2nd place big date

How M2M solutions can make Moscow “smarter� and make MTS a new leader in the segment David Dale

Anna Novikova

Petr Demidov

Anastasia Solomatina

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

The two-stage strategy ensures fast penetration of MTS in the M2M market alongside with forming the keystone for success in the long run First Stage: Smart City Solutions (years 1-3)

Second Stage: End-to-End Integrator

Use developed capabilities to address Moscow government plans and initiatives:

Switch from direct targeting of key industries to a role of end-to-end solutions provider

Smart Energy and Smart Grid  Smart grids and meters

Smart Healthcare

Four tenets of successful M2M business for MTS:

 Intelligent connected devices

Smart Mobility

 Fleet and traffic management

Smart city is a very large market and it is hard to enter due to regulation obstacles However, this initiative will: help to establish valuable relations with the government bring substantial benefits due to large scale Source: Team Analysis

Applications development platform Secure and compatible network

End-to-End solutions with value-added services Strategic partnerships

2

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

M2M technology can become a platform for implementation of a range of new opportunities M2M industry is destined for success…

By 2021 the number of M2M connections in the world would reach 2 billions

2 bln connections 1,8

… due to a range of opportunities it has to offer Segment importance

1,1

1,21

0,19 0,27

0,38

0,55

0,82

 Cost of modules declines  Business starts to understand M2M opportunities

For MTS it’s important to recognize the full potential of M2M and target key industries and areas Source: M2M insights for mobile network operators

 Vehicle diagnostics  Fleet management  Asset tracking

Utilities and energy

3,7

2014 2015 2016 2017 2018 2019 2020 2021

Now is the time to expand aggressively:

Transportation and telematics

4,9

 Smart grid  Usage monitoring  Remote diagnostics

Security and safety

 Intrusion detection  Remote surveillance and access control

Financial services and retail

6,4

 Digital signage  Point-of-sale terminals  Vending machines, ATM 3

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

Moscow is on the right way to become a real smart city But there are still a lot to be done 1

    

3

There are many problems in Moscow which can be solved by the «Smart city» Congestion in the center and main highways Poor public transport organization High emission of carbon dioxide Inefficient use of energy and water Poor organization of public institutions

Moscow government has a lot of ongoing and planned projects

Smart traffic lights Tracking of public transport location Integrated smart parking system Mobile and web portal for drivers: fines management, vehicle location notification etc.  Mobile and web applications to use with public services (including online forms for complaints and suggestions)  Remote registration for public medicine    

MTS and its competitors have a lot of 2 solutions already implemented….  Tracking systems for business purposes

many suppliers

 Antitheft systems. Energy and water meters for corporate clients

Megafon

 Security sensors for “smart houses”

many suppliers

4

And there’re many opportunities still not explored

    

Smart street lighting (MTS) Mobile ECG for use in ambulance (MTS) Smart energy meters for mass usage Smart insurance (pay-as-you-drive) Telemedical armband

Sources: US Machine-to-Machine (M2M) Communications; Team Analysis

4

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

There are many opportunities implied by Smart City concept: Transportation, Utilities and Medicine are the most promising for MTS in Moscow Transport

Examples of current tasks Examples of products Share in M2M market (Russia \ World)

Track location

Utilities

Medicine

Security

Industrial

Manage Track usage Waste and Track heath Prevent theft vending and production Optimize React quickly Prevent entry ATM usage control

GPS trackers Antiburglar Smart Smart meters Smart traffic armband and antitheft Smart grid system lights Remote ECG 41% \ 17%

Retail and Finance

10% \ 54%

3% \ 1%

20% \ 13%

Portable device Remote control

Heat, pressure meters

12% \ 2%

12% \ 14%

Growth opportunities Level of competition Technical challenges Organizational challenges ROI

5

5

Priority for MTS Sources: M2M insights for mobile network operators ; US Machine-to-Machine (M2M) Communications; Team Analysis

5

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

M2M-solutions on the different levels contribute to smart city transport environment Most of them are based on existing solutions of MTS

For citizens Driver assistance Antitheft devices embedded in vehicles

For businesses Fleet management

Promotion of existing fleet management solutions!

Automatic emergency call modules Implementation of standardizes interfaces for hardware side and Smart insurance (pay-as-you-drive) existing logistic software solutions  Successful market in USA and Industry-specific solutions Europe, emerging in Russia  Public sector: police, road  Potential demand of 0.2 mln management, etc. careful drivers  Implementation: sell KASKO in  Private sector: taxi, couriers, etc.

MTS bank or ally with an Driver performance and efficiency insurance company comparison tool (incl. for buses) MTS will need different approaches to development and marketing of M2M products in transport sphere:

Develop existing products of MTS Combine products of MTS and other businesses Develop new disruptive solutions

Sources: US Machine-to-Machine (M2M) Communications

For the city Traffic management Traffic sensors embedded into the pavement for speed and congestion control (already piloted in Moscow)

Smart street lights

(already piloted in Moscow)

Vehicle identification modules for toll collection paid zones

(used for trucks in Germany and Austria)

GPS/GLONASS tracking of partner and public vehicles as a means of congestion measuring (peer: Yandex maps system)

Embedded sensors of parking place occupancy (peer: smart Santander)

Smart bus stops (react to demand) 6

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

M2M solutions in the spheres of utilities and healthcare are relatively new to MTS, although some initiatives have been successfully tested

For citizens Installation of smart meters in place of existing ones Requires alliance with meter producer (presumably German one if additional licensing fails) Remote control of energyconsuming devices

For businesses Optional smart meters to optimize energy and water consumption May be produced in an alliance with a Russian vendor Solutions for HPU operating companies (in-city or cottage)

For citizens

For the city

Smart street lighting system (piloted in Krasnodar) In the perspective: smart grids for energy and water usage control on the city scale

For public and private medical organizations

Smart armbands to monitor health of the chronically ill (already marketed in Russia)

Mobile diagnostics installed in ambulance cars (e.g. mobile cardiographs are already used in a few regions)

Products analogous to the “Button of life�

Organization and monitoring of emergency cars

In-home environment management (heat, air conditioning etc.)

Remote medical diagnostics and consulting with use of mobile devices and special gadgets.

Existing products of MTS

Similar to existing products of MTS

Sources: US Machine-to-Machine (M2M) Communications

New solutions 7

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

M2M technologies are based on the chain of environments. Traditional scope of MTS is provision of connectivity but entry in other levels is possible.

Devices

signal

Identification module Regular SIM for most purposes “Extreme� SIM Embedded SIM (chip) for small devices Programmable SIM

Device Sensors Modems Controllers Easy-to-integrate connection modules Embedded computing Device certification Source: Team analysis

Connectivity

data

Cellular network Global SIM (alliances) Transmission: focus on 3G (optimal speed/coverage) Low-intensity transmission: SMS

OSS & BSS Control center Traffic routing Connectivity planning Quality management Emergency management Billing Business rules Troubleshooting SIM provisioning

Application

info

Development platform APIs for device management and data analysis Abstraction of connectivity Compatibility

Packaged solutions Models of geospatial and resource data Agents, device protocol Solutions for fleet management Solutions for resource management Integration framework Simple feedback rules

Interface Multiple outputs Cloud services provide scalability and economies Output to enterprise internal network is safe and flexible

User Interfaces Standard web interface for service management and applications use Mobile applications Integration with major databases Built-in data analysis tools 8

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

In order to secure the share in the M2M market mobile operators have to embrace a new end-to-end M2M solutions business model In the course of time mobile network operators will loose share in M2M revenue…

2

…moreover value-added services will take the place of traditional network services Service Enablement Platform

87%

54%

2013 2016 - Connectivity services - Integration&Software - Service level management - Data analytics

Connectivity Revenue

M2M Revenue Distribution

1

75%

-

25%

Connectivity Support

- Network Traffic Connectivity

Traditional “bit-pipe” role is more safe and certain but… … the future of M2M market belongs to end-to-end integrators.

Source: Team analysis

9

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

The long-term goal is to establish partnership infrastructure to advance to the role of provider of end-to-end solutions from just a network provider Customer Retention

The E2E integrator creates an ecosystem that engages all vendors and delivers the end-to-end solution to the customer’s problem Stages of implementation: 1

Provision of standard “branded” vertical products

2

Creation of solutions addressing specific customer requirements

This is the area to consolidate by forming partnerships based on revenue sharing

E2E Network Provider

This is the target position in the M2M pyramid This is where MTS is now

M2M Software Developer M2M Equipment Developer

Source: AT&T developing enterprise M2M apps; Team analysis

10

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

To gain leadership in the M2M market one should provide as comprehensive commercial offer as possible Services MTS already offers:

 M2M Manager mobile portal for monitoring and control  Standard M2M solutions packages  SIM cards suitable for harsh environment

Key differentiating qualities for M2M network provider should be improved What to add to the current commercial offer?

Increase the portfolio of ready solutions Offer packages of network consultancy services Offer M2M application platform

End-to-end level of service

Range of possible M2M opportunities

Provide service level agreements Ensure connectivity through global alliances

Reliability of service

Create helpdesk support 24/7 Source:US Machine-to-Machine (M2M) Communications

Low

High 11

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

It’s crucial to create an efficient partnership structure and find a viable scheme for its monetization Current monetization:

 Fixed + traffic-based payment tariff for SIM  Standardized solution packages

A flexible solutions-based billing is preferred by clients To realize this approach a partnership structure with revenue sharing relationships should be established Necessary partnerships for E2E provider: Go-to-market partners  Have an existing customer base in an industry for which M2M is an upsell Bring new business to the partnership Source: Team analysis

M2M technology partners

Operational partners

 Create platforms to manage M2M services  Provide technological specific solutions: devices, application software

 Ensure M2M device certification  Facilitate cross-border connectivity of devices

Help to cut through technical complexity

Ensure workability of proposed solution 12

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

Application platform provided by MTS is crucial to its success as a central player in the software side of Russian M2M market  MTS cannott vertically control the whole M2M market  Small niches will be covered by small developers and vendors If MTS creates an ecosystem for M2M solutions development, it will reap full benefits of market growth

 Reduced time-to-market, infrastructure costs and many risks of application development  High scalability and flexibility of solutions  Standard solutions create value for developers but are cheap for MTS due to scale  Developers cannot so easily change providers, therefore price competition is mitigated

Application platform is a product that creates long-term relationships with customers who now can focus on business value of M2M applications instead of technical side Framework for integration with modern databases and analytical tools API for remote requests Cloud-based scripting language that implements typical control of remote devices (compatible with world industry leaders such as AT&T) Event management, agent and device protocols. Data analysis tools.

Testing facilities. Web hosting services.

Cloud-based APIs that abstract away connections (hidden device connectivity platform)

Data storage Service control center

Standardized devices (mainly geospatial trackers or consumption meters) Source: AT&T developing enterprise M2M apps; Team analysis

User can access M2M data from anywhere User has access to all typical control operations User doesn’t bother about network organization User does not stick to specific device 13

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

Marketing of MTS M2M services will be oriented at individual consumers as well as enterprises

Government relationships  Partnership with government companies or control by government: “Мосводоканал”

50-100

 Partnership with go-to-market firms  Mutual advertisements

<50

Cobranding

>100

For consumers

Income, RUB k in month

For business

<30

30-60

>60

Age Group

Energy

Medicine

Security

Transport

Water&Waste

Finance

2014

2019

“Innovators” (2.5%)1

“Late majority” (84%)1

1.75 0.7

2.45

Business partners Consumers number of M2M connections, mln. units

82.3

65.8 16.5

Source: M2M insight for mobile network operators; MTS Report; 1 – by E. Rogers classification (in the appendix)

14

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

The strategy timeline embraces the smart city solutions implementation roadmap and the general M2M strategic initiatives

Business development

Smart city solutions

2014

2015

2016

2017

Basic fleet management solutions

2018

2019

Traffic management

Parking, street lights, jam estimation Smart insurance Business smart meters Smart grid Remote health diagnostics

Work on device standardization

Development of connectivity platform Development of application platform

Alliances with international MNOâ&#x20AC;&#x2122;s Launch device certification program Start institutionalized consulting

Sources: Team Analysis

Constant improvement of application platform

Work on device standardization

15

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

High business risks are an essential part of aspiring technology and M2M is not an exception Four 4 Major Business Challenges: Challenge

Action

Issue

Ability to influence

Initiate M2M adoption by  Lack of ready business providing standard solutions solutions based in M2M Technology Adoption at the start and create a  Challenge in integration of convenient platform that M2M into existing processes would foster applications development

Certification and regulation

Partnerships Monetize consumer sector

 Admittance foreign vendors and capacities is needed  Cooperation with government is critical in some areas

“Smart City” projects will help to push government towards further cooperation.

Device certification as part of joint efforts of the partnership

 Cooperation with peers Create the attractive M2M  Maintenance of control over development infrastructure vendors that will be costly to leave  Make consumers to pay for constant connectivity

Introduce pay-as-you-go model where it’s necessary

Sources: US Machine-to-Machine (M2M) Communications; Team Analysis

16

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

The implementation of M2M still faces a lot of technical challenges solving of which will define the its success in the market Four Major Technological Сhallenges: Issue

Action



Guarantee of data security

Threat of data manipulation and abduction  The problem is exacerbated in an open heterogeneous network

Build a data-sharing platform in which information will be accessed through service layer operating above various network devices

Availability of 4G LTE

 High speed data transmission is vitally needed for certain solutions

Develop own network Participate in shared network if necessary

Heterogeneity, lack of standardization

 Incompatibility of different applications, networks and devices

Creation of technologically flexible solutions Collaboration with leaders to create unified standards.

Foster M2M apps development

 M2M applications development popularity depends on complexity of their creation and demand

Provide off-the-shelf tools to help developers.

Attract as many go-to-market partners as possible

Challenge

Sources: US Machine-to-Machine (M2M) Communications; Team Analysis

Ability to influence

17

Summary

Opportunities

Technology

Business model

Implementation

Risks

Impact

M2M-solutions provided by MTS will change Moscow environment towards that of a real smart city To citizens Transportation

Utilities

Healthcare

Security

Sources: Team Analysis

 Travel time  Fuel consumptions  Cost of insurance

To businesses  Smarter logistics  Less fuel consumption  Motivate drivers

 Energy and water  30% decrease of consumption energy consumption  Consumer  Better tariff choice registration mistakes

To the city as a whole  Congestion  Accidents  Pollution from cars

 Energy efficiency  Ecological situation improvement

 Reaction for urgent responses  Opportunities to monitor health

 Optimal insurance program for employees

 Dissatisfied consumers  Death rates

 Robberies prevention  Accidents management

 Decrease of corruption level

 Better organization of police

18

Summary

Opportunities

Technology

Business model

Implementation

Impact

Risks

The impact of M2M segment on MTS business would be small however it will demonstrate profitability and growth higher than the rest of the company 1 The M2M segment will not play a big role in MTS business profile…

… however it will substantially surpass the rest of the company in terms of profitability and growth.

2

Share of M2M in overall revenue

M2M Revenue CAGR* 37,56%

3,98% 1,11% 2014

Key assumptions:

MTS 3-5%

*for 2014-2016

EBITDA margin for M2M reaches 64% in 2019 2021

NPV = 2,3 mlrd $

DPP = 3,8 years

 MTS market share = 52%  Number of connections in 2014 = 4,3 mln, CAGR(2014-2021) = 33%  Software development cost are part of OPEX Revenue (mln $) EBITDA (mln $) 127

-19 2014

178 -26 2015

241 -12 2016

396

315

481 307

538 344

602

385

192

83 2017

2018

Sources: M2M insights for mobile network operators, Team Analysis

2019

2020

2021 19

Team Summary

Summary

Opportunities

Technology

Business model

Implementation

Risks

Our modest and unambitious team of HSE students intending to tackle the most impervious business problems Anna Novikova

Petr Demidov

David Dale

Anastasia Solomatina

HSE bachelor graduate, Economics faculty

HSE bachelor graduate, Economics faculty

HSE bachelor graduate, Economics faculty

HSE bachelor graduate, Economics faculty

Semifinalist of Microsoft Case Competition Sky

Winner of Cup Technical, winner of â&#x20AC;&#x153;Russian Buffetâ&#x20AC;?

The winner of Cup Technical, finalist Microsoft case, MedXChallenge

Making market research and business analysis in Sanofi

Has an experience in Sibur, Nestle

Has an experience in investment department in Yamal LNG

Has an experience in Accenture, Nike Teaches in HSE

Has an experience in accounting department in Caterpillar

amnovikova@bk.ru +7-903-139-59-01

demidovpetr@yahoo.com +7-916-564-08-21

dale.david@mail.ru +7-985-191-31-68

solomatinaan@gmail.com +7-916-602-36-74

Cup Russia 2014, Big Date

20

Appendix 1. Sensitivity Table 5500 5000

NPV, mln $

4500

Key assumptions:

4000

Growth in connections

3500

EBITDA Margin in steady state

3000

Yearly decline in ARPC

2500

Terminal Growth

2000 1500 1000

Sources: Team Analysis

-30%

-20%

-10%

0%

+10% +20% +30%

Relative deviation from base case

21

Appendix 2. E. Consumers of new technologies Adopter category Innovators

Early adopters

Definition Innovators are the first individuals to adopt an innovation. Innovators are willing to take risks, have the highest social class, have great financial liquidity, are very social and have closest contact to scientific sources and interaction with other innovators. Risk tolerance has them adopting technologies which may ultimately fail.

Financial resources help absorb these failures.

This is the second fastest category of individuals who adopt an innovation. These individuals have the highest degree of opinion leadership among the other adopter categories. Early adopters have a higher social status, have more financial liquidity, advanced education, and are more socially forward than late adopters. More discrete in adoption choices than innovators. Realize judicious choice of adoption will help them maintain central communication position.

Individuals in this category adopt an innovation after a varying degree of time. This time of adoption is significantly longer than the innovators and early adopters. Early Majority tend to be slower in the adoption Early Majority process, have above average social status, contact with early adopters, and seldom hold positions of opinion leadership in a system .

Individuals in this category will adopt an innovation after the average member of the society. These individuals approach an innovation with a high degree of skepticism and after the majority of society has adopted the Late Majority innovation. Late Majority are typically skeptical about an innovation, have below average social status, very little financial liquidity, in contact with others in late majority and early majority, very little opinion leadership.

Laggards

Individuals in this category are the last to adopt an innovation. Unlike some of the previous categories, individuals in this category show little to no opinion leadership. These individuals typically have an aversion to change-agents. Laggards typically tend to be focused on "traditions", likely to have lowest social status, lowest financial liquidity, be oldest of all other adopters, in contact with only family and close friends.

Source: Rogers 1962 5th ed, p. 283

22