tournament different today is the technology - everywhere. And we're not talking only about carbon-fiber composite racquets. The century-old facility with its forest-green walls conceals the advanced analytics that are enhancing the entire experience for fans - not only for those who are fortunate enough to be there but also for those who can put on a virtual reality headset and soak in the action.

A live example of this can be seen at this years' ATP World Tour Finals which are being completely powered by the Infosys Information platform (IIP) and automation. We've leveraged technology to crunch 25 years of data from the ATP World Tour so that wherever you are or whatever your relation to the game, your experience as a fan is nothing like what you have accessed before.

Technology can be a funny thing. Sometimes it's a 'push' mechanism, not unlike a gust of wind, where service providers (or other retailers) inundate end-users with relevant and irrelevant data with little understanding of context vis-à-vis the end-user. Other times, however, technology can act more as a 'pull' mechanism.

Watch this YouTube video to better understand how this phenomenon works. The video is a demonstration that we are at cultural crossroads. It shows how technology is pulling us, whether we know it or not, or like it or not, to transform ourselves and our outlook on sporting events. For example, people above a certain age relish the opportunity to be in the stadium and soak in the action and energy. But, people below a certain age are unable to remove themselves from their smartphones. The news I have for you: The people who cannot put down their smartphones are the new consumers of sporting events. It's a cultural phenomenon which every savvy enterprise should capitalize on.

So you would best not fight the technological pull that is going on right now. Technology such as the IIP is amplifying the in-stadium experience for fans who still want to watch the action on the court or field. And it's also geared to those who are unable to detach themselves from their digital devices.

Insights are transforming the game - for fans and players

In the case of our partnership with the Association of Tennis Professionals, the IIP takes in data as it happens on the court, maps it on easy-to-use screens for fans sitting anywhere - courtside or at home - and offers real-time insights that up until recently you could receive only if you happened to be sitting next to Rod Laver! Tennis is a game of finesse, an art form in some ways. But it is also a game that is governed by a vast array of statistics. Analyzed by a platform like the IIP, fans can unravel interesting insights. If the score is deuce and Andy Murray has had more success at this tie-breaking game point this year versus last year when playing Novak Djokovic, chances are he's going to go all in. Or perhaps you're a fan of Rafael Nadal and want to know in what parts of the match he will exhibit his best moves. The answers can be found with just a couple of clicks on the ATP Leaderboard.

True, there are many technology partnerships in professional sports. However, the Infosys-ATP partnership stands out for leveraging the capabilities of our powerful analytics platform IIP, to gather from and analyse data for different stakeholders involved - fans, players, sponsors, broadcasters, and organizers.

Since the widespread use of the IIP, the website of the ATP World Tour has experienced a 27 percent spike in traffic to its 'Stats' section. Be it traditional fans, millennial tech junkies, or professional players - the seamless nature of the IIP proves that it is not just the data at your disposal so much as, how you can harness technology to utilize what you have that gives you a competitive advantage.

November 11, 2016

Thoughts on Windstream-EarthLink Merger - O Wind, if winter comes, can spring be far behind?

Posted by Anurag Vardhan Sinha (View Profile | View All Posts) at 10:30 AM

Thoughts on Windstream-EarthLink Merger  - O Wind, if winter comes, can spring be far behind?

Last Friday, I was having coffee with my team and discussing the wave of consolidations that are happening in the US communication industry when a colleague commented, "Anurag, with this pace of deal announcements, it looks like you will have to write an article every week." His words were prophetic, for two days later, on the eve of the historic US elections, EarthLink announced its merger with Windstream Communications in an all-stock transaction. The deal values EarthLink at about $645.2 million, and with debt at approximately $1.1 billion. Windstream shareholders will own about 51%, while EarthLink shareholders will own 49% of the combined company.

EarthLink was founded in 1994. It was envisaged as an alternative to dial-up internet service providers (ISP) like AOL who had a closed ecosystem. Dial-up internet services from EarthLink became popular by the turn of the millennium. They extended their success to broadband services but soon started facing pushback from Telcos. At the time of the merger, EarthLink had 29,000+ fiber route miles, 90 metro fiber rings and secure data centers that provide data and voice IP coverage. Dial-up as a mode for accessing the internet went out of vogue and by the end of the first decade of the new millennium, most of the dial-up giants like AOL got acquired. Those like EarthLink have been finding their new 'avatars' through partnerships/mergers and are focusing on niche markets not served or underserved by the telco giants of today. And it was only a matter of time that a player like EarthLink would want to grow beyond their niche market.

On the other hand, Windstream started as a boutique telecom company providing voice, and data connectivity using broadband, VoIP and MPL. They have expanded their consumer footprint into digital TV services and are today the 9th largest communication service provider in the US. They serve over 8.1 million people in 21 states. Windstream also services small and medium businesses through their managed service offerings like virtual servers, managed firewall, data storage. In a way this merger was on the cards, and here are some of the reasons why,

1. Enhancing Balance Sheet

Earthlink has been operating in a shrinking dial-up space and in order to fend off competition, have been diverging to new areas like home VoIP and IT services. Both Windstream and EarthLink had been facing stiff competition from telecom heavyweights and through this merger will achieve economies of scale and become more competitive. EarthLink's annual revenue is ~18% of Windstream's run rate and the merger will almost double Windstream's market capital and increase its cash flows by ~40%.

2. Complementary Networks & Operational Synergies

Apart from enhancing the balance sheets, synergies from this merger will make the offering from the combined entity more attractive to its clients. EarthLink had about 671,000 consumer subscribers, while Windstream has about a million residential internet subscribers. EarthLink had 29,000 route miles of fiber, of which 16,000 route miles are in areas where Windstream does not have coverage. This will result in an enlarged footprint of 145,000 route miles for Windstream's in its primary markets.

According to the merger note from EarthLink and Windstream, the combined entity is expecting more than $125 million in annual operating and capital expense synergies, within 36 months of closing. The expected Net Present Value (NPV) of this $125 million+ of synergies will come to ~ $900 million!

3. Customer Synergies & Complementary Services

Unlike large telco's, the focus of Windstream and EarthLink has been on medium and small enterprises. These customers account for 38% of Windstream's revenue and about 41% of EarthLink's revenue. The merger will give the combined entity complementary market reach and service capabilities. For example in Q2 '16, EarthLink launched their new 'software-defined wide area network' (SD-WAN) service that allowed enterprises to determine the most effective way to give internet connectivity to remote locations, such as a company branch offices. Post-merger, the expanded fiber network and access to Windstream's enterprise customers will strengthen SD-WAN offering.

4. EarthLink's debt as asset

In the merger note, it was announced that Windstream plans to refinance EarthLink's debt of ~ $436 million. However EarthLink's recent operating losses can also be carried forward to reduce tax, which are expected to have an estimated net present value of $95 million.

Competition has been heating up in the communication industry since 1982, when AT&T was broken into competing 'Baby Bells'. Post the AT&T breakup, hundreds of long-distance companies sprung up, heating competition in this space. By 1996, both Democrats and Republicans were convinced about the need to extend competition in telecom and allow local service providers, long-distance providers and cable companies into each other's markets. In 1996, President Clinton signed on the 'Telecommunications Act of 1996', which eased restrictions on media cross-ownership so that a single company or person could own multiple media businesses like broadcast stations, cable stations, newspapers, and websites. This resulted in huge influx of capital to the industry and companies set of on a rat race to build networks over land, undersea and in the air. This resulted in overcapacity and eventual implosion of the communication industry by the turn of the millennium. Since then, the US communication industry has been plagued by commoditization, regulatory controls, decreasing margins and new 'Over-the-Top' (OTT) entrants like Google, Facebook, Amazon and Netflix.

Romantic poet P.B. Shelley in his famous poem, "Ode to the West Wind" wrote "O, wind, if winter comes, can spring be far behind?" For the communication industry, the spring of consolidation had to finally arrive, to combat their existential threat. We saw waves of consolidation in the last 15 years which have resulted in the formation of large Tier -1 communication providers like AT&T, Verizon and T-Mobile. We have now reached a stage where the wave have turned into a 'Tsunami' of mega - consolidations. I had covered the premises for mega-consolidation in my previous posts, 'CenturyLink - Level 3 Merger: Expensive Network Buy or Strategic Consolidation?' and 'AT&T's Business Transformation: From Connectivity, to Services, to Experiences'. The Windstream-EarthLink merger is the third such deal we are witnessing with a fortnight.

The US communication market is still heavily fractured and there is scope for further consolidation. The image below shows the US communication market.

The market has been abuzz with rumors that Tokyo based SoftBank Group Corp.'s who owns more than 80% of Sprint is in a merger conversation with T-Mobile US. This, despite being stopped by regulator two years ago. The other potential acquirers of T-Mobile could include Charter Communications, Liberty Media, Dish Network, foreign carriers (for whom T-Mobile is the only way to enter the US market) and/or a private equity. Post the second wave of consolidation, the US communication market has six major providers - AT&T, Verizon, T-Mobile, CenturyLink, Sprint and now Windstream, besides four Cable MSO / Satellite TV provider -Dish Network, DirecTV(AT&T), Charter and COX. It would be interesting to see the next move from Tier 2 providers like C Spire, Frontier and US Cellular who now have become prime targets for acquisition. There is still plenty of potential in the rural areas for growth in high speed internet. These are areas not covered by the Tier-1 or Tier-2 providers and regional/ boutique players can pursue M&A as a quick way to consolidate their capabilities and grow their footprint.

You may also be interested in reading

AT&T's Business Transformation: From Connectivity, to Services, to Experiences

CenturyLink -- Level 3 Merger: Expensive Network Buy or Strategic Consolidation?

November 4, 2016

CenturyLink -- Level 3 Merger: Expensive Network Buy or Strategic Consolidation?

Posted by Anurag Vardhan Sinha (View Profile | View All Posts) at 10:06 AM


On 31st October, within 10 days of the mega- merger announcement by AT&T and Time Warner Inc, CenturyLink announced its decision to buy Level 3 Communications in a massive $34 billion cash-and-stock deal. The equity value of the deal, excluding debt, is about $24 billion. CenturyLink, offered $26.50 in cash and 1.4286 of its shares for each Level 3 share, there by valuing Level 3 at $66.50 a share. Post the acquisition, CenturyLink shareholders will own about 51% of the combined company.

CenturyLink, services 6 million residential Internet customers, mainly in rural areas and Level 3 operates mainly in cities on the East and West Coasts. Both companies have been facing immense competition from larger rivals and through this merger, believe that they can consolidate and stand up to the might of AT&T and Verizon. CenturyLink and Level 3 is expecting the combined company to save over $900 million in cost-cutting synergies, according to the press release announcing the deal.

CenturyLink shareholders have not reacted positively to the deal and it is evident from the fact that their stock dropped by over 10% on the day of the announcement. They haven't recovered since. Many fear that it will be difficult to realize the expected synergies and CenturyLink will be taking a huge risk by carrying a debt laden Level 3 which is operating in a hyper competitive market. The skepticism expressed by shareholders could be temporary and these types of trends are not uncommon when large M&A's happen. Over time we expect the trend to change as the dust settles down, and shareholders and market analysts start to see synergies at work.

Further, skepticism is also because such consolidations haven't really produced spectacular results in the past. The graphs below show the stock movement in the past 5 days, since 31st Oct. 2016.

CenturyLink shareholders.jpg

It is my firm belief that it is the contrary, that in the long run this deal can realize synergies and benefit all stakeholders. Here are seven reasons why I think so.

1. Focus on the core-business

This M&A focuses on the core business of CenturyLink & Level 3 and it is here that this union derives its strength -- unlike AT&T (to point out an example), which seems to be putting its $ bets on adjacent, and maybe not so adjacent markets. This union is all about strengthening their core offering -- fiber/broadband, and enterprise is their clear focus segment. Further, it is adequately apparent (from AT&T, Verizon and others) that consumer ARPU is dropping year-on-year, and other revenue sources are needed. This union is smartly betting on the 'niche' it wants to keep.

2. Creating the scale and size to compete

The communication industry requires high capital investments and the return cycle is long. Traditional communication services are getting commoditized at a fast pace and the sector is characterized by a classic 'winner takes all' situation. CenturyLink and Level 3 have been facing revenue and profitability pressures from larger competitors like AT&T, Verizon and Comcast.

CenturyLink and Level 3 has been competing hard for the same turf, but were curtailed in their inability to compete individually with juggernauts like AT&T and Verizon. This union helps them put up a joint front even while AT&T and Verizon's are shifting focus away from their core as their recent acquisitions indicate.

Post this deal the combined company will be the second-largest provider of communications to business in the US after AT&T with ~ $25 billion of revenue and 55,000 employees. CenturyLink has a 250,000-route-mile US fiber network and a 300,000-route-mile international transport network. Level 3 will add 200,000 route miles of fiber to CenturyLink's network, which includes 64,000 route miles in 350 metropolitan areas and 33,000 subsea route miles connecting multiple continents, springing it to a leader's position both in the US and globally. The image below shows the assessment by Vertical Systems Group before the deal.


3. The Enterprise push

The deal comes at a time when business clients are seeking more bandwidth and faster networks to move data. CenturyLink makes about 60% of its revenue selling network services to businesses, while Level 3 sells only to businesses. As per the press release, 76% of the combined company's revenue will come from business customers.

4. On-Net capability

CenturyLink is rolling out its GPON-based fiber-to-the-premises (FTTP) to multi-tenant units (MTUs) so as to rapidly scale business service installation. On-Net buildings or Near-net buildings, which are within close proximity to the fiber the company already has in the ground, allows it to rapidly scale service to business customers. With the Level 3 acquisition, CenturyLink increases its on-net buildings by nearly 75% to about 75,000, including 10,000 buildings in EMEA and Latin America.

5. Transformation for new telco services

Telcos have been focusing on software defined networks (SDNs) and network function virtualization (NFV) as strategies to combat the rapid commoditization of their traditional business. Combined synergy between CenturyLink-Level 3 can come from its virtualized capabilities.

CenturyLink has more than 50 % of its IP core network and data centers virtualized today. They have built their NFV platform in 36 network and data center locations with plans to expand into another 8 locations by the end of the year. Level 3 Communications has been building its own SDN infrastructure for the past three years and currently has about 75,000 network elements under the control of its SDN orchestration system. Both companies has been engaged in active in acquisition in the SDN space. In 2014, Level 3 acquired TW Telecom for about $6 billion and Level 3 has been using SDN for its Ethernet services that it acquired with the purchase of TW Telecom.

Both companies were already involved in network transformation efforts through SDN/NFV initiatives, including cloud, and this is bound to streamline, and introduce the required economics and agility necessary to rollout new services. This network transformation initiative will also bring OPEX and CAPEX savings in the long run for them to be able to invest in areas with highest revenue potential.

6. Combined Cloud & CDN play

CenturyLink has been positioning themselves as a cloud provider over the years and they had made several acquisitions in the past five years like Savvis, Tier 3 and AppFog to bolster their case. CenturyLink haven't been competing directly with giants in public cloud like Amazon, Rackspace and Azure but have been focused on offering a hybrid-cloud model for enterprises who due to strategic or compliance reasons wanted to retain a part of their data on premise. Last year, CenturyLink acquired ElasticBox, a multi-cloud application management startup who does orchestration across a dozen cloud providers, including AWS, IBM SoftLayer, Microsoft Azure, VMware, CenturyLink Cloud, Google Compute Engine and OpenStack.

Level 3 has created one of the largest content delivery networks (CDNs) with a capacity of 26.8 Terrabit per second using their tier-1 international transit network. The network features 93 locations around the world where more than 15,000 servers are used to deliver international content.

This deal will help in extending their footprint in CDNs and hybrid cloud as CDN actually drives cloud adoption through enhanced performance, scalability, security and cost savings.

7. Level 3's debt as a near term asset

Heavy investments in fiber by Level 3 outstripped its service revenues and this has led to debt on their books. The combined company can use this net operating loss to carry forwards and reduce their effective tax rates. The deal gives the combined entity ~$10 billion in tax credits that Level 3 has been carrying on its books and it can use up to $2 billion a year of the accumulated net operating losses as credit against taxes.

As discussed in my previous post -- "AT&T's Business Transformation: From Connectivity, to Services, to Experiences", communication service providers are taking either of the three consolidation strategies to defend their competitive positions -- market consolidation, horizontal consolidation or vertical consolidation.

The CenturyLink -- Level 3 deal did not receive as much attention as AT&T-Time Warner or Verizon-Yahoo/AOL (despite the size), probably because it was a routine vertical integration/consolidation of similar players, that industry has seen over the last several years. Companies like Level 3 and CenturyLink grew to their current size by acquiring capabilities across the value chain through vertical consolidation.

Both the companies are not new to M&A activities -- CenturyLink transformed itself from a traditional POTs company -- CenturyTel through the acquisition of capabilities from Embarq, Quest and Savvis. Similarly Level 3 grew by acquiring WilTel, Broadwing, Global Crossing and TW Telecom. We expect this big union to happen quickly, the dust to settle quietly and the new CenturyLink, to start business as usual.

You may also be interested in reading

AT&T's Business Transformation: From Connectivity, to Services, to Experiences

Thoughts on Windstream-EarthLink Merger - O Wind, if winter comes, can spring be far behind?

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