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April 26, 2007

Telco 2.0 Event: Digital Youth Summary

Web 2.0, Social Networking, User-generated Content, Digital Piracy, Peer-to-Peer distribution etc. are all buzzwords in the Telco, Media and Technology space at present. The March 2007 Telco 2.0 brainstorm covered many of these topics at the Digital Youth session. Below is our analysis of the day. See here for our in-going hypthesis and here for a relevant Youth-related post on the Broadband Incentive Problem and how to make money from these Web 2.0 junkies.

Modern Youth - They’re Different …Not

I deliberately asked Norman Lewis, Director of Technology Research at Orange, to kick off proceedings because I had prior knowledge of his speaking prowess from the Telco 2.0 event in October last year where he got the audience rockin’ in the aisles. Norman is a terrific speaker as he combines the gravitas of the experienced executive with the passion of the young. Once again he proved a hit with many Delegates describing him as the best speaker at the event. Since we were talking about youth, I half expected a gaggle of groupies to appear in the front row screaming his name and begging to have their event documents autographed.

As it was, Norman explained that the young today are different from grown-ups but only in the way that they have always been different. They like different clothes, different music, different films - just like we used to in our ‘pre-wrinkly’ days. What is striking now is the way they use technology to distinguish themselves from adults and ‘escape’ parents prying eyes. Norman calls this the rise of the ‘bedroom culture’ - a reference to the use of PC’s and the internet as a social networking tool rather than any reference to the sexual proclivities of the young. Technology is used as a tool to assert identity and communicate with like-minded peers in the same way we used to the street corner. His key lesson is that the young will continue to use Web 2.0 technologies to develop their social networks. The Telco community, therefore, has a choice - embrace this and develop new business models and propositions to serve this segment as it matures or risk being swept aside…

Peter Miles, CEO at SubTV, focused on the student community where SubTV provides ad-funded TV offerings to 2.2 million students in the UK (more here). He revealed a few snippets of his deep knowledge about students based on annual qualitative and quantitative research. Of particularly note was the fact that:

  1. 90% access the internet daily in 2006 (up from 82% in 2005 and 65% in 2004)
  2. 51% of students visit social networking sites each week
  3. 99% own a mobile (and 74% ‘would lose their mind if they lost their mobile’)
  4. They are VERY good at multi-tasking and filtering - normal marketing messages may not get through

He reiterated Norman’s point about the need to engage with this ‘alien’ culture or risk being swallowed by them.

Concerned that things were getting a bit gloomy, I was relieved that Nick Bassett, Market Research Manager at Vodafone UK did not paint a similar picture of the ‘Youth Tsunami’ coming to wipe out operators. He presented some behavioural segmentation analysis of Vodafone UK’s customer base and demonstrated that an important youth segment, the ‘Tireless Texter’, has the following behavioural and demographic attributes:

  • Typically young & single
  • Living at home with parents or guardians
  • Students or minimum wage employees
  • Restricted disposable income
  • Spontaneous & fun loving
  • Still a bit immature
  • Disorganised
  • ‘Generation iPod’
  • Heavily skewed toward prepay

As their name suggests, they are also obsessive SMS users because this keeps them connected to their ‘tribe’ 24 hours a day (yes, they will happily be woken up in the middle of the night by a text) at a very low cost. In keeping with a trendy and price sensitive segment, they have specific device requirements:

  • Modern. Yup, the device must be cool ‘n’ funky.
  • Have good quality camera. To capture those young fun-lovin’ moments…
  • Include Bluetooth. So those pics and games can be exchanged with friends for free.
  • Have lots of memory. To store those illegal music and video downloads.
  • An MP3 player. To play those (still) illegal downloads

Nick’s data-driven segmentation of today’s users was, in fact, consistent with Peter and Norman’s message that the youth are demanding new (web-based) propositions and business models that are at odds with operators’ subscription services. He clearly demonstrated that Tireless Texters do all they can to avoid paying and, judging by the size of the bubble presumably representing the segment’s revenue, it is not generating a large proportion of Vodafone UK’s total turnover.

This begged one big question: will the Youth carry this behaviour into their adulthood and, if so, what would the implications for operators? And the answer from panellists and delegates was…we’re not sure…only time will tell…but some changes are clearly afoot. Sorry, can’t be more helpful here.

New Business Models

Ian Henderson, Senior Director of European Digital Business at Sony BMG Music Entertainment, showed how the company is starting to monetise the 6 million (mainly youth) users it gets each month to its various websites through a new service: Musicbox. He explained that Musicbox was designed to:

  1. Convert promotional artist web sites into a large music web destination and network
  2. Generate new revenue from advertising and commerce
  3. Create an important direct-to-consumer communication channel
  4. Capture and monetise the internet value created by the popularity of Sony BMG artists and their music

Musicbox consists of a video player for the artist together with content and promotions/advertisements. It also has ‘social networking’ functionality by managing artist-based communities and allowing for user interaction through such things as reviews and voting. Advertisements form the main money-spinner with pre-roll, banners etc. being core pieces of the business model. Currently, Musicbox in Europe receives 4.5 unique visitors a week and 12.4 million page views. It was not clear how much revenue the advertising is currently generating but Ian was bullish about he prospects for the service.

Delegate questions showed wide-ranging views about advertising from sceptical (Advertising sounds great for an internet company but how can an operator cover its costs? Blyk is heading for oblivion surely) to supportive (Not so fast - ringback advertising works in several countries (waiting for an answer is dead time anyway) and listening to ads, e.g. when not communicating, works in both Africa and the USA.)

Alfie Dennen, Co-founder of Moblog UK (a mobile blogging site), also pointed out that advertising and sponsorship were a core part of his company’s business model. But he also explained how, by building a community of users, Moblog UK has successfully managed to charge 3% of its users £5 a month for premium services (higher storage limits for pics and no advertising).

I had asked Alfie to be controversial and he did not disappoint. He listed many things that operators were getting wrong in the Web 2.0-world and things they should do to address this. Observations such as “Your business models need to converge with Internet business models” riled some Delegates who made the point that operators continued to be substantially more successful than 99.9% of internet companies. This was a great way to stir up the debate and Alfie had strong views on how operators could take advantage of the youth-fuelled Web 2.0 phenomenon:

  1. Revenue share with network-agnostic services like moblogUK
  2. User Generated Content-friendly handsets and packages (e.g. X-series)
  3. Subscription to Instant Messaging packages
  4. Advertising-supported content
  5. Advertising-supported services/portals/platforms
  6. Subscription-based platforms (free, but higher tier model)
  7. You’re good at connecting people, become the hub

He felt that flat-rate data plans (such as found at 3 and T-Mobile in the UK) were the best way of driving mobile data usage up amongst all customer segments. At STL Partners we agree with this BUT believe that there also needs to be a corresponding variable, value-based revenue stream coming from upstream (from advertisers and content players seeking to distribute their wares via the Telco network) if operators are to cover their substantial variable network costs. Without this, the Broadband Incentive Problem which is becoming an increasing issue on the fixed internet will eventually become a problem for mobile: act now to avoid future problems.

Chris Lennartz, Marketing Director at LogicaCMG, brought the discussion back to operators’ core business: voice and messaging. He explored how messaging is (still) driving mobile data usage - SMS, MMS, email, SMS/MMS alerts and Instant Messaging being the top 5 services for mobile data. He explained how much of this growth would come from Instant Messaging going forward but that SMS would continue to exist since it served a different purpose to Instant Messaging:

  • SMS messages - public messaging (available to all and regulated), do not require immediate response (or any at all), for information only
  • Instant messages - community-based (available to some only), conversational, require immediate response

He envisaged a world of ‘Intuitive Messaging’ where these and other messaging forms are combined in a single, simple user interface which would allow users to pick when and how they read and respond to messages. He felt that operators should offer a one-stop shop for both forms of messaging but focus on innovating in, and making money out of, public messaging services. Very sensible stuff and one we concur with, although we believe that there are additional opportunities to generate value through the integration of public (Telco-based) messaging with the community (internet-based) services. As one Delegate put it:
“Let’s reserve the name IM for the Internet brands and use the IM technology benefits for enhancing the SMS/MMS offering by introducing SMS 2.0, where seamless interoperability with SMS and MMS is CRUCIAL.

The Cupboard is NOT Bare

As if to prove that operators are not starved of ideas and creativity regarding new propositions and business models, Martin Duval, Global Director Business Development & Partnerships for Start-Ups & VCs at France Telecom, outlined no less than 5 new Web 2.0 projects that he is driving. This was a whirlwind tour indeed and we all wished that Martin could have had 45 minutes (not the 10-15 minutes we allot to speakers).
One interesting point is that France Telecom is now actively seeking development of new services from start-ups as well as doing this in-house (the old model). Martin recognises that much of the entrepreneurial flair exists…well, with entrepreneurs. His role is to actively develop France Telecom’s relationships with this (VC-funded) group. He outlined 2 ‘made-in’ Orange services - Pikeo and SoundTribes and 3 being developed with start-ups - SMS Jukebox (with ycd.net); Blackmamba.net (with SongSong); and Groundsurf (with Ratleads):

  • Pikeo. In beta. A community website for managing and sharing pictures (like Flickr) using mobiles and for mapping their location (like Google Maps). A critical feature here is simplicity and usability: users can upload tagged pictures to Pikeo from their mobile with 1 click.
    (The business model here was not 100% clear but appeared to be increased data usage and stimulation of core voice and messaging services (people want to talk about the pictures). Clearly, there is also the opportunity for advertising.)
  • SoundTribes. A music community to allow the long-tail of bands to broadcast their work. Advanced social networking features to enable SMS voting, chat etc.
    (The benefit to Orange is increased use of core messaging services and high customer stickiness.)
  • SMS Jukebox. User goes to participating restaurant and can select a song from the menu on their mobile via SMS. User told when song will play and, when played, is charged €1.
    (A niche service but potentially important as it introduces the concept of the mobile as a remote control or hub for managing other services.)
  • Blackmamba.net. A community website based around hip-hop and Rap R&B (you can’t get more youthful than that).
    (This looks like pre-release marketing for a Blackmamba.net album due out in September 2007. For Orange this is looking to build customer loyalty and allegiance in the youth segment.)
  • Groundsurf. A mobile-controlled skateboard (yes, you did read that right).
    (This has must be a brand-building exercise for Orange, I am sure they don’t expect revenue from this!)

Phil Guest, Managing Director at Habbo Hotel UK, talked about the success Sulake (the parent company) has experienced with Habbo over the last couple of years. Habbo, (for those not up on their Web 2.0 sites) is a community site for the young (13-16 year olds) where users create their own personalised hotel room. They pay Sulake for furniture and other content for their rooms (music etc.) and this, together with advertising, generates the majority of Habbo’s income. Phil put the success of Habbo down to three things:

  1. A unique business focus. They don’t try and do hundreds of things but stick to developing the core proposition for their target market.
  2. Product Leadership. Strong value-for-money proposition (it is possible to decorate your room for around £3) and focus on providing broad and deep product range within the hotel environment (casual games + instant messaging + social networking + MMORGs)
  3. Operational Excellence. Centralised product development means that costs for developing new products are kept to a minimum and they can be rolled out fast across Habbo’s 29 country hotels.

Staggeringly, when Phil announced the launch of Pocket Habbo (for the mobile) there was a muted reception from Delegates. If ever there was an opportunity to explore opportunities in the Web 2.0 space with a leading player looking to leverage the mobile channel this was it…

David Springall, Founder of Yospace the company behind 3UK’s SeeMeTV and O2’s Look at Me service (click here for more on this), talked about the things that have made their platform so successful (and attractive to media players - they were recently bought by Emap). Contributors make videos with their mobile and upload them via MMS to the Yospace platform where they are moderated (by humans) before being posted on the portal. 3 and O2 users can then download and watch the clips.

The service has been enormously successful with Yospace paying out £250,000 to contributors for their content. Dave said that paying contributors has been a critical driver of content volume and quality - contributors can earn several hundred pounds each month for good content which they receive via Paypal. Popular clips automatically rise to the top of the menu, introducing an element of competition from contributors to see who can get the top slots. Another key success factor has been pricing: the clips are very cheap - they start at 10p (which includes data charges) - which makes them a simple ‘impulse purchase’ for users.

Everybody’s Doing It … Operators Can Do It Too

In the last session we had Tomi Ahonen, 3G Author and consultant, and Ronald Klingebiel, Director at the Centre for Strategic Studies of Ashcroft International Business School, talking about where the sources of value lie for operators and how they should take advantage of the youth opportunity. Tomi covered some of the case studies from his latest book, Digital Korea, including Cyworld (a virtual world similar to Second Life and Habbo which was acquired a few years back by SK Telecom). His presentation was packed full of interesting facts about Cyworld:

  1. Korean CyWorld used by 95% of the 20 year olds
  2. 43% of the Korean population as users
  3. Not only kids, adults too, even leading politicians etc
  4. The miniroom is an online living space for the minime
  5. Music sales 200,000 songs per day, 50 cents each = $109 million annually
  6. 30,000 businesses active in CyWorld, offer 500,000 items of content for sale. 40% revenue-share. Not all content created by SK Telecom.

There were many discussions about how relevant Cyworld is to the European and US markets with some delegates arguing that cultural differences made comparisons impossible. This elicited a great response from another Delegate: “Too many people blame some kind of “cultural” difference between Japan/Korea and the West. Rubbish. Kids on Japan/Korea buy the same brands of sneakers, jeans, etc that European and American kids do. Cultural differences are NOT the reason.”

The intense discussions showed that operator management DO believe there is a clear opportunity for Web 2.0 offerings but that execution remains the issue. This led to another hot debate about how to bring these services to market - make or buy (as SK Telekom did with Cyworld) and the branding required for Web 2.0 offerings. Conclusions? Probably that a mixed approach of make-and-buy (per France Telecom) is best and that discrete service branding (similar to KPN’s many brands in the Netherlands) is required as the incumbent Telco brand cannot credibly stretch into these new areas.

But Tomi also reiterated the point made by Nick Bassett at the start of the day that the youth, for all their Web 2.0 activity, are really defined by their SMS activity. They send a receive texts all day (including, apparently, texting through their clothes while in lessons at schools).

Operators have enjoyed the fruits of this SMS growth but in future need to harness SMS and MMS further to support growing user interaction, content creation and digital purchasing:

  1. For uploading content - Yospace, moblog
  2. For voting - SMS shortcodes
  3. For payments - Habbo content
  4. For promotions - SMS barcodes and semacodes to redeem digital (and off-line content)

Makin’ Da Money

The potential sources of value available to operators from the Youth segment that recurred during the day were:

  • Advertising and sponsorship. We covered this in the advertising workshop on the following day.
  • Voice and, in particular, messaging services. Via integration with internet messaging products (like IM) and the use of messaging as a tool for managing content, interaction and payments
  • Partnerships and acquisitions. With/of creative start-ups and internet players.
  • Continuous innovation. Easier said than done but the need to foster a culture of innovation in the product and customer marketing areas with Operators.

Realising these sources of value involves new business models, new products and services, new customers (for advertising) and new partners. Delegates summarised what operators need to ‘stop doing’, ‘start doing’ and ‘do more of’, as follows:

  • Being so risk averse
  • `Not invented here` syndrome
  • Stop talking about unwillingness to invest ahead of demand - if you want to generate equity style returns and ratings you need to behave as an equity investor would.


  • Focus on identifying business models that are attractive for investors
  • Cooperating with all stakeholders in the field
  • Being more confident in your ability to deploy scale to business advantage


  • More experimentation
  • Standards-based cooperation and standards setting. Need to bang vendor heads together.
  • More awareness of how national to markets are radically different in terms of maturity and penetration

We’ll be exploring the Digital Youth segment in more detail at the next Telco 2.0 event on 16-19 October in London. Please contact us if you have case study examples we should cover at the event…

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April 25, 2007

Is SMS under threat?

One of our Telco 2.0 event speakers, Tomi Ahonen, has written a passionate eulogy on the end user joys of SMS. We’re soon publishing our Consumer Voice & Messaging 2.0 report, and have been looking at the evolution of arbitrage and toll bypass schemes. Will the future be as rosy for operators as it is for their customers? Could SMS revenues be under threat despite growing volumes and adoption?

At the event we ran some survey questions on the first day with the full plenary audience. Given that SMS is a super-high margin product delivering between a third and half of most mobile operators’ profits, we asked if this service could be Skyped? These alternative services let you connect to a third party SMS gateway over the Internet (using GPRS, 3G, or Wi-Fi) and send SMS messages at well below standard operator prices. It’s much more plausible than VoIP displacing mobile voice, since there are few quality of service issues sending a one-off message.

The question we asked was:

What proportion of SMS messages will be originated from non-operator third-party services in 5 years time?

The results were quite interesting:

There seemed to be little consensus among the participants of whether the threat was real, and if so whether it was small or large. Each respondent was also asked for a reason why they chose their answer.

Those predicting a smaller haemorrage of customers to rival services cited several common factors:

  • users are too lazy or indifferent to the cost of SMS to try lowering their expenditure
  • there will be a general move towards IM, which will regulate costs and provide a richer alternative
  • spam and privacy concerns will keep people away from non-operator services
  • operators will just drop prices given any competitive threat

Those citing a larger threat suggested that messaging will be embedded in 3rd party applications, notably social networking services, and that operators will lose control of the context from which messages are initiated — as well as the revenue.

A common theme on both sides was the user experience. Those predicting a low rate of defection cited poor experience, whereas those forecasting some of the telepocalyptic scenarios felt it would come right over time.

We’ve been using a couple of such services recently. Given it costs 40p (about €0.59 or US$0.80) to send an SMS when roaming, we’ve had plenty of incentive. I’ve run out of credit on Vyke having used it a lot, and Jajah only lets me initiate voice calls, so we’ve screen captured all the stages of sending a message from smsBug instead. They all have a fairly similar user experience.

I’ve not included any of the sign-up and installation stages, as we’re assuming users will put up with considerable one-off inconvenience to switch (usually by handing a bank note and phone to a nearby youthful technophilic relative). You set up a pre-paid balance on each of these services, and download a Java client onto your handset. It’s not difficult.

We’ve laboriously documented all the steps, as there are more than for the standard texting experience.

We start from the home screen on my smartphone. I’ve set up smsBug as the (pretty horrible) second icon in the quick access row — the pair of bug eyes. I could have assigned this to the standard messaging hotkey — but we’re relying here on users knowing how to do quite advanced customisation to their phone UI. This isn’t part of the “out of the box” install (and probably never could be on the current generation of phones and Java.)

For some reason the message editor starts with the last message you sent, so you have to do a bit of selection and deletion to get rid of it.

Enter a new message — all standard text entry using native UI features like predictive text.

Then we select the options hotkey which gives us this menu. Somewhat strangely the next step is “send”, even though we haven’t entered any recipient details. And we now discover a “clear text” option, which isn’t visible or obvious to the user on first using the application. (You could fix this with a “select ‘clear text’ option from menu to create new message” down the bottom of the screen when the application is first used.)

A blank screen to type in a number.

We select the option to add a contact from the address book.

Pick the user using the native UI.

Pick the number. Note the boilerplate text glitch in that the UI assumes the purpose of an address book is to support calls, not messaging. (I really must delete that old Kansas City office number — I never look at my own address entry in Outlook!)

Now we’ve got our destination number. Unlike the native SMS user interface, you can only enter a single recipient.

Now send the message. This time “send” means “send”.

Ah, so as we’re going to use the 3G interface, we have to give this Java application permission. Every time.

And also select which access point to use. This is really the fault of the Symbian UI in not giving me more configuration control here. (“If in UK, always use T-Mobile”.)

Now a wait… This has taken up to 25 seconds before now.

A message briefly flashes by with my remaining balance and we’re dropped back into the message editor — unlike the native UI, it’s another keystroke to exit to the idle screen.

The service works — one new message.

And here it is:

None of this is integrated with the rest of the messaging UI of the phone. Your message won’t be stored in the outgoing messages folder. (The story for email is just the same — I have a 3rd party email application installed, but if I select “send via email” for an image I’ve snapped, the only choice is the native email UI, which isn’t configured in my case to send to anyone.)

Overall, I’d say that it’s worth jumping all these hoops to save yourself the best part of a dollar for sending a single SMS. Even when roaming, the combined cost of the bypass service and packet data charges are only a tiny fraction of the roaming messaging charge. I’ve found the services to be as reliable as those of the operators: even when sending “native” SMS when roaming, I’ve had messages fail to be delivered.

The real threat to operators was identified earlier. The owners of social networking applications will replicate these small arbitrage businesses and integrate them into a much slicker user experience. As SMS is hybridised with instant messaging they will also arbitrage termination charges when messages can be delivered over IP to a phone or PC.

Alternatively, as Truphone has done for VoIP telephony from mobiles, it gets integrated with the native UI and the user sees no difference except the price.

In the meantime, services such as these will put pricing pressure on the high-margin users (roaming, prepaid), and encourage the adoption of large or unlimited buckets of messages.

In either case, the SMS party may not be over, but the DJ has finished playing upbeat house music and is starting to rifle through his blues collection.

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April 20, 2007

Telco 2.0 event: Digital Worker Summary

‘Digital Worker’ means different things to different people. At the Telco 2.0 event we tried to look at this market segment from lots of different angles to see if we could come up with some new insights for the industry. We started with a basic hypothesis, outlined here, and were stimulated by special presentations from BT, Orange, Cisco, Nokia, and Intel among others.

Many thanks to Dean Bubley who facilitated the session and to Colin Mallett who acted as ‘Analyst-in-Residence’. (For those not there, more details of the agenda and stimulus presenters here).

Here is a summary analysis (the presentations and detailed verbatim output is reserved for participants):

The day was kicked off by Bob Brace of Ambulant (and, formerly, Nokia). He gave the day a quick introductory tour of many of the key elements facilitating Telco 2.0 and FMC services in the enterprise and small-business markets, including the emerging role of the Internet and disruptive non-operator services and applications.

Highlighting the broad differences within the “knowledge worker community” he noted some of the key problem areas facing next-gen operators:

  • working with (or around) large businesses’ IT departments, and
  • the ability to reach the right small businesses and serve them profitably.

His assertion that smaller companies “want services” rather than relying on “DIY” solutions is a popular refrain, but the uptake of unified communications, hosted email/telephony and similar offers still faces significant challenges from a commercial perspective.

Grant Goodman of Orange Business Services has been at the sharp end of delivering managed telecoms services to businesses for some time. Although Orange is best known for its mobile business, France Telecom’s former Equant corporate data unit has been rebranded under the same umbrella, and this helped him provide a good, unbiased picture of the full range of connectivity requirements for knowledge workers - it’s certainly not “all mobile”.

The pragmatism showed through in Orange’s use of different “mobility profiles” for different employee groups: the types of devices, applications and connections used by a salesforce will differ from the same company’s IT operations. He stimulated the debate by suggesting that a key Telco 2.0 role among remote-workers will be the management of complexity, not by techno-religion, but through consultation and customisation. This theme of consultation and “one size doesn’t fit all” ran through many of the day’s presentations and discussions.

Piotr Cofta of BT Labs gave a fascinating and provocative presentation about the nature of trust and identity among remote- or knowledge-workers, blending a solid engineering background with recent immersion in some of the “fluffier” bits of social science. In theory, working at home or “on the road” brings greater productivity and employee satisfaction - but the actual results show that some managers don’t trust what they can’t see, and even pay less.

Interestingly, the Web brings some answers - especially “trust enhancing” approaches like eBay’s seller ratings and feedback comments. He suggested that operators might have a role in facilitating “relationship-based” communications as a cornerstone of a Telco 2.0 strategy - but he cautioned that this couldn’t be achieved through some half-hearted attempt to “corporatise” the archetypal Web 2.0 MySpace and FaceBook experiences.

Sample verbatim feedback from participants:

I liked the conflict between collaboration within organisations and the fact that in many organisations, managers are motivated to hoard information since information is power. Does this mean collaboration within organisations is doomed to fail?

Is there margin in serving SMBs currently?

How much of the complexity is it in the interest of the industry to maintain? How important is it to simplify the customer experience?


Knowledge workers need smarter devices

Paul Murdock from Nokia’s Multimedia business group introduced some of the potential new tools available to remote workers. Notably, he reinforced a strong recent message from Nokia - that the “real Internet” is where it’s at, ideally experienced by business users on a device with a big screen, WiFi and a huge range of familiar branded Internet applications and direct access to corporate servers.

He saw a strong osmosis effect where familiar consumer-type experiences (ie the Web and other Internet-based applications) bleed into knowledge worker space, and drive demand for “Internet-optimised” computers rather than general-purpose PC [a nice video of UMPC future scenarios here]. More operator-centric devices like conventional smartphones, or even the trendier WiFi/SIP enabled E-Series range didn’t get much of a look-in.

The presentations continued to take a hard-nosed technological line with John Woodget from Intel, who followed up the previous day’s plenary presentation by starting with more detail on the underlying innovations like WiMAX and virtualisation. The importance of fitting “innovative charging mechanisms” into enterprises’ procurement processes was also stressed.

So, for example, devices could be bundled with specific services and targeted at particular user groups’ needs, perhaps reversing the usual mobile subsidy model by including “free” open Internet access along with a “closed” line-of-business service in the upfront purchase price.

A particularly interesting example was that of a dedicated “healthcare terminal” for ill or elderly users, which incorporated medical features like patient monitoring and “reminders” to take drugs, along with more social features like email and chat. This could potentially be provided and managed by a forward-looking telco in conjunction with healthcare providers.

John’s comments about Virtual SIMs also provoked a set of questions about the possible models for identity management in future - and whether an operator-oriented SIM card fits well with a typical enterprise’s desire to control its own security platforms.

The discussion after this session also took an interesting tangent towards Telco 2.0 and environmental concerns. Partly stimulated by concern over redundant and wastefully incompatible electrical chargers, discussion also went on to consider operators’ potential roles in managing, reducing or even monitoring organisations’ carbon footprint - even if this just started as a marketing strategy for services like collaboration and messaging.

How will we reconcile the tension between the desire for the coolest device and run of the mill corporate security processes?

Will the Internet interface really take over from vertical-market applications? Will we see fedex guys, soldiers or bank terminals all using web technologies?

Is the mobile operator SIM on its way out?

Is there a difference between ‘service-centric’ devices customised to operator services, vs. application/IT centric devices which are not linked to a given service provider?

Eat your own dogfood

The next session focused on actual real-world use cases of various new communication technology and service platforms. Barry Turner from Cisco gave a quite inspiring presentation about the way in which the company is making collaboration and virtual teams work effectively on a global scale - and all this even before it’s fully acquired and integrated its new subsidiary, WebEx.

Video streaming, high-definition “telepresence” conferencing, unified communications & presence and assorted other tools all have a role - and although it has a lot of in-house expertise, Cisco does indeed outsource various parts of the operation to third-part service providers, rather than solely just buying “pipes”.

Paul Kilkelly from BT gave a presentation on the evolution path of BT’s own employee intranet portal, which gives its employees (many of whom are mobile- or home-workers) access to 95% of “employee services”. Leaving aside the wince-inducing HR-speak, the real innovation is in blending the internal web front-end with an assortment of external “Webside” Internet features like RSS feeds and the ability for users to reconfigure the content and layout of their own “page” whilst still conforming to a centralised security and management policies.

Although some observers decried the interface as “Web 1.0”, it’s unrealistic to expect organisations with 10’s of thousands of employees to deploy this month’s latest AJAX fad immediately.

Finally, rounding off the day’s trio of BT presenters with very different angles, Simon Partridge from the carrier’s professional services team spoke about the consultative business processes that are necessary to get corporate clients to adopt flexible (sorry, “Agile”) working styles. This brought some of the more evangelical advocates of business use of Telco 2.0 down to earth - it’s all great in theory, but in the real world enterprises have entrenched cultures and business processes which act as friction to adoption.

Senior executive buy-in, construction of measurable business cases and definition of appropriate training regimes are all less-sexy-but-essential corollaries to selling the shiny new technology/service message. (Interestingly, the environmental theme popped up again, with BT claiming to have reduced CO2 emissions by 54k tonnes per annum, largely from a reduction in commuting).

I wonder if all enterprise-focused operators need big consulting & professional services divisions?

Presentations seemed to focus on the needs of the larger enterprise - what about the needs of the SMB?

The examples are technological and focused on knowledge workers. How do you see these examples being adopted in the broader [enterprise] market?

Start, stop, more….

The delegates were then invited to take a step back from the presentations for an interactive session, looking at the broader marketplace for Telco 2.0 services for knowledge workers. People were asked to suggest what operators should be doing to make Telco 2.0 a reality in the enterprise: specifically, what should they start doing, stop doing, or do more of? The comments were pretty diverse, but among the most poignant were:

What should we START doing and WHY?

Open our networks with APIs to let developers integrate telephony into their apps [this theme of opening APIs and encouraging developers came out very strongly, with several related points being made]

Build consulting expertise

Productise our own internal IT systems as external services

Think about unexploited capabilities built into the network or existing customer relationships, eg to create services around trust management, location information etc

What should we STOP doing and WHY?

Thinking that all developments will require years, hundreds of people and huge amounts of money to complete

Approaching IT or web2.0 as TI 2.0. It’s starting to look like IN

Focusing on locking in customers. Instead, try to create continuous value for them

What should we be doing MORE of and WHY?

Partner with others who may be more nimble and quick to market [This comment was echoed by others who also pointed out the role of fast, fleet startups in helping Telcos’ innovation process]

Thinking about where ‘services’ stop and ‘applications’ begin.

Looking to the future

We concluded the day with a couple of sessions to illustrate where the value might lie in operators’ future knowledge worker Telco 2.0 plans.

Filling in for his colleague at the last moment, Ronald Klingebiel from Cambridge University’s Centre for Strategic Studies looked into the shifting value chain for telecoms in the knowledge worker and SME space. He highlighted some interesting market opportunities arising from personal mobility - such as the opportunity for services the communication needs of “commuting residents” with second homes abroad.

He also considered the various types of FMC solution that are becoming available, and how different operators and service providers from across the value chain are moving into each others’ domains. Although it wasn’t explicitly considered in the presentation, the volume of enterprise-centric FMC solutions has mushroomed during early 2007, although operator-based solutions will need to fend off the challenge from more enterprise-controlled platforms.

The final speaker was Anish Kapoor, CEO of the intriguingly-named YuuGuu, who presented his company’s vision of an easy-to-use, web-oriented conferencing and presence solution. Although YuuGuu is a startup rather than a traditional telco, it is probably the sort of organisation that operators should look to for Telco 2.0 inspiration. There is an interesting argument that one aspect of operators’ service platform strategies should be the ability to offer services across the web to customers who don’t purchase access.

Particularly in communicating between one company’s knowledge workers and its customers/suppliers/partners, it is highly unlikely that all participants will share the same network provider, especially if they are geographically distant. Licencing and rebranding “white label” Internet-resident services could mean the operator could extend its service & application reach far beyond its traditional boundaries.

So, what next?

The final interactive session attempted to derive some concrete objectives for the industry. To achieve success in developing and implementing Telco 2.0 strategies for the “digital worker”, what should the industry be attempting to do over the next 6 months, and the next 3 years?

In the next 6 months, what are the next steps?

Define KWs [knowledge workers] and how they overlap with other employees. Segment by size, workstyle, location, vertical industry

Look across Telco borders in collecting customer insights of the KWs. Maybe the real need for telco functionality lies somewhere else.

Start developing mechanisms for KWs to work effectively with multiple devices, multiple numbers etc, ie embrace ‘multiplicity’ rather than trying to work against it

Audit our own IT and comms/collaboration systems for capabilities that could be productised and offered to customers in other industries

In the next 3 years, what are the next steps

Focus on understanding how tech impacts on work-life balance

Examine the nature of trust & relationships and assess whether any service models are possible

Knowledge workers will more and more work as freelancers. So start developing services for the self-employed KW. eg provide an automated hour registration tool with mobile telephony

Build a comprehensive channel partner strategy to access SMEs and specific vertical markets

Next Steps for Telco 2.0 Initiative

Clearly some big themes have emerged here. What really is the unique value that telcos can offer the Digital Worker market? What compelling ‘services’ should telcos create that avoid competition from Open Source or from being baked into software by the big IT companies. For mobile operators, what’s next after Blackberry, telematics and data cards?

The answer seems to lie in the following:

  1. Much more creativity in:
    1. Market understanding and segmentation (especially in the SME sector).
    2. Channel development (especially in the SME sector)
  2. Much more innovation (commercial and technical) in Voice & Messaging for the enterprise market.
  3. Thinking more laterally about device form-factors and functionality.
  4. Finding a clearer role for telco operators vis-à-vis enterprise IT.

The Telco 2.0 team will be exploring these issues over the coming months.

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April 19, 2007

Telco 2.0 Event: Nice TV Coverage

A very nice feature on the Telco 2.0 event by Telecom TV here. You can click to view it here.


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Vonage’s woes and “better telephony”

The hot VoIP gossip at the end of last week was the departure of the Vonage CEO following a legal assault by Verizon over patent infringement, as well as some disappointing financial results (increasing customer acquisition cost, stagnating customer revenues).

Any pundit loves to point to correct predictions (whilst quietly letting the duds slide into the memory hole), and we’re no exception. Over three years ago, we forecast that Vonage’s business model was a dodo and wouldn’t fly. If your sole value proposition is access arbitrage and low price, you will lack differentiation from landline voice, and be subject to regulatory attack that raises your cost base to comparable (or even higher) levels to incumbent operators.

So, what could they have done differently? Here’s a sneak preview from our forthcoming report - Consumer Voice and Messaging 2.0:

Well, given the whole point of an end-to-end IP network is unbounded flexibility not offered by switched intelligent networks, they needed to differentiate the Vonage telephony experience. Vonage has to overcome the downsides of their fixed line substitution approach: weaker emergency calling support than landline, VoIP’s uneven quality, need to change phone number, and no line power. This better telephony experience has to be more than skin-deep and generate significant value to beat the pain of adoption.

Furthermore, for DSL customers forced into buying bundled POTS service, there has to be a reason to put Vonage at the heart of your communications experience. Otherwise, why not just save yourself a ton of heartache and simply buy a prepaid calling card for those high-cost international calls?

Is there a market for “better telephony”? It’s hard to tell given the few examples (Verizon’s iobi does OK but doesn’t set the world alight, and Skype gives away the product without charge). The Apple iPhone may raise user expectations with its Visual Voicemail feature. As the iPhone suggests, a differentiated telephony experience is likely to need different devices. Allow use with installed handsets via an analogue adapter, but if you really believe you’re the broadband phone company, could we suggest offering some broadband phones? Taking a Gillette analogy, perhaps the telephony service is the margin-free handle, and the devices are the razor blades (which also provide churn-busting lock-in)?

Still, if you want to go for the differentiated telephony experience, here’s our eight-part recipe:

  • Available everywhere, for everyone, in any situation. You might think that mobile telephony is the last word in spreading talk into every corner of our lives, but it’s not. Vonage need to make their experience:
    • Reach new outlets. You should be able to initiate a Vonage click-to-call from any web site, do callback from any phone (as with Jajah, for example) and avoid bill international calls to your Vonage account.
    • Reach new users. Vonage could have offered high-margin devices for kids, who are today excluded from telephony because you’re afraid what will happen when your three year old starts pressing the buttons. Why can’t my kids call their grandparents whenever the latter are online?
  • Socially aware. This means allowing users to have roles and multiple personas — the “business” me, the “personal” me and the “private” me. The last may offer anonymous calling, for example, with disposable time-limited numbers for dating or auction site use. Another example might be iotum’s smart routing that understands the difference between a client calling you and a colleague.
  • The ultimate directory. Use caller name databases, automatically fill in my address book, let me search my social network as well as “friends of friends”.
  • Presence-enhanced to help users time their calls. If you knew someone was on a call already, would you have called? If you knew they were on a business trip to China and it’s 3am there, would you have called? If you knew they were in a meeting… you get the idea.
  • Enhanced privacy and security. Encrypt on-net calls. Gather data on rejected calls, unreturned voicemails, and work out who needs to be excluded from bothering users and when.
  • Improved media experience. We’re seeing BT position themselves here as the “premium audio” player with their hi-ds branding. Other examples might include audio tones (whacky noises to play during calls), ringback tones, and enhanced conference calling where you can tell who is speaking (Skype does this). Build cameras into every Vonage phone, and make “see what I see” a core feature. Press the shutter button briefly, it shares the snapshot; hold it down, we’ve got shared video. Just don’t call it a video call — let the users add or subtract pictures and video as appropriate during the conversation.
  • Integrated payment and data transfer. Partner with merchants to make the “Vonage-enhanced” calling experience a truly wonderful one, free from annoying IVRs and dictation of personal profile and payment details. (eBay might be able to execute on this with Skype and Paypal, Vonage alone would need partners). It’s like Adobe’s acrobat and your tax return: you can print it out and manually fill it in, or you can enter the details electonically into the form. Make Vonage telephony multi-modal from the start, keep the devices with a common, simple UI that avoids the fragmentation of Java mobile handsets.
  • Perfect the user interface. Make voicemail as easy to use as the iPod is. Make conference calling simple and intuitive.

We’ve by no means exhausted the ideas and possibilities. You’d steal plenty more ideas from the “Voice 2.0” startups. There are some other parallel activities you’d want to undertake, such as offering an API set and “mashup” applications and services from partners.

PhoneGnome was profiled on this blog last autumn, and their product allows you to preserve and extend the value proposition of traditional fixed telephony. Vonage offers fewer user benefits with higher cost. There’s no shortage of user dissatisfaction from incumbent telephony, and once they’ve experienced something better they won’t go back. You just have to offer something that’s clearly better.

You can read more about the future of voice and messaging services in our forthcoming report: Consumer Voice and Messaging 2.0

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April 18, 2007

Interview: Rory McKenna & BT’s open platform

One of the unmissable themes of the Telco 2.0 event was the trend towards partnership and the need to build technology platforms that enable this.

We were pleased to have Rory McKenna present at the Technology Insiders’ Workshop. His job title is as unfamiliar as that of the subject to most telco execs: Director of the Web 21C SDK. In English, his job is to create the tools and interfaces that let third party developers, big and small, access BT’s core network and IT facilities. He also brings a refreshingly sceptical view of the world from outside of telecoms.

This reinforced BT’s message from Paul Excell (pictured below right) on Day 1 of the event: partnerships and an open platform are key components of BT’s business strategy.

Rory has kindly agreed to answer some questions on the initiative, but first some basic facts from his presentation:

  • They are exposing seven sets of functionality: Voice calling, Conference calls, Messaging, Authentication, Location, Information about me (profile), and Contacts
  • Their web services application program interfaces (APIs) work with all the major development environments (Microsoft, open source, etc.)
  • They signed up over 1700 individual developer accounts, with UK based developers clearly predominating.

You can learn more here.

Q: What’s the status of the project in terms of commercial deployment? (Development, testing, live, etc.)

You always ask the hard questions…. So from day one when we started on this path we have always strived to maintain the mantra of keep it simple, build the community, prove the concept and then add complexity when the market demands it. So we release end of April with a very simple commercial model based on buying credits to use the current set of services. We would be naïve to think all of the commercial intricacies of billing are covered for all possible scenarios but this does lead nicely into our approach to stay at the level of selling services and letting the application developer worry how to handle the commercial aspects for their specific offering. Then learn from the community what else they want from us.

So at the end of April we will have two service offerings, the Beta platform that we are currently running, free for very limited use and a simple banded offering for small, medium and heavy usage of the services. The important thing for us to prove is that there is a market out there that will pay for this, and as we move into a 2.0 world, whether it is branded Web,Voice,Telco it is the software developers that will have more influence on how these services progress.

Q: What’s the commercial imperative for this activity? (e.g. Direct generation of revenue from API access, increased user adoption of basic access, product ideation, PR, exploratory R&D, or something else?)

Probably all of the above, leads back to the sector the applications are being built for. We’ve proven that it works across all customer segments, Enterprise to Consumer. So we are truly ubiquitous with this model. Imperative is a resonating word with me, especially in Telco land. Convergence is interchangeable with imperative now, in my own opinion, we need to maintain the innovative element and allow co-creation with as wide an audience as possible and we finally need to provide a sandpit for developers to test applications and show that BT can help them in that product creation cycle.

Q: What kind of IT and business development resources does it take to enable 3rd party access?

I’ll let you accept questions on this, that’s such an open question, Do you mean as a big company or someone wanting to use our services? Everyone can be a reseller now, especially in the 2.0 model, so are you a provider of one or more services, how complex are those services, what service wrap is required to support your service. We have tried to prove the one developer in the basement approach, building their application and servicing their single customer. If they scale we scale with them, if you can capture that market then you open up innovation to a massive audience.

Q: Who sponsors and champions your work from the commercial side of the BT organisation?

Al-Noor Ramji, BTs CIO, championed this from the beginning. It has been a low risk investment though in terms of opex and risk, other industries adopt this approach and a few of us have come from the investment banking angle where this open API implementation is de facto if you want to survive. What I am seeing now though is uptake both internally and externally to utilise the SDKs, it appeals to the ISVs(Independent Software Vendors) serving the SME market and we have a number of forward thinking business partners that are actively participating.

The business partners are bringing their experience of market evaluation and commercials which helps considerably in positioning BT as a SaaS provider.

Q: What internal barriers do you face? Are you finding strong acceptance or resistance to the idea of becoming an open platform?

Hard question number 2… Any big company will have issues on opening the platform, I think the big win here is that this is not Powerpoint, you can kick the tires and see what it means to you as a business. Security for sure was our biggest hurdle, once you conquer that milestone for services you offer, the opportunity for businesses to experiment in a secure environment removes the concerns. Everyone from the business side looks to IT to provide that ability to create and innovate, if you can’t provide that in a corporate environment then you will be disenfranchised by leaner suppliers externally. But when it comes to implementing solutions on a global scale, BT is uniquely positioned to solve those issues.

Q: How much of a barrier is it to you that other telcos have different partner sign-up systems and APIs? Do operators need a common API set and partner business processes - even going as far as the kind of clearing houses that banks operate?

You mentioned my sceptical view on the telco world at the start. It isn’t really sceptical, I want reuse for a market beyond the pure telco play. Making phones ring is actually quite difficult, what happens behind the SDK exposure is complicated but if you use the sdk you realise you don’t have to be a domain specialist to make this stuff work.

So in answer to your question I don’t know if there should be a clearing house, it makes sense to me, but it has to be geared towards execution whereas today we seem to be geared towards standards and design. We’re not imposing a standard, we want multiple exposures that make sense to a consumer, that will drive some sort of commonality. I remember the early days of FIX and that is 9 years ago, it has evolved iteratively, we as telco need to learn as players and vendors that we need to collaborate to identify what is commodity and move to more commercially valuable services.

Q: What partner applications have surprised or interested you most?

We know the internal applications that are being developed against the services, they tend to combine a collaborative Web 2.0 concept with the Telco2.0 services. It is exciting because I believe we are demonstrating how you can make the web apps more customer focussed and making that contact from a web page out to the real world. Externally is a difficult call, we know what applications use which services, but in a white labelled world do you care, or do you offer an avenue for the application developer to request new services from you. We shall have to see how that evolves.

Q: How do you see the programme evolving over the next 12-18 months?

So we have primed the pumps. We will continue to target the development community, we are at Java One and TechEd Orlando in the next 3 months. We will be providing more services that appeal to the community. We have a number of internal engagements that are using the SDK services and this is gaining apace. In summary we will continue to innovate, prove revenue and keep one step ahead (which is difficult).

Q: What are the key lessons for other operators following the same path?

Nice one, finish with hard question number 3…

Listening to the presentations at the event I reckon the lesson is that the IMS/SDP platform is a Telco focussed play, it has to happen but it is just layers of abstraction in my eyes though. The SDK we are providing is at a higher level of abstraction. Maybe standards will evolve, lets let the market decide what that is. If all you want to do is send a message then surely it should be sms.send(“message”, “recipient”), a call should be makecall(“callee”, “caller”). Who knows, but provide an open platform that allows people to do that cost effectively, securely and with guarantees you might actually appeal to a wider audience.

Many thanks to Rory for taking the time to share the lessons of BT’s open platform initiative with Telco 2.0 blog readers.

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April 17, 2007

Telco 2.0 Event: Advertising Workshop Summary

Below is our summary analysis from the ‘Telcos in Advertising’ invitation-only workshop at the Telco 2.0 event on 29th March, including key recommendations for the industry. This supported the findings in our Market Study (btw, if you’re a GSMA member or 3GSM exhibitor, you can get a healthy discount on the licence price).

The day after the event we jetted to New York to help the GSMA with their Mobile Entertainment & Advertising Summit and learnt 3 additional things: 1.) Americans are more bullish than Europeans about the ability of mobile operators to generate significant new value in this space in the next 5 years (75% confidence rating vs 50% in Europe), 2.) stimulated by speaker Martin Sorrell (CEO, WPP), that the opportunity is potentially much broader and richer than ‘advertising’ per se - mobile marketing services and mobile-centric commerce, and 3.) this is an exciting new area to work in, and it’s about to scale up and industrialise quickly…Here’s the analysis:

The Benefits Of Mobile (and On-Line) Channels Aren’t Always Obvious To The Advertiser

We kicked off the workshop with a presentation from the new customer group: the advertiser. John Baker, Managing Partner at Ogilvy Interactive, highlighted several of the factors which would drive adoption of the digital and, especially, mobile channels from the advertiser’s perspective:

  1. Cost - make it cheap (and simple) to advertise
  2. Demonstrate audience growth
  3. Illustrate customer responsiveness through this channel - i.e. show a clear ROI to advertisers
  4. Be patient! There is a need for cultural change amongst advertisers. John highlighted this as a key barrier from the demand side for on-line and mobile advertising because brand managers and media buyers are measured and rewarded using metrics, such as Customer Reach, which do not easily square with the digital channels (where the focus is on engagement and interactivity).

Responding to these, John then suggested four areas of focus for Telco operators to add value:

  1. Make it easy to buy advertising - simple, low-cost and standardised
  2. Maintain growth of the on-line and mobile channels. In many markets this is less about adoption now (where markets are fully saturated for basic internet and mobile services) and more about HOW customers are using their PC and mobile. For example, growing content, entertainment and transactional services (e.g. mobile as a payment tool) is important.
  3. Produce credible research demonstrating the effectiveness of these channels.
  4. Educate the advertising community. It is not sufficient for operators to rely on a build-and-they-will-come approach. Instead operators need to educate advertisers on the benefits of their channel AND work together with advertisers to jointly develop solutions. The customer needs to be part of the development process.

The Content Owner: On-Line Advertising…Yes! Mobile Advertising…Not Sure

Sunil Gunderia, VP Head of Mobile EMEA at Walt Disney, picked up the baton and gave some insight into the content owners’ perspective. Disney is investing heavily in its on-line capability with content offerings covering Graphics and Apps, Games, Video and Audio. Advertising forms a core part of the business model by enabling free-to-user content and games and Sunil felt that the rise of ad-funded content would continue on-line.

However, Sunil noted that mobile advertising remains uncertain for several reasons. Some of these mirrored John’s advertising perspective but additional important factors included:

  • The paucity of good mobile content. Mobile data pricing inhibits the development and usage of mobile content, although Sunil noted that fixed-rate data plans will help drive traffic going forward.
  • The propensity for walled gardens on mobile (in spite of what operators’ say) making the channel less attractive for consumers and content providers (3 and T-Mobile in the UK are exceptions here).
  • The lack of a large-scale advertising infrastructure - lots of fragmentation makes delivery of advertising awkward and costly.
  • Unclear consumer acceptance of mobile advertising.
  • Lack of advertising standards (formats, metrics etc.)
  • Nebulous business model for value chain participants - who does what and how are they rewarded?

Sunil felt that mobile had some clear advantages for advertising - response channel and location-awareness in particular - but that much needed to be done if mobile content was going to develop. Without mobile content, the opportunity for mobile advertising remains limited.

The Value Lies Within the Telco Customer Data

Stephen Stokols, VP Strategy at BT Retail, articulated the company’s vision for advertising. In fact, one suspects that he gave a clear insight into the overall strategy of BT Retail: open up and become an enabler. He pointed out that the enablers of internet growth (the fixed Telco’s) had pretty much been cut out of the growth and that advertising was a way for fixed (and presumably mobile ISPs) to carve out a valuable position from on-line activity.

He summarised the opportunity as:

  1. Leverage rich customer data. ISPs have clickstream, callstream, opt-in and demographic customer data and can leverage this (in an anonymous, aggregated way) to provide contextual and preference data to advertisers to improve targeting, interactivity and response.
  2. Turn dumb pipes into intelligent pipes. Telco’s have the opportunity to become the ad-serving network of choice because they have a complete view of customers (unlike portal players, search engines or e-commerce sites). They can serve relevant advertisements wherever customers go (on-line) and are not reliant on them visiting or transacting on specific sites.
  3. Enrich customer relationships. Telco’s have the opportunity to use this knowledge to deliver more relevant customer content and applications as well as advertising: they can be both the advertising enabler and the service provider. Stephen explained that currently BT is delivering this through on-demand TV (BT Vision) and a web shop for PC apps (BT Download Store). Soon the company will add BT Contact (an aggregation site for users’ communication needs - email, IM, etc from multiple providers will be unified on a BT portal).

Scale - Google Has It…Can Telcos Develop It?

Mads Moller, Vertical Head of Technology at Google and Arie Baak, Senior Consultant at LogicaCMG both explored the challenges for operators in carving out a successful niche in advertising.

Mads outlined the changes taking place on-line (with media and audience fragmentation) and the power Google has in being able to organise the long-tail for users. On-line content and brands are growing at a startling rate and Google has been successful by helping users simplify this complex world. This has resulted in massive scale - Google delivers 81% of search page views in the EU and Google sites reach 150 million internet users in Europe. The clear implication for Telco’s was that partnering with Google was the way forward on-line and on the mobile. There remained a degree of scepticism to this in the room from operators!

Arie picked up on a theme I had raised in my opening presentation: that the advertising market is far smaller than the mobile industry and that mobile advertising would need to reach $92 billion by 2011 (not the $11 billion currently forecast) to reach 10% of operators’ revenues. Later, Richard Saggers (Head of Mobile Advertising, Vodafone Group) said that some of the confusion about advertising becoming 10% of operators’ revenues may have come from Vodafone and that the company actually aimed to make mobile 10% of advertising revenues. Arie felt that mobile internet would not be sufficient to make mobile advertising a sustainable business and that only ‘in-service’ advertising could do this - i.e. advertising that is delivered in conjunction with core voice and messaging services such as SMS, MMS, Voicemail.

He felt that delivering personalised advertising (based on individual customer criteria) was the solution but pointed out that even with this form of advertising (with its higher CPMs) the required number of ads (1.5 ads a day per subscriber across an operator’s entire customer base) meant that operators had to use all their available inventory AND get all the processes working perfectly.

Go On…Just Do It

After lunch it was the turn of the operators themselves to talk about (a) what they are doing in this space and (b) company/industry strategies for success. We were lucky to have: Heinrich Arnold, VP Innovation, Deutsche Telekom; Hugh Griffiths, Strategic Advisor Group Strategy, O2; and Richard Saggers, Head of Mobile Advertising, Vodafone Group present.

Unsurprisingly, the operators were hesitant to reveal too much about their future intentions and instead focused either on specific examples OR on wider industry issues. This is in part because, as Richard put it: “This is an industry play, not a company play”. He reiterated points made earlier about the need for scale and standardisation and called for close cooperation between operators to build a common set of standards across the ecosystem for:

  1. Mobile inventory specifications and categories
  2. Common formats and agreed technical standards
  3. Metrics for campaign monitoring and validation
  4. Mobile marketing needs a common and consistent planning and buying currency
  5. Code of conduct and pro-active consumer protection with strong self-regulating elements

He forcefully made the point that mobile advertising is different to on-line advertising and not a simple extension of the tried-and-tested internet formula. Some of the differences we don’t even know about yet because our learning is still in its infancy but obvious benefits of mobile include: the response channel and ability to transact (which may become a much bigger area of advertising than brand); personalisation; ability to integrate with other media campaigns to manage the customer through the full purchase process (awareness-engagement-interest-action) - see bullet below on Contextual Information for more detail.

Richard went on to say that Vodafone estimates 1-3% of their total revenues may come from ‘mobile advertising’ in 5 years time (but that even 1% is the equivalent of 2 impressions per customer per day every day). He supported this figure by pointing out that:

  • 50% of brands say they will spend 5-25% of their ad spend on mobile in 5 years time.
  • A large proportion of mobile customers say ad-subsidised content is attractive to them.

In keeping with his view that this is an ‘industry play’, he commented on industry development falling into 3 phases:

  1. 2006 - Tests and trials (such as Vodafone Italy Free SMS and MMS with ads; Vodacom (South Africa) Free ad-funded SMS to encourage people to call back ‘Please Call Me’).
  2. 2007 - Scale
  3. 2008+ - Industrial roll-out

But a key point he made was that advertisers are trialling the mobile channel at the moment just as much as operators are trialling advertising. Only if they see value in it they will increase their budgets for the mobile channel. “The mobile industry has no right to expect growth in this area, it must earn it”.

Heinrich was perhaps most revealing about his company. He outlined 3 specific opportunities for Deutsche Telekom and through these, gave some insights into where the company saw value being created going forward:

  1. Contextual information. Heinrich explained the opportunity to integrate mobile with other media campaigns through barcodes. For example barcodes could be read by the mobile from products (e.g. Shampoo) or other advertising media (e.g. Newspapers and magazines) and then redeemed against products and services (e.g. Hair conditioner or digital music downloads). He pointed out the viral opportunities of having such barcodes disseminated by, for example, SMS amongst users.
  2. ‘New’ TV services. From what we could see, this opportunity appears to be in the conceptual stage at present. Essentially, it seems that Deutsche Telekom management anticipate IPTV to follow the Web 2.0 route with targeting, personalisation and user-generated content becoming increasingly important. If this is the case, Heinrich argued, the value shifts from the programme producer to the IPTV provider who can manage this process. Watch this space…
  3. Qiro - local search and community. Qiro is in beta and has been spun out of T-Labs (Deutsche Telekom’s R&D area). It is a local search and community tool which enables users to:
    1. Search (and be routed to) nearby services - ATM, cinema
    2. View buddies on a local map, organise a rendezvous point and manage group communications
    3. Receive and redeem vouchers and tickets for local services
    4. Develop and distribute products and services (user-generated content)

Heinrich explained the interactive advertising opportunities with the service where local users requesting a product or service (e.g. cinema tickets) are pushed SMS vouchers (e.g. for free popcorn at a cinema) and can purchase tickets and redeem vouchers through Qiro.

Recurring themes throughout the day

  1. Standardise. Need to develop a standard approach to content and ad delivery (standard formats, business models, metrics, campaign management, customer profiles)
  2. Metrics/Measurement. These are a critical differentiator for mobile (and on-line) advertising and go hand-in-hand with the ability to use the mobile as a tool for responding to advertising.
  3. Broaden the Ad Platform. Operators underestimate the value they can offer in this area (and the threat the represent to the internet search engines) owing to the breadth of their assets. They need to develop a ‘platform’ that encompasses ALL their assets if they are to take full advantage of the advertising opportunity.
  4. Technical. For mobile, need sufficient bandwidth (and guaranteed connectivity) to deliver content and advertising and, for fixed and mobile, effective (federated) identity management capability to orchestrate the sharing of customer data (profiles, entitlements and analytics).
  5. Usability. The end-user experience remains paramount. For mobile, content (including advertising-related content) needs to be ‘made-for-mobile’ (with a 3-clicks-to-find rule) and, for fixed and mobile, demonstrably safe and private for end-users.
  6. Industry Collaboration. A go-it-alone strategy is doomed to fail. The industry needs to work together to grow the advertising cake. This does not preclude strong competition and individual company activity but this must complement the wider issue of building something of value to the new customer - the advertisers.
  7. Innovation. Operators are (often unfairly) criticised for their inability to innovate. The advertising opportunity will be a test of their capabilities in this area since it will require delivery of new services to new customers with new business models. Now is the time for operators to develop robust processes to manage the innovation process for advertising and other new business opportunities.

    STL Partners/Telco 2.0 Conclusions
  1. Advertising is first step to something bigger - marketing services (corporate identity, research, sponsorship, direct marketing) and mobile-centric commerce (mobile payment and redemptions), . “Mobile Marketing - Hype too high in the short term, too low in long term.” (Martin Sorrell, CEO, WPP, GSMA MEAS, 30 March 2007)
  2. Advertising is another way for operators become more of a trusted service provider to end users by providing highly targeted, relevant marketing which offers real end-user value in terms of high-quality content and services at cost and retail promotions.
  3. The advertising and marketing services opportunity creates a new upstream market for operators: providing analytics to brands and merchants not just ad-serving capabilities to end-user customers.

STL Partners/Telco 2.0: Actions

For Individual Operators

  1. Rigorous analysis of real addressable market(s), cutting across not only mobile, but also cable, ISP and TV (if a converged operator).
  2. Develop a ‘flexible strategy’ (based on a start-up mentality) that enables changes of direction as opportunity becomes clearer supported by a ‘best-efforts’ business case.
  3. Create a dedicated and flexible organisation which operates outside the structured processes and culture of the core business.
  4. Continue partnerships and trials to develop understanding of customer experience and operator/partner roles and business models.
  5. More creative customer segmentation - micro-segmentation to establish framework for targeting and personalisation of content and advertising.
  6. Define rules for automating the CRM processes and systems required to support a data-driven advertising platform.
    For Telco Industry (supported by GSM Association and other bodies)
  1. Analyse in much more depth the commercial and technical interfaces between mobile/Telco content and advertising industries.
  2. Fast-track the GSMA and other bodies activities:
    a. Ad formats
    b. Campaign Management
    c. Ad Metrics
    d. Customer profiling
    For All Parties
  1. Educate advertising industry by making things simple and demonstrable.
  2. More creativity in developing business models to grow the advertising and content opportunities.


After the operator presentations, Delegates were asked to enter their responses to the following survey for FIXED and MOBILE operators:

  1. How confident are you that Operators can create a valuable new revenue stream from advertising in the next five years?
  2. How confident are you that Operators will successfully capitalise on this opportunity in the next 5 years?

The responses are shown in the graph below, and followed by their comments.

Fixed - Results

Fixed%20Success.png Fixed - Comments
Mobile - Results


Mobile - Comments

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April 16, 2007

Telco 2.0 event: Business Model Map Q&A

At the Telco 2.0 event we presented our Business Model Map. Rashly I promised to answer all of the questions from the 250-odd participants. Given the quality of the questions, we’re reproducing some of them here to help clarify the map and its implications.

You can read the background to our Telco 2.0 Business Model Map in the following four-part article series: Introduction, The axes of the map, The business models, and The consequences.

In a nutshell:

  • Network operators are delivery/distribution businesses: they deliver valuable bits from A to B.
  • There are many ways of delivering those bits. For example, a video could be sent on a DVD, via IPTV, a peer-to-peer download, streamed from a content delivery cache, etc.
  • The map documents these distribution channels for valuable bits. Which ones are you as a telco going to invest in?
  • Each one is assessed on two criteria: does payment automatically flow between connectivity and the content/service (“commercial integration”), and is the delivery network hard-wired to that particular media delivery, or general purpose (“technical integration”).

Q&A Business Model Map

Can you clarify the Embedded Business Model?

It’s the reverse of the handset subsidy model. You buy a device which comes with connectivity embedded - a bit like those self-adjusting clocks. As we in-fill the device market between mobile handsets and PCs, we’ll see a huge range of appliances, many with relatively short lifespans (under 2 years). Embedded a fixed period of connectivity into the device eliminates a huge amount of billing and revenue management cost.

In other words, as we have more tailored devices deployed, we’ll see many variants on how the money flows between the hardware, service and network. In this case, it’s the hardware sale that funds the rest.

Is it fair to read the matrix and bubbles in the following way: no single new business model, nor a combination, will compensate for cash flow lost on traditional business (bubbles are revenue right?)

That depends on how optimistic you are that operators can grow the “new opportunity” bubbles. In the chart their sizes all add up to the same amount in every scenario, so I’m just showing relative (not absolute) changes.

We do not understand the “protection” zone

You try to protect the existing revenue model of vertically integrated telephony and messaging. Do this by gentle feature innovation, extending the commercial footprint (e.g. non-geographic numbers, short codes) and resisting competition.

We deliberately don’t call it “product innovation” because it’s not about seeking new online services products (best left to Internet players) but extending the lifespan and economic model of the ones you’ve got.

Q&A: Tiered access and QoS

How do we deal with the situation on Tiered service (Paris Metro model) where disputes arise - proof of QOS etc.?

The point of systems like Paris Metro Pricing is that they retain the cost structure and efficiency of best-effort delivery. If you don’t make a promise of guaranteed delivery/capacity (just better statistical odds of delivery), there’s no dispute possible or proof needed compared to the “reserved capacity” model of QoS.
You can read more at here.

Can you detail the Tiered commercial model?

Think “multiple virtual dumb pipes”. Today my computer talks to the Internet on device eth0 or wlan0. What if there were five “virtual” interfaces (“vnet0” etc.), and I could choose any one of them, but some had higher cost/lower contention? And I could dynamically switch between them? Think of it as like TCP/IP’s back-off mechanism, but you step up and down priority levels as well as transmission rate.

A lot of the complexity is going to be hidden from the user. Say Skype get together with a bunch of carriers to offer Mobile Skype. Rather than re-write Skype to fit into IMS (no chance), they use a high-priority virtual pipe for the VoIP part, and a low priority one for the IM/file transfer.

One day, you might have hundred or even millions of “virtual Internets” (“VWANs”, to mirror Virtual LANs). A bunch of Xbox gaming devices might talk to each other on a virtual network, safe from denial-of-service attacked from the general Internet, and with the priority and latency they desire.

Does traffic prioritisation have some value as a business model at least in the short term?

Short term, yes. Enterprises, absolutely. And there will always be some friction in the system between different generations of technology that some network smarts will be needed to smooth over.

The comment was made that it was desirable to move away from deep packet inspection - what model would be better?

DPI isn’t all bad. For example, I’d retain it as a means of identifying “bad” packets like DDoS attacks, spam, fraud management. However, as a means of value-based pricing, it’s kaput. Even from a physics standpoint, it’s a non-starter: move all the bits from the optical transmission domain to the expensive and slow electronic processing domain. I’m sure Cisco would like you to do it, but it doesn’t mean it’s a good idea. You’re just in an arms race with your own customers to cloak the traffic. A better model is either (i) spend the money on more capacity and stick to all-you-can-eat broadband, (ii) go to the Paris Metro Pricing style of tiered dumb pipes plus offload the heavyweight traffic to CDNs, (iii) lock down the edge devices to eliminate the problem at source.

Was the Paris Metro Pricing a way of Bell Labs ingratiating themselves with the new French owners

Bien sur! Err, no. The research was done back in the days of Bell Labs, before croissants came on the cafeteria menu.

Q&A: Low vs high integration models

Is the future in the radical advances of end-user devices (high memory, CPU power, client-based apps)? Does this accelerate the ‘dumb pipe’ scenario for infrastructure?

Yes - ever more applications become possible to deliver over a general-purpose network with a general-purpose handheld computing device.

How do you move from a world of one size fits all broadband into a slicing and dicing world? If broadband is unlimited, who would want to bundle it into a device? Will users be willing to move off their unlimited plans to tiered plans?

As “legitimate” P2P and video download traffic moves onto content delivery networks and separately packaged offerings (that avoid peak hour, keeping capex down) the price of “unlimited” broadband will probably rise. For the average email/web/Youtube user, they won’t notice a thing. But the broadband “hogs” most certainly will. We’ve already seen the first steps in the UK with BT wholesale going from an unmetered to a metered product. (I’d expect a congestion-based pricing scheme to be next.)

Do consumers really dislike vertically integrated offers? It is the cost and service that matters. Given cheap offering with good service, one probably will buy everything from one place.

They love them! However, technical vertical integration makes for incredibly slow progress (e.g. voice telephony network) compared to “dumb pipe” applications (e.g. social networking). The trick is to preserve some of the commercial integration of service and delivery without the technical integration.

Can you really integrate commercially without any technical integration/leverage? Explain…

Sure - you’re just accounting for the packets differently based on their origin and destination. There’s no magic - as long as there’s some compensation that flows between the device, content or service and the underlying connectivity provision, then you have some form of commercial integration.

Packaging service/devices etc with connectivity is a good answer, but the worry is that the examples James gave are actually about startups that help users unbundle.

These two trends are not mutually exclusive. Artificial bundles will be torn apart, but where they create convenience to users then they’ll buy up packaged offerings.

What are the fundamental technical drivers of business model & structural change? For example, does Moore’s Law and smarter end-devices MANDATE that a dumb pipe model will evolve?

Blame Claude Shannon, the father of information theory. The information carried by a signal is independent of how it was delivered. Dumb pipes are less complex than smart ones, all other things being equal. So if you can get the application to work over the cheap pipe, why pay more for a specialised one?

Q&A: Telco culture and organisation

How bad does the crisis have to get internally/externally at the telcos before they actually embrace change? Do we need to go through a real period of agony before the willingness to change becomes real?

We’re already there. The ISP industry is already a world of hurt except for some niche players, with exits and M&A on the up. The crisis is as much for the users as for the operators, who can simply delay investment. The users miss out of the experience they require, and the economy never gets to grow new industries.

What is the future for incumbents

In the short-medium term, they’re OK as there are such large barriers to entry and a regulatory tar-pit to negotiate. In the longer term most will disappear (consolidated into a few mega-operators with the necessary scale). Many will exit the application services space or become effectively different businesses (e.g. BT’s global services, where the network is just an enabler, not the product). Probably a similar story to what’s already happened in other utility and media industries. British Gas used to retail cookers - but no longer.

What should telcos do today? What’s the first big tipping point?

Decide which core Telco 2.0 strategy you want to follow: diversification, protection, platform or pipe. Then exit the non-core stuff (but preserve the revenue streams via partnerships). “Tipping points” are a bit of a semantic illusion, it’s a continuous process of evolution.

In terms of broadband and mobile who owns the customer today?

The customer owns the customer. At best, you own some expensive glass and electronic boxes, plus some databases of variable quality. If “2.0” is about anything, it’s the users being in control of their destiny.

What might the cultural changes be for Telcos to become more innovative?

Innovation does not equal invention. Innovation is simply applying inventive ideas to bring those things to reality. Telcos are plenty innovative enough, just not in end-user services. Most of the innovation is in deployment and operational management of networks, which you never get to see. The evidence is in how well they’ve adapted to extremely rapid technological change. I don’t think it’s possible to create an innovation or invention culture in a mature organisation which doesn’t have one.

What’s the underlying structure out of your perspective which makes change so difficult? No moralistic judgement — a structural explanation

I don’t think change is difficult. The telecoms industry has undergone incredible change in the past 25 years (mobile, broadband, optical transmission, regulatory) - as much if not more than most other industries. How much has Google really changed? You underestimate telcos.

Why are Telcos so low in R&D spend?

Shareholders have done really well out of gatekeeping other people’s innovations being distributed over their pipes. Maybe telcos are like travel agents: high turnover as you act as a handling agent for 3rd party products, but that artificially inflates your revenue and expectations for research spending. Given the efforts of the Internet companies and telco equipment vendors, overall there’s no lack of R&D in communications.

How do telco’s strike a balance between commercial innovation and innovation in technology which is often their bargaining card/source of competitive advantage?

Easy - exit the services innovation space and partner. Focus on integration and overall user experience across multiple services and payment/delivery methods.

Q&A: Peer-to-peer & video distribution

Can you expand on the telcos’ exploitation of peer to peer and content delivery networks?

“If you can’t beat them, join them.” Telco IPTV isn’t going to deliver the Lithuanian shows I want my kids to watch; or give my brother his dose of British TV out in California. There are going to be many different aggregators, editors and recommendation engines. Operators need to make it easy and advantageous for those video distribution networks to minimise backhaul costs and contention. Today there’s no incentive to make your P2P application operator network friendly.

Since P2P is so successful, can Martin and James suggest ways for Telcos to monetise it?

Just deliver the damn bits! Someone else made them valuable, so don’t expect the extract the premium for content creation. Build content delivery networks that are cheap to run and flexible to support many different aggregation and delivery models. Work to lower capex by creating incentives to avoid transfers during peak network activity.

What should the service providers do about the cost to them of “Over the Top” content traversing their networks? Deep Packet Inspection does control this and requires intelligence in the network.

Throttling users in arbitrary ways is just going to lead to network neutrality legislation and consumer backlash. Find ways and incentives to get those P2P apps to deliver their content in cheaper and more efficient ways. Stick 100Tb of BitTorrent cache in every central office!

Operators need to block P2P traffic! The people that pay the bills for broadband won’t care! I would happily pay for fast content delivery…but you need to free up the network first.

This just isn’t feasible in the long run. Users don’t know or care what the delivery technology is, and if you give them a bad experience (or bill shock) then you lose too.

How do we reconcile the cost of carrying bits with flat-rate in a video dominated traffic model?

You can’t which is why the current Internet model will fragment and video distribution will be done via cheaper methods. Just like you send most parcels by parcel post or UPS ground service and not next-day 1st class mail.

Q&A Wholesale

Moving complexity from retail models to wholesale is far from simple. Peering agreements are complex - how can this be driven?

I think this is an unsolved problem, and the industry is going to have to work out new structures for aggregating wholesale connectivity of varying quantities and qualities and packaging it together. (Telecom probably ends up looking more like the mortgage re-sale market - build a network, and then leave the problem of filling the pipes to someone else.)

Please explain further the shift of complexity to wholesale from retail - give a practical example?

Easy - look at the Blackberry or Three’s X-series. You don’t need to sign up to a data plan, read the terms and conditions to see if you can do the things you want, and watch the megabyte meter all the time.

Is there an advantage for network operators to break themselves up (like BT)? Is there more shareholder value if operators split into retail and wholesale?

Yes…. But. In the case of BT, despite the Chinese walls, the CEO and board can effectively synchronise investment across the two halves of the business. BT has a good balance between the discipline of separation (wholesale can’t rely on one captive customer, retail can’t rely on a distribution monopoly) and the need for services and capacity to be deployed in sync. If there was no such synergy, we’d probably have seen a break-up already. We heard some evidence at the event that the City rather likes the structural separation model, as utilities have higher multiples than volatile telco services.

Regarding shifting of complexity from retail to wholesale: why should it be done, and how can it be done? Isn’t it just about shifting the risk? The risk is still there!

The WHY is because you want to manage the capex cost associated with the delivery of low-value (and often pirated!) video content. This is generally time-insensitive and needs to be shifted out of peak hour (or where economically unsustainable, eliminated via raising metered broadband prices at higher usage levels). The HOW is documented in the business model map - go read on the Telco 2.0 blog my 4 articles on it. You’re mitigating risk by taking some control over it, and aggregating risk to smooth it out. For example, with the BT Openreach structure, they make money no matter which one of Sky, Virgin Media, BT Retail, Carphone Warehouse, or anyone else turns out to be the winner.

Q&A Customer data and relationship

What about the future of data ownership and control? Isn’t this the future cash cow that perhaps telcos, if they can become platform players, can excel in?

Yes, in principle. Just as Google extracted the latent value from the collective effort of hyperlinking, telcos could feed social network applications with the squeezed juice of CDRs. Whether they can finesse all he legal, branding and cultural issues is another thing.

Google has been successful by storing, analyzing and monetizing what users are actually doing. Telcos have/own lots of data, what are the challenges in building business models around this data versus charging for access?

Privacy, regulatory, brand, encryption technology, user experience,…

It’s going to be tough.

How to provide user-centric solutions when telco model still largely views the household, not the individual, as the customer

That’s both a problem and an opportunity. Yahoo! don’t have a clue who I am at all, so the telcos should see their glass as half full here.

Q&A Partners, portals and services

When will web services stop being free? What will be the catalyst

They’re not free already: you have to buy an expensive PC and broadband connection, and then watch a bunch of ads (or give away valuable private data to enable those ads). We’re just moving to a world of many different business models linking the devices, services and connectivity.

Should telcos partner with Google, MSN, Yahoo on Consumer apps and focus on Enterprise / Business opportunities?

Depends on each telco. These aren’t mutually exclusive.

How can the telco better leverage the customer’s various contact directories?

Sync with network, offer an API, enable 3rd parties to access it, take out the barriers to usability!

How about this as a business strategy: rather than development & investment in new services, adopt a simpler strategy of “seed and buy” successful small competitors and using the telco capital for acquisitions?

Yes, telcos could become like Cisco and vacuum up the good services ideas. However, what’s the point if they are then limited to one operator’s distribution network? It’s like building supermarkets for Toyota car owners. Totally unnatural. Although maybe Cyworld and SK Telecom is the exception that proves the rule.

Partnering is obviously a critical success factor in the new world - how should this be embraced?

Big question. The first step of anyone embarking on a “platform” route is probably to separate partner management into its own exec position independent of BizDev.

Q&A Service innovation

Isn’t innovation with big Telcos more like “we are because we are expected to”? Is it still a “show business” or real one? Why are there no ground breaking innovative products, if the above case is not true?

It’s been very comfortable selling vanilla voice and messaging. The risk/reward for telco managers doesn’t make it worth trying to jump that shark.

Where is the innovation coming from? Generate it from the inside or stimulate external creation? How to drive, channel and capture innovation?

All the above - depends on each operator’s situation and what opportunities present themselves.

My hypothesis: the endgame will be: there will be money in Access, in Devices, but not in the three C: Communication, Communities, or Content. These will be free, paid by ads or thrown in for free by the telcos.

I think all five of them will be fine businesses. Content will become more personalised and interactive, meaning much of the copyright crisis will naturally subside. Is World of Warcraft content?

Q&A …and the rest

What value or cost are users attributing to access the internet to make use of all these services?

They don’t care about the Internet per se. Campaigns to “save the Internet” have zero resonance with the public.

How quickly will regulatory bodies and policy makers react to this change?

About five years too late, if history is any guide.

To what extent can the overall telecoms spend purse be grown? How many other purses can telecoms raid?

Banking is ripe for disruption, and DoCoMo are probably the ones to watch.

What of the telecoms vendors? Especially the big complex integrated ones?

I think I’ll need consulting dollars to answer that one.

It’s going to be a whole lot smaller as an industry. Again, other industries have led the way, e.g. GE into “power by the hour” rather than turbine sales and blending services with hardware.

What are we going to do with all the copper?

Put Chilean copper miners out of business by flooding the scrap market…. There’s almost 70m tons of it in the legacy access networks.

What are the payment models for future fragmented services?

Equally fragmented, which will probably drive a user experience crisis in the medium term as the user switches between metered, free, ad-funded and “bundled” service connectivity.

What tech features telcos need to have on client platforms (PCs) to enable Telco 2.0 services?

The Virtual SIM that Intel described would be a great start, so we could provision applications with network access, rather than whole devices.

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April 13, 2007

Guest blog: Sowing the Seeds of the Portalpocalypse

One of our speakers at the “Telco 2.0 event”, Marty Algire , VP of Platform and Products for RadialPoint shared some entertaining ideas on how operators could turn the tide of commoditization on the Web portals and search companies. We’ve invited Marty to do a guest blog post for Telco 2.0 and share those ideas with a wider audience.

The Telco 2.0 primary claim is about the separation of network connectivity from user facing applications and services, and the Web 2.0 influences on those applications and services. One of the strategies of Telco 2.0 is “partnerships and 3rd parties’ innovations are required to complete the bundle.” This platform/partner strategy was lifted directly from the Telco 2.0 blog, and has been repeated in some form or another by industry analysts and SDP vendors for at least the last 5 years.

However, if you’re a developer, and you’re looking to experiment with your new service idea, would you gravitate towards your local Telco and it’s APIs to their universally unique provisioning system, or to one of Google/Yahoo/MSN where you get access to APIs for search, storage, email, chat, presence, etc…?

The investment required to play the platform/partner strategy has changed within the years characterized by the Web 2.0 moniker, and to be competitive now requires providing access to core end-user applications and their data, and allow developers to build on top of those. So the problem becomes one of building upon an already functional end-user application, not plugging into a platform of OSS/BSS APIs.

Even if Telcos did have a broad and smooth application surface area of APIs and rich data, which are years away with current IMS/SDP approaches, why would any 3rd party partner want to fragment their development resources across 100+ Telcos when they can reach a user base 200-500x larger directly via Google/Yahoo/MSN?

The best form of defence is vigorous attack

Telcos are not going to software develop their way out of this one, and there is no one partner or consortium or set of standards that’s going to save the day: they should scorch the ground Google/Yahoo/MSN stand on now by together funding open source search, email, chat, and voice applications (for examples, see Nutch, Jabber, and Zimbra) and enlisting the existing army of open source developers to their cause. This gives Telcos a common set of core Internet applications and moves them into the ‘build upon’ game.

Now the question for the developer becomes “I can play around with my service idea at Google, Yahoo, or MSN, each of which gives me access to 200MM to 500MM users, or I can build it upon this open source platform used by all the major Telcos which gives me access to a comparable user base and I can take advantage of the existing long standing billing and service relationships Telcos have with their customers.”

Linux has already taught the technology industry how to compete with an entrenched platform, and we started off by saying the Telco 2.0 primary claim is about the separation of network connectivity from user facing applications and services. Therefore, by open sourcing what is separated from the network, Telcos can sow the seeds of commoditization in the platforms of their portal competitors and start to move the value away from software bits back to the network, where the Telco has an inherent performance and cost advantage.

Google needs to steal telco customer relationships to grow earnings

With several large Telco contracts to provide portal and search functionality up for renewal next year and the year after, the word at the recent Telco 2.0 conference was that Google has been competing aggressively for the search business by making big revenue guarantees.

On the surface it may appear that Telcos partnering with Google (Google is used as an example here, the same holds true for Yahoo or MSN) for search is not such a bad idea. After all, users need to get their search results from somewhere, and it’s not like the results page is driving users to google.com web properties and applications. However, by joining the AdSense network big Telcos will end up increasing the value of keywords and ranking and that drives the high margin revenue on Google.com side of the business, which continues to take customer relationships at the expense of Telcos.

Step into my parlour said the spider to the fly

The Google FORM 10-K for the period ending December 31, 2006, shows that Google aims to run their AdSense network (when access providers do a Search deal with Google, they are joining the AdSense Network) as close to break even as possible. Revenues from Google’s AdSense network were $4.2bn and Cost of Revenues were $4.2bn. This is not a revelation, the annual report points out the margin on revenue from the AdSense network is low, and much lower than that from the Google.com web properties (the web pages created by Google where Google displays ads, e.g. search, froogle, gmail, groups etc…) However, what is interesting is how revenue from the AdSense network drives earnings in the Google.com business.

This part requires an understanding of how click volume drives the prices of keywords and their ratings upwards. Let’s say this table represents the cost per ranking for the keyword ‘Portalpocalypse’:


If you consider the cost of the click only, than the 5th rank is half as expensive as the first rank and therefore provides higher value to the advertiser. However, the advertiser gets much fewer clicks at that ranking. Advertisers pay more per click to receive a higher ranking which delivers more clicks. Therefore the larger the number of clicks, or network of publishers generating clicks, the higher a keyword and corresponding ranking is valued.

Therefore, Google the advertiser network runs the AdSense business at close to break even because it maximizes what publishers make which attracts more publishers which drives up the total volume of clicks and therefore the auction prices for keywords and rankings. This way, Google the publisher, earns more revenue at fatter margins when clicks are generated from its own web properties.

Of course, Google could always trade profits from it’s own properties for profits from AdSense, but by maximizing pay to publishers in AdSense they ensure the rapid expansion and overall market share of the Google AdSense network, and there is no benefit to a more balanced approach so long as their own properties remain popular.

Therefore, to drive earnings Google will continue to invest in kick-ass applications that attract users away from Telco services, and yet this investment in applications are funded by Telcos and other large publishers joining the AdSense network.


There is no way today to replace the $30m-$50m a year in revenue each Telco could make from joining the AdSense network. However, Telcos can protect their future revenue by investing in open source search technologies in parallel to their portal deals. This way Telcos can sow the seeds of commoditization into the portals’ business, and over the long term move the value away from software bits back to the network, where the Telco has an inherent performance and cost advantage over the portals.

Open source search technology is indeed immature and such an investment does require a longer term view, however, open source search is inevitable: there is too much power in the search platform for it to be left to a few private companies and it’s a technical problem developers are naturally attracted to. To borrow a phrase from legendary technology investor Roger McNamee - the guy with the longest time horizon wins.

Telco 2.0 editor’s note: It wouldn’t be the first time that “my enemy’s enemy is my friend” became received wisdom: think IBM undermining Microsoft’s OS business with Linux, or Google attacking Microsoft’s browser hegemony by funding the development of Mozilla Firefox. Are free ad-funded portal services more of a threat than realised, demanding a more severe commoditise-the-opposition response? As always, comments are open.

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April 11, 2007

Interview: Malcolm Matson of OpenPlanet on OPLANs

For some time we’ve been convinced that the key to success in fixed networks is innovation in the financing, access and pricing of the network - and not trying to evolve the vertically integrated model (as attempted by our American friends and lusted after by our German cousins).

As you may have read in our Digital Town event summary, Malcolm Matson from OpenPlanet gave a strong endorsement of a fundamentally different way of building access networks: Open Local Access Networks (OPLANs). We find these an intriguing idea, but also a hard one to get a firm grip on. Hippy communitarian dream or level-headed investor opportunity?

The nutshell definition is an OPLAN is a privately financed access network, dedicated to serving a local geographic community (anywhere from a street or business park to an entire town or city). It is open to all-comers who wish to interconnect with it. It isn’t tied to a specific technology, but typically means deploying fibre access with symmetric speeds, since many users may produce more traffic than they consume.

Access outside of the local network (e.g. Internet access) is a service which is provided by a partner on top of the access network. The OPLAN itself provides no services whatsoever beyond local transmission.

Partners in developing an OPLAN are typically municipalities although Malcolm stresses that it is their covenant as an anchor tenant, committed to using the OPLAN for all its local connectivity needs, that is the key, NOT direct municipality investment. Long-term he argues that OPLANs will become owned by passive institutional investors (e.g. pension and insurance funds) as ‘the new real estate’, delivering stable returns, low risk and passive investment management costs. The key defining feature of an OPLAN is the legal and financial set-up of the network which, whatever the corporate structure, prevents the OPLAN from acting like a traditional telco.

OPLANs superficially look like the unbundled local copper loop solution, except that:

  • the network is truly separately owned, no Chinese walls and whispers.
  • the capital hasn’t been confiscated from either taxpayers or investors in privatised PTTs.
  • its constitution is designed to be non-discriminatory to any retail partners.
  • it is guaranteed not to engage in any form of service which could compete with users..

We had a number of questions for Malcolm, who has kindly agreed to respond to them here.

T2: You state “end-user ‘access’ charges are broadly based on servicing capital and maintenance cost-recovery”. Can you elaborate on how this works in practise?

Because the OPLAN model is derived from what I call the “imperatives” of the new digital technologies (namely that intelligence is at the periphery in the hands of users and the network is ‘dumb’) then it stands to reason that there are no ‘operators’ as such. It is no longer like a railway where the routing and control of traffic is in the hands of the infrastructure itself, and therefore ‘buying a ticket for the service of riding on a train’ is all that is on offer. Now we have a motorway situation whereby there is no relationship between the financing of the construction and maintenance of the motorway itself and any vehicle that runs over it.

This principle is already well in place in the ‘internet’, despite the attempts of some vested interests to try and destroy this ‘network neutrality’. But in the local access network, everything (and I mean everything) goes through the local central office of the telco operator (now also occupied by me-too vertically integrated competitors) where it can be ‘taxed’. In the OPLAN model, the financing of the construction, maintenance and upgrading of the infrastructure is dealt with in any number of ways - but totally independent of any specific service running over the network.

T2: If OPLANs are such a good idea, why don’t we see more of them?

OPLANs are only a ‘good idea’ for the mass of citizens and businesses that are not part of the global telecoms/cable TV cartel. For the latter, OPLANs are the kiss of death to their vertically integrated service-provider business models! But because these vested interests are massive corporations (and tax generators), they have the ear of public policy makers and their now, great ally the regulator, to tilt and twist the market terrain to extend their life way beyond what a true free market would otherwise permit. But I believe we will see a collapse of the service provider model and an explosion of OPLAN developments in the next decade. ‘When?’ precisely, will depend on the vision and political commitment of the pioneering cities who have the courage and determination to go for an OPLAN solution.

T2: How should incumbent fixed operators react to the threats and opportunities of OPLANs?

Most have left it too late …preferring to rely on sector specific regulation and a helping hand from their friend the Regulator. For most of them, my advice is what I gave in my interview with TelecomTV at Telco 2.0.

T2: How is the rate of return of the network managed? If you’re a monopoly provider, won’t you capture monopoly rents?

I have already stated that there is an important element of preserving the ‘public good’ and ensuring democratic accountability in terms of preserving the benefit for users and not ‘absent owners’. There are any number of ways of ensuring this, many different models and legal mechanisms to deliver this. As the OPLAN market matures, the financing will increasingly be ‘debt only’. In these early days, there is a risk which requires a degree of equity funding, but even here, the special purpose vehicle (SPV) can negotiate caps on this or even use mezzanine debt. My hunch is that many OPLANs will be owned by non-profit bodies or ‘Community Interest Companies’ as we have in the UK. This does not mean that there are no profitable opportunities surrounding the funding and management of OPLANs - of course there will be and this is essential if they are to emerge in a market economy. But these profitable opportunities will not be based on the ‘ownership’ of the infrastructure and an obsolete ‘service provider’ model.

T2: How can the idea of serving the common good be squared with the demand for investors to get maximum return?

See above Think of your own home - the bank (or building society) owns the physical structure but ALL the benefit and value to be derived from using it, remains with you. There is a massive DIY market and countless other free market opportunities from this model but the only person who benefits from any return on the investment in the house itself - is YOU.

T2: Does an OPLAN rely on public sector sign-on as an anchor tenant to ensure sufficient capacity utilisation?

I would say, undoubtedly ‘yes’. The public sector (all arms of it) in any town or city is almost certainly the largest revenue generator for the telco in terms of naked connectivity. But in few countries is there any joined up policy at the local level - it is all centrally state driven in vertical sector silos…. health, education, police etc. It is only when a city (under visionary local political leadership) appreciates the potential value of having the local school connected over an OPLAN to the local hospital (say) that there is likely to be the necessary commitment to travel down the rocky OPLAN path.

T2: Can OPLANs co-exist with legacy telco and cableco access infrastructure, or do the economics demand a monopoly access provider?

I do not think they can. As soon as an OPLAN is in place, then why would anyone want to use anything other than this ‘cost based’ delivery infrastructure - especially as, almost by definition, it is the cheapest to use and secondly, it guarantees not to compete on service provision. But that’s why the OPLAN model is seen as poison by any vertically integrated telco/cable TV operator committed to persisting with that obsolete business model.

T2: Which geographies of markets are most promising for OPLAN deployments?

I would not wish to generalise here - there are so many critical variables plus choice of technologies, that there are no rules yet. OpenPlanet has a good understanding of these and before embarking upon any specific project, we insist on undertaking an exhaustive joint-venture feasibility /business modelling project with the municipality of the community or city concerned.

T2: How are the funding, construction and operation of an OPLAN structured? Are build-out and operation outsourced? Or are those players brought in more closely as long-term business partners rather than just suppliers?

As much as possible is outsourced by the SPV OPLAN vehicle which OpenPlanet and the local municipality will create and this is done on a strictly competitive tendering basis - element by element… design, construction, financing, open-lit layer, maintenance etc.

T2: What evidence is there that investors will find OPLANs a more attractive investment than conglomerate vertically integrated telcos?

Already dealt with this - I have no doubt that banks and institutions will come to love these low risk, asset backed ‘real-estate’ investments. Private and public equity investors that have been deluded into thinking that the vertically integrated business model will persist into the future, will have a real shock as many of today’s market leading telcos and cable TV companies go under. Only then will they turn their attention to investing in the plethora of new service and application providers (if thay have any shareholders funds left!) - but what advantage will they have over the creative 14 yr old in his San Jose bedroom? You Tube is a sign of things to come. The old days of ‘hundreds of markets of millions of users’ is over …we now will see a world of ‘millions of markets of hundreds of consumer’. So there will be ever more money made from free market deployment in this digital age … it may just mean that ‘fortunes’ are more quickly made (and lost).

T2: Isn’t a national operator a more attractive option to a services partner than a fragmented bunch of local wholesale operations each with its own peculiar technology and business processes?

Have you heard of Google or Yahoo? They seem to do quite well over the highly fragmented IP net we call the internet. In an all IP world, there is no room for a ‘service partner’ whose entire raison d’etre in the past has been based upon a unique capability to link ‘source of content’ with ‘demand for content’.

T2: We heard of the co-operative movement in Nuenen (Onsnet) where the users are (subject to a membership fee) also the owners and recipients of any dividend payments. Why private OPLANs rather than community co-operatives?

Nuenen is an OPLAN (except that its not really ‘open’!) A co-operative IS a free market form of private ownership and no doubt this will be used by some communities - not very many I believe but as I have already said, an OPLAN can adopt any number of means of organising itself to achieve its primary objectives of openness and user-value. The mutual ownership model is one.

T2: What are the three best real-world examples of OPLANs being deployed, and what are the lessons from them?

I am not going to say! I have long argued that unless and until there are one or more OPLANs that have delivered demonstrably sensational socio-economic benefit to their communities, the world will remain sceptical. Given what is at stake here, I am not going to draw the attention of the vertically integrated, service provider community to where the seeds are best taking root to destroy their futures! Rest assured that there are a number of such very encouraging OPLAN developments and the world will get to see and hear about them in due course and then a mighty cry of “why can’t we have one’ will be heard … a cry that will be too loud for politicians to ignore or to loud for the special pleading of vested interests to drown out. But take a look at www.oplan.org for some front runners!

Thanks to Malcolm for talking the time to share his ideas with Telco 2.0 blog readers.

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April 10, 2007

Telco 2.0 event: Technology Insiders’ Workshop summary

Most of the Telco 2.0 event is aimed at folk from the commercial side of the business. But we also run a workstream for senior technologists who are increasingly looked upon by the business to help provide strategic direction and product ideation. The world of IP offers fewer natural boundaries than that of traditional telephony, and many of those employees most plugged into Internet culture won’t sit in marketing, business development or product management. So the second of our event summaries is from the Technology Insiders’ Workshop on the third day.

Our kick-off presenter was Steve Devo, the lead architect of Vodafone’s global web services platform initiative. In a way I wish Steve had been given the opportunity to present to the 250 people from the commercial side on day one of the event. We’ve been talking about partnering and platforms for a long time; to Steve this is the everyday reality of doing business in the future.

His core themes were:

  • The immediate future is in “mashups” of core telco network capabilities and IT/data resources with 3rd party applications.
  • At the very least you must reduce fragmentation and partner complexity within your own operator group (e.g. Vodafone’s global operator portfolio) with a single partnership agreement and common technology. This includes the business processes around the partnership (signup, payments, etc.) as well as APIs themselves.
  • User privacy and anonymity are core to your offering. (An area where Internet players fare poorly, especially as they lack access and control to device or billing identity data.) This means building sophisticated controls that prevent different bits of information being handed out and then assembled to form a profile of user location or behaviour that the user would not approve of.
  • You need to build a common operator-specified external interface to protect the network, provide vendor independence, and hide the multiple implementations between different networks and network subsystems.
  • Don’t sit around waiting for a single common industry solution to everything. Just work with what you’ve got and learn what’s useful.

Steve is treading the part I followed (and fell off down a cliff) five years ago at Sprint, so I’d dare to add more key requirements: get senior business sponsorship for your platform/partner initiative; conquer the IT/network cultural divide of who owns the APIs; and treat the partners as your customers and involve them in driving the requirements (so the business hears their voice, not yours). Otherwise, you’ll be crushed between the budgetary needs of the next billing system and network upgrades.

After this message, let’s talk about money

So, do we really have good commercial requirements for the core voice and messaging roadmap? Judging by the presentations and feedback at the previous Telco 2.0 event, vendors and operators alike have been accused of running a technology-led vision that is weakly aligned to user needs.

I reprised some of STL Partners’ research findings on Voice & Messaging which will be appearing in our forthcoming report. Briefly:

  • It’s about the user experience and meeting that — not VoIP, FMC, or the acronym of the week.
  • We don’t have a good idea of what the real user needs are, despite the two core products of voice and SMS generating most of the industry’s profits.
  • The top three rated features by industry insiders were presence data (i.e. user control over the timing of calls), ease of use (think: Apple iPhone visual voicemail) and enhanced directory services (“address book 2.0”).
  • When you map the top dozen features as to whether an IMS or new service platform is needed (beyond existing IN platforms), the answer about half the time is “maybe not” or “no”.
  • A similar story applies to fixed-mobile convergence features.

Several people commented on Martine Lapierre’s market statistics based on Alcatel-Lucent’s forecasts, and how large they see the IMS market becoming. The smell of obsolescence hangs over much of the 1990s era mobile telco infrastructure. She laid out a number of case studies that showed how the vendors have to play various roles from supplier to business partner. Whilst these network upgrades may not yet be enabling revolutionary user experiences, the flow of sustaining innovation and spending is likely to increase for some time regardless of the telco/IT/Internet collision.

Thomas Welzel of T-Mobile International really stirred things up with his implicit declaration of war on the Internet players who would steal away telecom revenue. He defended the services approach, which is about putting together the end-to-end user experience and proposition: sales, provisioning, application, seamless connectivity, payment, and support. The Internet players are long on application ideas, but short in all other domains. Thomas is ready for the fight - but wishes other operators would have more stomach, as he declares:

…we need to understand that “Collaboration on the back end” is for the benefit of every market participant. A non-optimal joined-up approach is still far way better than the best possible individual solution.

First rule of architecture: make the entrance obvious

Our service architects had no shortage of things to say. It’s always fun to have sponsors with diametrically opposed views, and Keiran Dalton of Aepona sure did deliver a contrasting opinion to those of larger established competitors. He’s tired of over-complex telecom-specific service delivery platforms that cost a fortune to deploy, require rare skill sets, and often fail to deliver. It says “SDP” on the tin, but inside is a multi-year integration project.

He foresees a revolution in progress whereby off-the-shelf, cheap commodity IT applications servers, message buses, and hardware take over. Integration costs decline, as everything looks like an IT system. What’s a “network element” anyway, if they’re all just managed boxes of electronics?

We think we heard it out loud: “Every large SDP project we’ve tried has failed.”

Colin Pons of KPN is no stranger to “cheaper, faster, better” in the Darwinian world of Dutch telecoms. Colin’s metaphor for the current approach to IMS is this: just because you can hit a nail with a wrench, it doesn’t mean it’s a good idea. KPN sees its job in a complex, fragmented world of multiple access methods, devices and competing services as just being the guy in the middle who pulls it all together for the user and just makes it work. To this end, SIP and IMS and just possible tools in the bag for smoothing over the many differences between the elements of a real-time environment.

He had some pretty harsh things to say about IMS: fragmented incompatible implementations, poor wholesale services support, barely able to support all the functions of the telephony business model, and pretty hopeless at reaching out to other business models. (Ever had the feeling we’re stuck with SS7 and TDM networks for some time to come … as they’re the only thing that really works in the real world?)

Given his message, you half expected Shane O’Flynn from Openet to come both dressed for a funeral, as well as bearing christening gifts. He implicitly spelt out death rites for the traditional network equipment provider. Unless you’re blasting photons down glass or through the ether, you’re out of business. The world doesn’t need you and more. His message - and the birth of a new breed: “new ways of enabling huge volumes of real-time services, at low-cost” again through working to make commodity IT hardware work in the real-time telco environment. (Somehow, I suspect this won’t be news to Google. Five nines? Millisecond responses? No sweat.) Shane’s recipe:

  • Run on standard HW & OS (Sun/HP Unix, Opteron/Itanium, Linux)
  • Run on off-the-shelf SW (Oracle/SQL Server, Veritas)
  • Exploit the HW & SW properly (Multi-threading model, Multi-core chipsets, Grid Architectures, Virtualisation to reduce footprints)
  • Stop being allergic to Open Source software

As a former Oracle tech consultant, I can appreciate that you don’t want your system to take a 60 second tea break just because you’ve switched some backup recovery or logging setting over. The promise to deliver answers from an enterprise database has always been “whenever I’m ready…”, which is the space that gave companies like TimesTen (now owned by Oracle) room to grow.

Still, a showdown between the vendor Davids and Goliaths is going to be good for pundits, if not for shareholders.

Who is that at the front presenting? Are you sure? Can you prove it?

We had two presentation on the sunken rock of telecom on which many large projects founder: user identity. It’s not glamorous, the technology is either utterly mundane (formatting names and addresses consistently) or incomprehensible (got a PhD in crypto?). Nobody in the commercial side of the business will love you for fixing it, but they’ll damn you for all the data quality issues and integration costs as customers try to cross application and divisional silos. I still have recurring nightmares from a digital identity project that involved putting about 2000 post-it notes around a massive conference room to try to match the customer databases of several dozen disparate systems.

Aude Pichelin of France Telecom detailed just a few of the challenges in scaling her Mont Blanc of identity crevasses and treacherous icy cornices. Her message is that you need to scale the mountain by planning to get to the top when you’re standing at the bottom, which means looking at identity as an end-to-end issue (with presumably organisational structures and processes to prevent each project going its own way). For example (one I’m making up), in the multi-party multi-service world, anonymity is important. But if you shared the IP address of a user with a 3rd party (maybe just accidentally in a SIP header) then you’ve exposed that user to being tracked across requests and sessions and personal data being correlated.

Also, from the user’s point of view they want a single place to manage their relationship and identity profile, permissions and preferences with the operator. After all, if it’s all fragmented, what’s the operator’s value-add? You might as well sign up for a whole bunch of disparate services from web portal operators and organise your own connectivity and devices.

Telcos are in the identity supply business to internal and partner applications, but they hardly know it. Which is a shame, because messy unglamorous businesses are often rather profitable.

Aude finished with an appeal for operators to get their standards sorted out in this space. Which nearly teed up John Storrie of Nortel, who gave us a briefing on the ITU’s new working group on identity standards. This isn’t a technology standards effort, as the IT industry has provided us with no shortage of standards to choose from. Rather, the focus is more on common choices of interface and process to enable operators to create interoperable services. (And before you chuckle, remember we can be talking about mundane stuff like roaming.) Maybe Google are right and we’ll never pay another bill in our lives as all our needs will be serviced gratis (if you don’t mind viewing this short message from our sponsors. And this one, and maybe one more.) The audience was sceptical in the questions and feedback of the ITU’s relevance and authority in the area. However, in the real world of billing, mobility and legal accountability sorting out some basic customer data exchange standards and principles could take a lot of friction out of the world of telecoms commerce for operators and their services partners.

If we build it, will they come?

My wife told me to take down the BT posters from our bedroom wall and on the ceiling, but let’s face it, BT are tops in our STL surveys of who is getting it right, and remain somewhat of a Telco 2.0 poster child. Rory McKenna gave an extended review of BT’s open API experiments. BT are working to package up all that developers need to build applications with just a few lines of code. You, a free tool, a $1000 PC and a $10bn network to play with. They support a wide range of interface standards, making It easy for everyone - and have signed up far more developer partners than they ever planned for. BT is very much “walking the walk” of opening up and becoming a platform enabler for 3rd party services.

We should be hearing more from Rory soon on the blog.

Thomas Magadanz from the Fraunhofer Institute was our final speaker of the day, and detailed the test labs they have built from trialling IMS implementations. What’s important about Thomas’s work is the incredibly low barriers their environment put between you and building a real-world IMS-based application. The most critical part is OpenIMS - and open source IMS implementation (proprietary vendors please look away now) that covers all the defined IMS nodes and also offers a hosted test bed. You can also just download and compile away your own IMS application server environment.

Unless the average telco engineer and web developer can get his hands on this technology, it’s doomed. Not because of anything wrong with it, but because to succeed technologies need to be adopted and integrated with the Web 2.0 world. Does a technology really exist before there’s an O’Reilly book on it in your local bookstore?

If they come, will we have built anything?

We rounded off the day with a quick survey. How important are combinatorial services to quad-play operators? These services are ones that cross the divides between fixed and mobile telephony, TV and the Internet. We gave three examples:

  • Using the TV to see the caller ID of a caller and the remote control to reject the call if unwanted.
  • A virtual secretary application that handles inbound and scheduled calls based on your activities and context
  • Escalating instant messaging to voice calling, but using the landline or mobile phones and not PC telephony.

The outcome - our network engineers, whose jobs may somewhat be at stake depending one the answer, unanimously agreed: the users want this, and we’re going to deliver it.

How important are combinatorial services to quad-play operators?

Again, thanks all the speakers, analysts-in-residence and participants for coming and taking part.

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April 6, 2007

Mobile Internet and the Broadband Incentive Problem

We helped to facilitate the GSM Association’s Mobile Entertainment & Advertising Summit in New York last week, and presented to a pretty senior crowd a summary of our recent report on ‘Telcos in Advertising Value Chain’ (background here, and the exec summary of the report here). More on this to come in later posts…

…but in the meantime, on this week’s theme of the ‘Broadband Incentive Problem’, I was approached at the end of the event by a Director from Hutchison 3G (an innovative and disruptive European mobile operator) who challenged my assertion that offering flat-rate data tariffs to stimulate mobile data and content usage (the operator becoming in affect a MISP, ‘mobile internet service provider’) would lead to the same ‘Incentive Problem’ that fixed ISPs are facing.

My point was that we need much more sophisticated advertising models than we are currently considering, to overcome this and other problems related to realising the potential of mobile entertainment and advertising. His point was that 3UK (and other mobile operators) had so much spare 3G network capacity that the broadband incentive problem is not really an issue - it’ll take a long time for the pipes to be filled.

I was a jet-lagged and tired at the end of the event, so didn’t want to defend my point there and then. I also wanted to check with my colleagues how valid his objection to our thesis was - how pertinent is the Broadband Incentive Problem to mobile as opposed to fixed operators/ISPs? So, I asked our Chief Analyst, Martin Geddes, to respond, here:

“Hutchison 3 might have a tactical break on it as the disruptive 5th player in the UK market, but as a strategic problem it remains an issue. They can’t offer affordable flat-rate price plans that let users do anything they want because a few users will go haywire and flood the network’s capacity. They can do what T-Mobile have done, and use contract terms to limit streaming, etc on the basic product.

So there are ways of tackling and mitigating it, but it probably needs a multi-pronged approach: not only ‘sticks’ to ban P2P, but also ‘carrots’ to give the users the content they crave via efficient and affordable delivery means. You might also innovate in the pricing model, for example offering flat-rate but supported by “gold”, “silver” and “bronze” priority levels — with network hogs causing congestion finding their throughput increasingly throttled.

The broadband incentive problem I think is real for mobile operators as well, and it is mainly driven by video.

E-mail, web, and VoIP have all been about sending text, images and audio. These are comparable in “value per Mb” to within a couple of orders of magnitude. For metered usage, value roughly corresponds to volume, so it’s a fair charging mechanism. Flat-rate gives you a fairly short and predictable usage curve — there’s only so many email and web pages you can read in a day.

P2P music distribution was the first taste of the Broadband incentive problem, when you have a ton more low-value traffic which pushes the value-volume link out of kilter by maybe another factor of 10. Furthermore, unlike Web pages which you tend to read, you may speculatively download libraries of music when you only have an intention of sampling a small proportion of them.

Video breaks the Internet model because it imposes too many costs on the delivery chain without any regard to the value of the content, capex of peak hour usage, or efficiency of delivery. The download-to-view ratio (how much of what you receive to you view) is quite low — maybe as low as 10% from one stat I saw.

Finally, if I were Hutchison 3, I wouldn’t want to crow too much about low utilisation levels of 3G spectrum…”

Editor - more on this topic as we analyse the output from the Telco 2.0 brainstorm…

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Telecom TV coverage of Telco 2.0 brainstorm

A big thank you to our friends at Telecom TV for nice coverage of last week’s Telco 2.0 brainstorm, here.

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Telco 2.0 event: Digital Town summary

Over the next week or so, we’ll be reprising some of the key ideas and themes from the breakout sessions. First out of the gate is Digital Town, where we were looking at future funding models for access networks.

It’s useful to be a utility

The day was opened by Jonathan Dann of investment bank Bear Stearns. He noted that the telecoms sector has recently rallied, and that is being driven by ring-fenced assets like BT’s Openreach being given utility ratings (i.e. better than damaged telecom ratings). This should come as no surprise: the BT access network is being paid for by a collection of different business models of resellers and unbundlers. Together they will provide a less volatile return than a single integrated retail division.

Jonathan deeply hinted that the upcoming fibre deployment in the UK needs to learn something from this: Verizon FiOS-style approaches may not meet City approval. Our single one-size-fits-all IPTV service really is the best way to pay for this $bn access network… But will the investors keep buying that story?

Brian Condon of Close The Gap has been building a large community co-operative fibre project in the Netherlands. The striking thing is that “triple play” doesn’t reflect the value people get out of the network. To them, the core things aren’t necessarily fast Internet access, but rather the ability for elderly or infirm residents at home or in care to be able to watch and participate in a church service, or video conference with their doctor. As an Edinburgh resident, I can easily imagine a Festival TV being popular and profitable - but not until most homes and hotels are wired up for it.

Ricardo Krikke of the International Network of E-Communities (INEC) echoed this sentiment, saying:

  • Triple play is a ‘me too’ strategy and doesn’t deliver the full benefits of broadband
  • The involvement of the public sector in access network deployment is inevitable
  • Government’s job is to stimulate aggregation of public services.

Overall, it couldn’t be clearer that investors and users aren’t looking for fibre to repeat the 3G experience: over-priced, under-utilised, with a wrong guess at what applications the users really want.

Some audience feedback using the Mindshare technology:

“Why do we need open networks to enable public services? Can these services not be provided on top of existing networks?”

“Why no similar projects in UK - is it a peculiarity of Dutch society?”

“What is the legitimate role of the public sector, is it to work within the market forces or bypass override them?”

“Is there not a risk on a 20 year view of some increasing proportion of users having their needs addressed entirely by mobile + DTT / satellite and therefore not needing fixed at all, thus reducing revenues for this “utility” — so there is a risk…?”

Monopoly, meet monopsony

Ed Brown gave a UK perspective on how £250m of public sector buying power was being aggregated into a regional network supply contact in Yorkshire. The critical barrier is overcoming the EU’s rules on public subsidy or market distortion. In the Q&A one perceptive audience member asked about what happens at the end of such contracts: aren’t you hostage to the now monopoly supplier? This seems to have been taken into account, with contract extensions and asset buy-outs written in.

This model of public sector purchasing power being aggregated appears to be a likely major growth area that will have a ripple impact on operators and suppliers everywhere.

The message of “business as usual will not be tolerated” was reiterated by Oliver Breidt of Network Economy. He observed that integrated operators are creating weak revenue growth and shareholder returns compared to the companies that focus on the individual parts of the service delivery puzzle. The future lies in “white label” operators who are comfortable with extensive (or even exclusive) wholesale operations.

“In vertically integrated telcos delivering end-to-end service quality is possible. But how do you ensure fulfillment, assurance and billing end-to-end in a disintegrated, broken-up world? End-to-end service assurance will stil be expected by customers, won’t it?”

“I like the open access model…however when I look around the world the only market based economy with significant fibre deployment does not sign up to the open model.”

Three for the price of two

I asked our ever-insightful analyst-in-residence, Keith McMahon, to give a 2-slide 2-minute presentation on “Can Joost take off?”. Joost is the PC-based broadband TV product of the folk who brought you KaZaA file sharing and Skype. Since most of the access network deployments are based on the premise of selling bonded (overpriced?) video entertainment, it’s a critical question. What if IPTV gets Skyped?

Keith outlined a four-stage evolution of the peer-to-peer technology: pirate’s friend; content-provider friendly P2P that adds in legitimate licensing deals and DRM (but remains uneconomic); network-friendly P2P that works with the operator’s network topology and caches, rather than backhauling every bit across the world; and finally advertiser-friendly P2P that personalises the experience. So the overall message is that we’re only at stage 2, and Joost won’t make any material difference - yet.

Don’t just sit there, do something

Our next session took some lessons from those who are actually building networks rather than buying them or advising about it.

Steve Hurdle manages the Wireless Cities programme for BT. This is a rather cunning initiative that partners with cities to deliver outdoors wireless access (e.g. for parking meter wardens). BT get access to lots of street furniture and fixment sites for their equipment, and use unlicensed spectrum. With their forthcoming wave of convergence devices, many of those minutes in densely populated regions may traverse the BT infrastructure. You can see this might have a real effect on how large their wholesale minute bill is to Vodafone, on whom they have built their MVNO. Vodafone end up with all the cost of build-out to meet their license commitments, whilst BT cream off the most profitable traffic. (Note that none of this is what Steve actually said aloud, just our reading between the lines…)

Again, a take-away is that the era of top-down national infrastructure deployments is ending. In its place you have many local initiatives, and local knowledge and personal relationships matter as much as technology and funding.

Rami Houbby from the Fibre to the Home Council reminded us of some basic truths: historical bandwidth trends indicate that the limits of copper technology are likely to be breached around 2010. The growth appears to be coming from open access networks in northern Europe, with some major new projects such as in Vienna. Municipalities can access low-cost finance, and passive infrastructure is an appropriate investment opportunity for them. His key advice?

  • Co-ordinate with all key areas of the Municipality, e.g. Local utilities, Municipal housing, Schools and internal administration
  • Get the residents involved: Find out what they really value, Provide simple and realistic information about build and service plans

I was rather taken by the tool for laying fibre in cracks in the pavement. I’d have to be careful my 18 month old daughter doesn’t pick out telecoms infrastructure with the collection of stones and leaves she normally finds so fascinating every 20 paces.

“WiFi - has the industry missed an opportunity with bad / expensive roaming / interoperability?”

“Why is Europe slower than the US in building out fibre?”

“When will FTTH deliver beer - that’s the killer app!”

So, where’s the value?

We concluded by comparing and contrasting three different outlooks: a national operator with a national viewpoint; local community networking; and bottom-up user-built networks.

Baldewijn Westerbeek of KPN shared some of the challenges and opportunities in the Dutch market. KPN has restructured a little like BT, with a fenced-off wholesale and infrastructure division. They are making a number of strategic shifts, the first three of which he listed as:

  • Traditional phone company to Multimedia company
  • Copper to Fiber
  • Technology driven to Market & marketing driven

But can they do it all?

To KPN, “Telco 2.0” means evolving the vertically integrated operator in each layer, not separating the layers. We’re an innovative Internet technology company! We’re an infrastructure builder! We’re a customer intimacy specialist! It remains to be seen how long KPN remains in all these businesses. They may succeed and be rewarded copiously for it, or severly punished for their ambition. BT is also executing every Telco 2.0 strategy at once: diversifying, doing product innovation, opening up the platform, and building a wholesale pipe business. As a KPN investor, I’d be asking: just what is KPN going to do that offers unique synergy or outstanding excellence? Are they focused enough, or is their energy too dispersed?

Next was Malcolm Matson, who recounted the basics of the OPLAN (Open Public Local Access Network) movement. He sees a future where local access networks are privately financed with long-term debt attractive to pension funds etc. The network assets held in special purpose entities that are structured to encourage a monopoly supplier, but without monopoly rent or the possibility of favouring particular services players.

The challenge of Malcolm’s model is the opposite of KPN’s. KPN can offer a nationwide delivery platform for a content partner. Every town having its own network may mean excessive fragmentation in the wholesale market. There’s no easy answer: you can’t expect local control to result in homogenous networks. However, a specialist OPLAN constructor could achieve scale and commonality efficiencies.

No doubt we’ll look at OPLANs in more depth in a future blog post.

Finally, Robert Lang from FON gave the contrasting viewpoint of bottom-up network construction. We think there’s a cautionary tale here for both fixed and mobile operators. Firstly, what’s the point in bringing fibre to every building in the city if the only one you can access is in your own home? Walk down the street, and you’ll be bathed in inaccessible WiFi to cheap, fast backhaul. The value isn’t in the pipe, it’s in making the pipes accessible!

Mobile operators should also pause for thought. As we move towards widespread picocell and femtocell deployment, the standard operator build-out approach may fail. Expensive software is normally used to mix demographic and RF data to plan cell sites. But as you get down to ever-smaller scales of in-fill of coverage, the operator no longer has best knowledge of where the gaps in coverage are (no measurement trucks visited my basement) or which are the most important to users. Maybe the business model needs to evolve, so venue operators (bars, nightclubs, stadia) can help build the access infrastructure, share the risk and the rewards?

“Understand the motivation for the OPLAN model but it risks fragmentation, lack of interoperability and serious casualties.”

“Do investors see the world like KPN or like Malcolm?”

“If OPLAN networks are privately funded and owned, what is to stop market forces leading to the network falling into less public spirited hands.”

We’d like to thank all the speakers and participants for making this such a stimulating and interactive day.

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April 3, 2007

Online Video Market and the Broadband Incentive Problem

A super piece of analysis by Jeremy Penston, one of last week’s Telco 2.0 brainstorm participants, here on the Online Video Market and the Broadband Incentive problem.

Jeremy’s analysis provides good rationale for the ‘New Telco Models of Distribution models’ we proposed on the Telco 2.0 Business Model Map - 1.) service-funded connectivity; 2.) ad-funded; 3.) P2P/Content Delivery Networks, 4.) Device-funded; and 5.) explicit tiering a-la Paris Metro Pricing.

I think the GBP 2.10 figure Jeremy mentions as the average cost to telcos/ISPs of delivering HD (Hi-Def) video assumes that all the bits are backhauled. A topology-aware P2P program that preferentially pulled content from nodes close by would probably lower this cost significantly. And the assumption that HD is the critical medium, whilst it makes for big delivery cost headlines, is probably wrong for some time to come - YouTube shows there’s a healthy market for low-res long-tail and my brother in Sacramento wants his fix of Top Gear (popular TV car show in UK) in whatever format he can get it in…

More on this topic to come once we’ve processed all the ideas and comments generated at the Telco 2.0 event.

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Telco 2.0 Strategy Report Out Now: Telco Strategy in the Cloud

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