Telefónica: Digital Dreamer?

The premise of an almost autonomous "new telco" division within a traditional network operator is an exciting one for the industry, suggesting as it does all sorts of startup-type behavior and "new world" mentalities.

That's all very well. But can such entities generate any revenues?

Yes (or "Si"), says the team at Telefónica Digital, formed in September 2011 by Telefónica SA (NYSE: TEF) to lead the group into the promised land of digital applications and online business models. (See Telefónica's Looking Trendy and Telefonica Holds Key to Digital Model.)

The Spanish giant has given the Digital division not only the opportunity to act like a separate company but also to develop and make money from a number of existing and developing service lines, namely advertising, cloud, security, M2M, digital content distribution, eHealth and financial services, as well as Tuenti (Spanish social networking service), the Terra Internet services unit and Media Networks (TV distribution in Latin America).

As a result, Telefónica Digital was, at launch, a business with annual revenues of €2.4 billion (US$2.95 billion) in 2011.

That's a great place to start, but Digital's CEO Matthew Key is tasked with generating annual sales growth of 20 percent each year up to 2015, by which time Digital is expect to be generating revenues of about €5 billion ($6.15 billion) by 2015.

Key expects big things from some of those service lines: Up to €1.5 billion ($1.84 billion) in annual revenues from content distribution in 2015 and up to €800 million ($983 million) from M2M in the same year. And by that time there should be revenues from new developments, such as Firefox-based devices and from services currently in development or yet to be dreamed up in-house, or by the many startups that Telefónica Digital's Wayra unit is courting and financing. (See Telefónica Bangs Its Digital Drum, Et Tu, Telefónica? and Why Gonzalo Martin-Villa Is Kissing Frogs.)

There is also hope that such developments will also impact the Telefónica group at large by improving revenue per customer, reducing churn (through the development of sticky applications) and improving market share. "The more products customers use, the lower churn will be," stated Key at a recent media briefing in London. "We need to help Telefónica retain its relationships with its customers."

Key is equally clear about what Telefónica Digital will not be. "We don't want to be, or can't be, the next Facebook or Google, and we don't want to enter the hardware market. We're all about creating products that build on our core strengths," added the CEO.

Let's see how that works out by 2015.

— Ray Le Maistre, International Managing Editor, Light Reading