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November 29, 2007

Verizon Wireless’ volte-face: Virtue or Vice?

It’s been all across the tech news and blogosphere: Verizon Wireless has announced that they’re moving to a, well, less closed, network attachment model. For those whose job isn’t to surf the web, the summary is that pace certification testing by Verizon’s labs, and an unknown amount of bizdev negotiation, you can attach any device you like to the Verizon Wireless network. If you had to sum up Verizon’s strategy to date, it would be “Execute!”. They’ve simply done a great job of merging Airtouch, GTE and other properties; building out more coverage than the opposition; keeping an adequate level of handset and content innovation; and generally not screwing up.

The key details of the new offer — price, process and terms — remain hidden behind the PR fog. So what’s the unique Telco 2.0 slant on the news? When the market leader switches strategy, it’s not some short-term panic over Apple, Google, WiMax or spectrum auctions. It’s part of the deeper structural shifts in progress. So as we’re in the final assembly stage of our shiny new Broadband Business Models 2.0 report, here’s what’s on our minds about the future of connected devices:

Firstly, disaggregation of the value chain is a long-term inevitability. Regardless of Verizon’s taste in cell phones, there’s always going to be a need to assemble devices, software and content in configurations Verizon doesn’t think of, and sell through channels Verizon can’t access. For example, we’ve concluded content aggregation has strong increasing returns to scale, and as telcos aren’t very good at being media companies, they will exit the portal business — be it for text, video or music.

So in one sense, it’s “what took you so long?”.

Secondly, Verizon can now offer up its assets — billing, retail logistics, care, etc. — to partners. These assets can be sweated far harder. Verizon takes ideas for handset and content, develops them together, markets, retails, supports and bills for it. Along that chain there is always a weak link. By allowing other businesses to go around the weak link, the full value of the other parts of the business can be realised.

As it happens, they’ve got a good network, retail, customer care and billing. So handsets and content are probably the bottleneck in delivering value. The CDMA ecosystem is smaller than the GSM one, and many of the handsets available only appeal to the techno-mad Japanese and Koreans. Far from being a “dumb pipe”, we’d anticipate Verizon moving to a broad platform play offering a suite of services to partners. For example, did you know there are around 30000 sales tax jurisdictions in the US? Offering phone service is hideously complex due to a maze of federal, state and local regulation. Why fight through these thorns to the sleeping princess yourself when Verizon can rent you a ladder over the hedge?

If you were having a Coasian view of the world, you’d simply note that commodity IT, web services and the Internet have lowered the cost of integrating outsiders into the business. Hence the relative value of internal vs. market transactions has changed. “Open” and “closed” aren’t virtues and vices, but merely stages of evolution.

Next up, if you were running Verizon Wireless and looking to make your business more efficient, what can you do? You could set higher targets for your execs and exhort them to do better. However, management targets and incentives (as the UK public sector has discovered) are blunt instruments. You might get cost savings or revenues at the expense of investment and brand quality. So instead you draw inspiration from the structurally separated fixed-line business. Benchmark your retail operation against outsiders. Make them feel the heat of competition purely on the merits of their own sub-part of the business. The Verizon retail business is no longer a monopsonist buyer of Verizon’s network and wholesale assets.

Finally, the most critical factor in Verizon making a success of wholesale network access will be to construct pricing that incentivises the desired behavior. Offering flat-rate vanilla ISP plans to wholesale partners will be a fatal mistake. Consumers need simplicity. Wholesale clients do not. You should not be afraid to confront them with complex wholesale pricing that reflects both the value and the cost of running the network. That means reflecting peak and off-peak times, congested areas where there is less spectrum or fewer attachment rights, and differential pricing depending on where Verizon has an advantage over competitors in terms of speed or coverage. The partners then have to work out how to design and package their product around these parameters, and create the simple retail propositions.

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Liberty Global Inc: Is TV Dead?

Liberty Global Inc, Europe’s largest cable-TV company, presented at the Telco 2.0 event last month to answer the question of whether or not TV was dead (“Will Video Kill the Telecoms Star?”). Despite the slightly alarming information that TV viewing in the UK, for example has been static or declining since 2001, Liberty’s Managing Director of Corporate Development, Andrea Salvato (i/c global M&A), concluded that there is life in it yet.


Here’s our take on it:


There is clearly a specific demand for the “lean back” experience of ambient media as opposed to the Internet, which makes greater demands on the user. The sheer mass of major live TV events makes broadcast TV indispensable; from technical point of view the typical bandwidth requirement for a million concurrent streaming viewers at 400Kbits/s is, it seems, one-third greater than Akamai’s peak throughput on an average day.


Andrea drew five main conclusions for the future of TV, informed by a study from Bain & Co, to which we have added the Telco 2.0 slant.

LGI Conclusion 1:
Continuing strong demand for the “lean back” experience of TV (which is very different from “leaning forward” to surf the web)

Telco 2.0 Slant 1:
True there is real growth (both in eyes and amount watching) in emerging markets, especially in the Eastern European Markets where Liberty Global are expanding but in developed markets total viewing is probably peaking.

However, the “lean back” and “lean forward” terms are slowly losing meaning. What is SMS voting on a TV show? Or catching up on The Daily Show via YouTube?

“Will the lean-back consumer continue to be the ones that advertisers really want to target?”
Participant comment at the Telco 2.0 event via Mindshare.

Furthermore, valuable niches will increasingly be anchored into communities, interest groups or resources that already have an online component, so the idea of a pure stand-alone media distribution business has a “sell-by” date that’s rapidly approaching. Two minutes of the grandkids romping in the garden are more compelling viewing than a whole evening of BBC1. Plus the demographics of TV are changing, with the young abandoning TV for other media.

LGI Conclusion 2:
Youth behaviour is shifting towards “lean forward”: but the impact will be limited by 2012

“Although teenagers typically drive the consumption and development of new media platforms, teens age 12-17 viewed 3% more traditional television during the full day than in the 2004-2005 television year.”
Nielsen Media Research, September 2006

Telco 2.0 Slant 2:
We think youths are driven to the “bedroom viewing” with buddy participation and interaction via online communication tools such as Instant Messaging and SMS rather than “family viewing” in a communal room - only “big” live events will get the family “leaning back” together.

The conclusion above also fails to capture the difference between volume and value: the TV may be on, but it’s no longer such a focus of attention of the individual or their peer group. (More on this in our new ‘Digital Youth’ stream on this blog in the new year).

LGI Conclusion 3:
Public internet based alternatives will take time to catch up with the quality of the “lean back” experience provided by TV platforms

Telco 2.0 Slant 3:
Yes. We doubt whether internet streaming will ever catch up with broadcast quality. TV platforms will always try to improve quality to keep differentiation (eg supa-dupa-HD). Traditional TV broadcasters are also in control of the whole of the networking stack and standards bodies such as DVB should theoretically be able to innovate much quicker than the internet standards bodies.

Downloading offers more potential, but the old saying that “you can’t beat the bandwidth of a station wagon loaded with hard drives” continues to hold, just as the NetFlix and Amazons of the world dish out content on physical media via the post at low cost.

The Internet’s take-up of video distribution will be slow because the substitutes are so good. Plus as long as the uplinks remain so poor, much of the long tail — dependent on prosumer content creation — will be a docked stump waving feebly in the air.

But these arguments rather miss the point. The value will increasingly move towards how you interact with communities of interest, and how content is aggregated and recommended. This is an ideal use of the Internet.

Again, “lean back” and the other Marshall McLuhan metaphors aren’t working in our new world. The medium is no longer the message because the Internet is a meta-medium capable of spawning new media. These application-specific media (e.g. YouTube for shared short-form video) are precisely tailored to both the message and the user. The fixed formats of the past no longer constrain and intrude into the message, and the medium becomes invisible. You talk about “watching TV”, but you don’t talk about “Youtubing”, because it’s the videos on YouTube that hold centre stage, not the medium.

LGI Conclusion 4:
Value chain players (particularly content owners) are unlikely to promote the internet above TV-based platforms until fully proven


Telco 2.0 Slant 4:
The players will be willing to experiment and in particular will want to avoid iTunes-ification of distribution platforms, ie. single wholesaler dominance.

In addition, in order to have much chance of gaining value from new advertising, marketing and transactional capabilities, they are going to have to blend together the best of many media (broadcast, SMS, Web, IPTV, etc.). Viewing it as an “either-or” is wrong: the answer is “both”.

LGI Conclusion 5:
Most traditional players will adapt successfully to changing consumer habits

Telco 2.0 Slant 5:
We might wonder how much LGI paid Bain for their report. This is a pretty bold statement given what’s happening to the music and publishing industries. In the short term, yes; but generally technology revolutions do tend to sweep away a large proportion of the industry’s incumbents. Organisations like the BBC face a demographic crisis as their viewers’ age and a generation of youth switches to more social, creative and interactive media.

“Liberty says that change will be slow, and they may be right, but business models get set early and once the die is cast, they are incredibly difficult to change. So we need to treat IP video as a critical problem now, so we don’t screw up the next decade!”
Particpant comment at the Telco 2.0 event via Mindshare.

Inevitably over time small number of “scaled” content owners will reach a mutually beneficial settlement with small number of “scaled” access networks and primary distribution platforms will emerge. Innovation within distribution will still occur especially with niche content owners and smaller access networks that have least to lose with experimentation.

“What is Liberty going to do as its customers start to disintermediate its premium content services using web-based services? A free or cheap download will appeal to some of Liberty’s VoD customers for example.”
Particpant comment at the Telco 2.0 event via Mindshare.

In summary, we would, of course, agree with LGI is that TV is not dead, but evolving. The Internet as a substitute won’t happen, and it too is evolving. People will use more than one channel at a time to gain a more personalised and thus richer experience. The key challenge for cable incumbents, and anyone looking to make money from content, is to innovate with our business models to suit this change. And we need to start this process now with some fresh thinking. Here’s some more analysis re perils of ‘Triple Play’.

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November 28, 2007

Triple play, go away!

Yesterday we were running through four case studies from our new Broadband Business Models 2.0 Report looking at how the content aggregation and distribution businesses interact with one another. The four products we picked on are Joost, Iliad’s Free service, Sky Anytime and BT Vision, but of course we’ve been following many others. We’re seeing some common themes, plus some ideas of our own, that we thought we’d share with you:

  • You have to match the right content to the right distribution system. Get it wrong, for example by picking mass market content when you should be deep in the long tail, and you’ll fail. Get it right, for example by giving user generated content equal footing in the distribution system, and you’ll be rewarded.
  • Two-sided business models (with payment from users as well as merchants) generally beat one-sided models.
  • Scale matters in both content aggregation and distribution. Sponsors and advertisers demand it, and distribution efficiency needs it. Few businesses have both. Telcos trying to build both capabiliies as a “triple play” will mostly fail.
  • Indeed, always carry a wet fish with you. Whenever you hear someone say “triple play” (or “Quad” or “Quin” Play), slap them across the face with it until they wake up. It’s nonsense. A dream. If anything it’s “multiplex play” — how do I use my customer relationship and distribution assets to market and deliver content from relevant aggregators to targeted users? For example, how does an ISP serving the small business market offer multicast video from a business newscast partner?
  • The triple play is a vestige of what Umair Haque calls the “massconomy” — mass production of a standardised product, versus the “edgeconomy” where everything is personalised and also understands the user is a critical producer as well as consumer of value. Iliad’s TV Perso is a classic example here of going beyond bundling, by allowing users to create their own TV channels, including their own content.
  • Telcos have a cultural handicap: they’re obsessed with billable events. Consumers want bundles. The marketing skill is how to build and break bundles.
  • Speaking of bundling, consumers want to buy product and delivery together as a package (“FREE delivery!”). They also dislike endless small charges for calls and content — there’s a large “certainty premium” that they pay for bundles. However, the classical consumer surplus analysis of bundling only applies when you group dissimilar but complementary goods (e.g. TV and phone service). And it only works to reclaim some market power for yourself. If your basic product isn’t very good, because you’re stuck in a “massconomy” mindset, it doesn’t help.
  • That means operators need to open up their assets (network, logistics, customer data) to upstream partners to help them bundle the retail proposition.
  • Most vendors have nothing like the offering that the operators need. Nowhere near. Sorry.
  • Content still isn’t king. If you really want to make money, go re-invent the freephone number business.

Much more on this here.

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Carphone Warehouse: Broadband Video Decision Time

David Goldie, CEO of Carphone Warehouse Telecoms posed half a dozen big questions around broadband video strategies at the Telco 2.0 brainstorm last month. He was honest enough to say he currently didn’t know the answers. Below is our response, which we’re sharing on our blog because we feel lots of other telcos around the world can learn from this.


For those not familiar with the company, Carphone Warehouse is the number one retailer of mobile phones in Europe and is currently expanding in the USA through a partnership with Best Buy.

Carphone’s business model was once based around this premise: users didn’t know what mobile phone to buy, and were indifferent to which operator, since mobile services worked more or less the same everywhere, so they went to Carphone to check out all the mobile handsets on offer, and get assistance on picking the ‘offer-of-the-day’ tariff and service provider.

Back in 2003 regulation changed in the UK to allow the profitable reselling of BT voice services. Since Carphone had a very strong retail presence, it seemed a simple step to expand into the home phone business. But, as with the CLECs in the USA, most UK resellers underestimated a number of factors: the cleverness with which the incumbent played the regulatory game, the need for scale, and the sheer bloody hard work of building a services and operational infrastructure. In order to gain scale fast, Carphone went on the acquisition trail buying big voice resellers and the internet access business of AOL UK. Having invested heavily in unbundling, today Carphone is the third largest ISP in the UK after BT and Virgin Media.

The problem they face relates to the move (by all operators in the market) towards more complex bundles of fixed and mobile voice and data, TV and online content. Today these bundles and related services are the cause of confusion in the user’s mind, not the phone: users now know what phone to buy (they are more sophisticated in this area), but not which plan.

The biggest strategic challenge facing Carphone is how to position itself in this new world, especially one where broadband video is set to explode. So, David posed these questions to our brainstorm participants:

DG Q1: Who pays? Do we shift to advertising funded models?

Telco 2.0 A1: We believe it is vitally important to create 2-sided business models with revenues coming not only from ‘downstream’ end-users (consumers, SMEs, Enterprises) but also from ‘upstream’ content and application providers.

Moving forward there will need to be more innovation in pricing and bundling than in technology. Advertising will never be able to completely fund everything, but will allow upside to certain services. There’s a lot more power in engagement than in pure advertising. What can Carphone do to give its end-users an exceptional experience when interacting with merchants or other upstream partners? It doesn’t have the assets or relationships to enable the complex value chain needed for “Advertising 2.0” (now with added Cluetrain), so we’d recommend sticking to being a really fine retailer. If you thought being an MVNO or broadband unbundler was hard, entering the meltdown vortex of a media company in parallel would be positively suicidal. Let someone else work out the winning content models, and you help them sell it.

A comment via the Mindshare audience interactivity mechanism after David’s presentation drew a pricing parallel with the airline industry:
No frills airlines are now requiring customers to opt out of additional services (luggage, insurance, fast boarding). Will no-frills ISPs such as Carphone do the same to squeeze out a return?

DG Q2: Is control of the home hub important?

Telco 2.0 A2: Absolutely critical.

The home hub will function as both the gateway to the outside world and as the controller of home networking. The home hub is the new “edge of the network” and will be the key battleground. We’ll have unbundling and open access rules around home equipment within the decade, to be sure! Carphone could always change its name to “Networked Edge Device Warehouse” (or something more catchy)…

DG Q3: Will content be stored at the network edge or in the CPE (Consumer Premises Equipment)?

Telco 2.0 A3: Both.

Some services will be network based and some home storage based - there will be no single architecture for all services.

A critical success factor will be managing the content that the users themselves create. Their photos and videos of their kids playing are more important than all the DVDs stacked around the telly. It’s going to be bi-directional.

DG Q4: What position do we take in NGA (Next Generation Access)?

Telco 2.0 A4: It’s absolutely essential to get deeply involved in this debate and to try to influence the future.

Either campaign for a “Swedish” (mixed muni and shared), “Dutch” (muni-private hybrid), or “Danish” (utilityco) solution. Or go for a “Judo” solution and somehow turn (BT) Openreach’s universal access approach into a liability. Just don’t even think about building any fibre yourself, except as a decoy or spoiler.

DG Q5: Should access providers build a position in content/TV/IPTV?

Telco 2.0 A5: As a mass-market player, definitely not. You’ll only end up making Chelsea’s footballers even richer. Trying to do everything yourself is impossible and Carphone will be far better partnering.

Another comment via the Mindshare audience interactivity mechanism after David’s presentation provided the perfect medicine:
If Carphone do focus on being an ‘open facilitator’, why don’t they offer a charge-to-bill capability to enable the broadest range of content providers to transact with customers?

DG Q6: What mobile content delivery capability do we need?

Telco 2.0 A6: Wrong question. How do you enable a better personal communications experience?

Tomorrow we’ll review issues raised by Liberty Global’s Managing Director of Corporate Development at the Telco 2.0 event (previewed here).

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November 26, 2007

Plusnet: We traffic shape and are proud of it

Basic economics says that when demand exceeds supply, rationing is one possible solution. In the ISP world, this is achieved by traffic shaping and we believe it is a perfect solution as long as it is implemented in an open and transparent manner to customers. Plusnet, a mid-sized UK ISP recently acquired by BT, provides a possible template for all ISPs worldwide.

“Net Neutrality is an issue no ISP can escape. We’re convinced that demand for bandwidth driven by innovative applications will always outstrip the physical and economic supply of network. For that reason Net Neutrality is a pipe-dream. We believe it’s vital to put the customer in control of what takes priority on their line and we’re already developing that capability.”
Neil Laycock, CEO, PlusNet

Plusnet uses a combination of its Ellacoya and Juniper equipment to perform its traffic shaping. It is completely open and transparent with its current and prospective customers on how it achieves this. It is also very clear on the expected impact of the traffic shaping across a typical 24-hour window and what happens when the network is under abnormal load.

Plusnet is also very transparent in how the network is performing and provides most of the data online delayed by 15 mins visible to all.


The above actual example clearly shows P2P and Usenet traffic increasing when capacity is available on the network. The graph also shows that if people scheduled their P2P traffic overnight there is plenty of additional capacity available.

Plusnet also provides each of users a detailed view of how much bandwidth of which type they are consuming during the month. Plusnet tools even allow the user to inspect each packet to see how it is tagged and opens the possibility for users to provide feedback if tagging of a particular obscure service is incorrect.

“Faster broadband speeds without traffic control is like a powerful engine in a racing car with bald tires. We believe our unique traffic control system gives our customers the best tires in the broadband race. When the faster engines are more widely available, our customers will have the best car in the race.”
Neil Armstrong, Products Director, PlusNet

The net effect of all this openness and transparency is an increase in customer satisfaction which has been steadily growing during the 2007. Increased customer satisfaction feeds through onto the bottom line through reduced churn and increased sales referrals from its own base which is the Plusnet primary sales channel.
plusnet-cust-sat.PNG Admittedly the Plusnet customer satisfaction was climbing from lows in 2006 which were partially of their own making: a combination of a disastrous port of its base to “up to 8-meg” products; and a few fat fingers running their email service.

The end game of the traffic shaping is to put customers in control of each of every packet: not just in terms of prioritisation, but also in term of filtering. Obviously for non-technical users there will be standard templates.


We think the Plusnet approach goes a long way to addressing the concern that traffic shaping is less about “serving the customer” and more about “screwing the customer”. No doubt none of the above is what network neutrality advocates had in mind: it can hardly be argued that Plusnet’s customers lack alternatives or are uninformed. However, we do not think that traffic shaping is the only possible solution to congestion and QoS issues. How will the costs of DPI equipment scale as you move to fibre? Would widespread use of traffic shaping cause users to game the system, disguising P2P traffic sharing as 2-way video? For an example of alternative approaches, Paris Metro Pricing is also worth a look, as it offering the user a carrot to get their content via more efficient means than peer-to-peer.

You can read more about our views and those of survey respondents on ISP cost management in our soon-to-be-released Broadband Business Models 2.0 report.

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Ring! Ring! Hot News, 26th November

In Today’s Edition: VoIP disaster at the burger bar, bandwidth fever rages across the US, Australia, Germany, and Britain, IBM starts building its own googleplex, Etisalat thinks likewise, there’s a knife fight for a huge Indian GSM contract, Telefonica is planning something big in Latin America, fixed-mobile substitution races ahead in China, Thai regulators get panned, there’s a breakthrough in video encoding, and Celtel’s free roaming expands to 12 African nations. Plus, Telco 2.0 Recommends…

Broadband Connectivity

US businesses crying out for bandwidth.

Telco 2.0 Comment: Want to find out what happens when the VoIP link from an automated drive-in burger joint to its call centre goes sporky? Read the link…and demand your fibre access loop today.

Australia n telcos fight over metrofibre.

Telco 2.0 Comment: Aussie regulators, it seems, are still trying to get real connectivity deployed through competition; the result is a tangled web like this, with competitors struggling to avoid competing and get on the shared network train. Perhaps they should take the hint, especially as it’s an Australian telco that provisions the equivalent of one DS3 per 30,000 customers for its “broadband” service.

Aussie CNET does a useful WiMAX roundup.

Telco 2.0 Comment: Worth bearing in mind, nameless Aussie telco - WiMAX is coming and could soon be in your subscriber premises, eating your lunch.

QWest: forward to fibre or back on the market?

Telco 2.0 Comment: It’s the industry’s $64k question, really - do what it takes to get the fibre out there, and build businesses independent of it, or manage decline. Check out the infuriated customers. And the performing pig.

Germany’s countryside desperate for broadband, turns to community networks and WiMAX…

Telco 2.0 Comment: And it’s not telecommuters, either; the FAZ reports that even artisans want faster Internet access for their businesses. Remember, people, the business of telcos should be business because there’s more of it than there are ads, games or movies added together.

And the UK Government puts the hard word on the telcos; we want fibre!

Portals, Partners, and Platforms

Now IBM leaps into the plex business

Telco 2.0 Comment: Everyone’s doing it now - it being the massively parallel online computing thing. Telcos can benefit from their connectivity reach and expertise in big infrastructure; but unless you look sharpish, Google, Amazon, IBM, BT Global Services, and Akamai (Edge Computing) will have eaten it all.

Etisalat starts building a wholesale business.

Telco 2.0 Comment: Here’s an example - Etisalat is using its own regional operating divisions as the launch customers for its wholesale/plex business.

Telco 2.0 Strategy

Indian monster-deal in the balance.

Telco 2.0 Comment: Don’t imagine that selling to emerging (or emergent…) markets will be easy. India’s BSNL is making NSN and Ericsson fight like cats in a sack for their huge GSM network upgrade.

Telefonica’s $14bn CAPEX budget for Latin America.

Telco 2.0 Comment: So what are they going to do with that chunk of change? WiMAX? Fibre in urban centres? Big IT infrastructure? Space elevator?

China: the substitution roars on

Telco 2.0 Comment: Everywhere in the world the trendlines point the same way - from fixed to mobile, from voice to IP, from higher margins to low or none at all. China is no different.

Digital Politics and Regulation

Thai regulator panned.

Telco 2.0 Comment: Still talking about convergence after 10 years - how unlike the home life of our own dear OFCOM…

Technology Disruptions

Raptors hunt telcos.

Telco 2.0 Comment: Everyone’s vexed about web video quality. Perhaps there is another way besides either QoS control or the JCB solution - namely really powerful error cancelling?

Celtel takes its single HLR for Africa a step further; now it’s the end for roaming charges between 12 nations. And you can use your cashable airtime transfer across them too…

Telco 2.0 Recommends: Telepocalypse is vexed by Nokia nagware; the other Martin collects an astonishing number of unlikely IMS adverts, there’s no IMS or even SIP in Android, Microsoft .NET comes to S60, Free the Social Graph.

There’s something deeply ironic about advertising IMS on YouTube…

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UK Broadband Market Gone Wild

Could it be that Britain is edging towards a major high-speed deployment? Minister for Competitiveness (and ex-telecoms analyst) Stephen Timms is expected to call in BT and other telco execs today for what promises to be a heavy meeting; see here and here for details. The figure of £7bn mentioned is believed to be for a deployment of fibre to the street cabinets.

There are reasons to think some of the telcos who will go to see Timms might be keen on the idea. After all, cable neo-monopolist Virgin Media has just given up on its plans to deploy triple-play over ADSL outside its cable footprint, thus leaving Cable & Wireless’s troubled DSL operation (ex-Bulldog) hanging again. However, Virgin is going ahead with the Sky Sports clone channel they are developing with Setanta.

Carphone Warehouse, meanwhile, who led the “free” broadband burst in Britain, is having some problems of its own; it’s running out of metro backhaul in London. This is roughly what you might expect; selling the product for cheap with no explicit limits, Carphone must have had to pack its infrastructure ruthlessly, and now the cracks are showing. They showed plenty of moral fibre going ahead with it, a certain amount of dietary fibre marketing it, and now they are desperate for optical fibre.

Obviously, the best strategy to adopt in this situation is to bribe more people to sign up - right? Well, that’s precisely what Carphone is doing - giving away Playstation 3s to new subscribers. Which is rough on other retailers, but will do nothing at all to help Carphone’s creaky backhaul net or creakier balance sheet.

And, apparently, the industry still hates its customers.

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November 19, 2007

Ring! Ring! Hot News, 19th November

In Thiis Edition: Vodafone’s first data billion, investment plans in China, Romanian call centres, Expansys’n’Truphone, China Mobile switches off Everest, India joins Google in the WiMAX queue, a contest for rural mobile apps, Sarin vs the iPhone, and just how difficult is it to develop for the thing? Plus, of course, Telco 2.0’s favourite blog posts this week.

Telco 2.0 Strategy

Vodafone makes a billion from data

Telco 2.0 Comment: Possibly the first operator to break a billion sterling from data traffic? It’s where the disrupters are, after all. More importantly, note that Voda had to shift 19 per cent more minutes of use to gain a 2 per cent uplift in revenue.

In other Vodafone news, Arun Sarin wants to buy China.

Telco 2.0 Comment: Or will China buy Vodafone? Snark aside, one thing Vodafone certainly has learned is that emerging markets investments are great fun; you have to wonder whether dealing with the Ministry of the Information Industry will be quite so easy.

Call-centre company comes to Cluj.

Telco 2.0 Comment: A German call-centre outsourcing company expands in Romania. What will that do for the local market for telecoms? Remember, the biggest market is…the market for everything else.

Technology Disruptions

New customer for Truphone.

Telco 2.0 Comment: A major field where development is needed is that of reducing the activation energy the user has to find to start doing new things; Truphone and Expansys are pushing at just this point.

Now that’s what we call low ARPU.

Telco 2.0 Comment: China Mobile’s base station with line-of-sight to Mount Everest has been switched off for the winter - not enough traffic, apparently. It’s a pity we can’t do that with MMS.

Broadband Connectivity

BSNL in monster WiMAX tender.

Telco 2.0 Comment: India’s state carrier BSNL is after a billion dollars’ worth of WiMAX kit, with a view to building some 70 urban networks and then a big rural-access operation. They also want to deploy “WiMAX kiosks” to get basic computing and connectivity into the villages, as well as linking up schools. The whole thing has some similarities to our own work in emerging markets. Addressing the ‘bottom of the pyramid’ requires more than just low-cost facsimiles of developed market products.

GoogleMax still on the cards?

Telco 2.0 Comment: Google likes some WiMAX too…and the Clearwire/Sprint fut could mean an opportunity. See this post for more on the reasons.

Digital Product Innovation

India’s contest for rural mobile apps

Telco 2.0 Comment: This looks interesting; very interesting. More here.

The Nokia N95 launches in the US: and Arun Sarin bashes the iPhone

Telco 2.0 Comment: You wait ‘til you try programming it…

Telco 2.0 Recommends

A video review of the N95 (US model):

Some outstanding blogs: Tim O’Reilly blasts OpenSocial; your new source for dodgy DRM-free movies; QoS gets trashed; TechCrunch UK reports on the app that does for your inbox what the NSA already did to your CDRs.

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November 16, 2007

AT&T 2.0, IPTV and the BSkyB connection

An instructive summary of a recent presentation by one of AT&T’s Group Presidents, Ralph de la Vega, covering IPTV and the broader transformation of his company here.

De la Vega’s track record is near perfect. The way he re-built Cingular and merged it with the old AT&T Wireless is a text book example of how to do a mega-merger with different technologies (GSM & TDMA), especially when we have the not-so-smooth comparison of Sprint and Nextel so clear in the memory banks.

For Telco 2.0 watchers the key quote from his talk is this:

De la Vega sees the industry as focusing on three points to push the entertainment industry into the 21st century. Content needs to be accessible on all three screens, it needs to be high definition, and it needs to be high quality. “The new TV is not something we can do alone.” “AT&T 2.0,” as de la Vega described it to chuckles and sighs from the audience, “is looking for partners.”

We wonder whether IPTV, as currently architected by Microsoft and deployed by AT&T into the home via DSL, is the answer. We are much bigger fans of either a) the evolving BSkyB solution or b) the Verizon FiOS solution (ie broadcast on a fibre wavelength) with IP-based solutions for the long tail (perhaps over a dedicated VLAN).

We await with interest AT&T’s next big strategic move which we predict will be the purchase of either DirectTV or EchoStar. Note: if they buy DirectTV (a customer of NDS) watch the rollout of the BSkyB solution across the States….

More on the links between AT&T and BSkyB here, and on Sky’s approach to broadband here.

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November 15, 2007

Forget Mobile Advertising…Think Bigger

We had a very fruitful discussion at the recent Digital Advertising & Marketing Summit we ran with the GSMA. Over 80 people attended from across Telco, Content and Media Industries with some enlightening presentations from future customers (Mather Advertising, Disney, Ogilvy); operators (Vodafone, Orascom); partner service providers (Yahoo!); trade bodies (Mobile Entertainment Forum, GSM Association, Mobile Marketing Association) and vendor partners (Infospace, Mobile Enterprise, Openet, Infospace and Alcatel-Lucent).

The full write up of the day - including all the brainstorming output and voting - will be made available shortly to participants but there were a few recurrent themes that I can share with you here:

  1. Advertising is a great opportunity because it opens up a new revenue stream from a new set of customers by allowing operators to be a platfom in a 2-sided market. It therefore can contribute to the decline in core revenues and is strategically important.
  2. No it isn’t, just look at the exec summary of STL Partners report Telcos’ Role in the Advertising Value Chain - the global advertising industry is only 25% the size of the Telco industry. Even if operators captured everything, there is no way advertising is going to fill the hole in core voice and messaging revenues. In fact, it isn’t work getting out of bed for.
  3. But Advertising is a great opportunity because it opens up a new revenue stream from a new set of customers by allowing operators to be a platfom in a 2-sided market …

Round and round and round. Several in the room advocating Advertising as the silver bullet and others dismissing it and pointing to the lack of REAL acitvity from the operator community as testament to their perception of the size of the opportunity.

So is this Argument Resolvable?

We think it is.

The problem at the moment is that too many pundits and practioners consider advertising as the end-game for the platform play. An alternative view is that is is just the beginning. It may not be big enough it in its own right but, combined with the other platform opportunities we believe that it is likely to be very interesting.

This leads us to two questions:

  1. What are the other platform opportunities?
  2. We “believe that it is likely to be very interesting” ain’t good enough - where’s the data to prove this?

Research-based Approach

We have decided that researching the broader platform opportunity for operators is the single most important new piece of research we can do. It will complement and build upon our existing reports on Telco Strategy and Advertising and our forthcoming ones on Broadband Business Models and Voice & Messaging 2.0.

The report will focus on answering the 2 questions above and defining how operators and vendors should move forward to realise the vision.

We haven’t yet defined all the platform opportunities available to operators but believe that these are likely to include:

  • Advertising
  • Marketing Services
  • Content Distribution
  • E-Commerce Support (including billing and payments)
  • Voice and Messaging

We will look to define the opportunity for operators in each of these markets; quantify the separate and aggregated opportunity; identify common requirements to deliver each; identify learnings from within and outside telecoms; and recommend how to move forward.

A key component of this work will be value chain analysis of each relevant sector and then defining the potential future role of the operator and the value likely to be captured as a result. The trick will be to work with experts in each market.

We are committed to delivering this for the Mobile World Congress. Any comments and questions on the Table of Contents below, please drop me a line.


The Telco Platform Opportunity

A Telco strategy and business model for the 21st Century

STL Partners Research Report

Table of Contents

14 November 2007

Introduction and Overview - What is a Platform?

  1. Current Telecom Operator Challenges
  2. The Structure and Benefits of 2-sided Markets
  3. Key Success Factors for a Platform Provider
  4. Strategy Implications for Operators
  5. Role of this Report

Telco Platform Options - Scope to Grow & Grow

  1. Scope, Definitions and Methodological Issues
  2. Platform Options:
    1. Advertising
    2. Marketing Services
    3. Content Distribution
    4. E-Commerce Support
    5. Voice & Messaging
  3. Conclusions & Implications

Sizing the Platform Opportunity - United we Stand; Divided we Fall

  1. Advertising
    1. Current Value Chain & Money Flows
    2. Potential Value Chain & Money Flows
    3. Telecoms Operator Revenue & Margin Opportunity
  2. Marketing Services
    1. Current Value Chain & Money Flows
    2. Potential Value Chain & Money Flows
    3. Telecoms Operator Revenue & Margin Opportunity
  3. Content Distribution
    1. Current Value Chain & Money Flows
    2. Potential Value Chain & Money Flows
    3. Telecoms Operator Revenue & Margin Opportunity
  4. E-Commerce Support
    1. Current Value Chain & Money Flows
    2. Potential Value Chain & Money Flows
    3. Telecoms Operator Revenue & Margin Opportunity
  5. Voice & Messaging
    1. Current Value Chain & Money Flows
    2. Potential Value Chain & Money Flows
    3. Telecoms Operator Revenue & Margin Opportunity
  6. Conclusions & Implications

Case Studies - Telecoms is lagging other Industries

  1. Case Studies from Telco
    1. Vodafone (Betavine)
    2. BT (EMP & 21C)
    3. Akamai
  2. Case Studies from Other Industries
    1. Amazon
    2. Google
    3. Ebay
    4. Betfair
  3. Conclusions & Implications

Making the Change

  1. Key implications and recommend actions for
    1. Fixed and Mobile Operators
    2. NEPs
    3. IT Vendors
    4. Investors


  1. Platform Definition
  2. Platform Options
  3. Platform Sizing
  4. Lessons from Other Industries
  5. Making the Change


  1. Glossary
  2. Research methodology
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Standardising the Definition of ‘Telco 2.0’

The Telco 2.0 team has been travelling a lot recently - spreading the gospel and testing response. For example, some of us were in Dallas last week for the TM Forum’s Management World Americas event, a big show of 1500 people that has traditionally catered for the OSS/BSS industry. The TM Forum is growing in stature fast as its software standards are increasingly being adopted by the cable and media industries as well as telco.

We were invited to sit on a keynote panel on the first day to talk about ‘Telco 2.0’, along with IBM and Oracle’s global communications sector leaders and BT’s CIO. We then took part in a closed-doors session for operators only - CIOs/CTOs from most of the biggest players in the market. Finally a ‘masterclass’ the following day, looking at ‘the future of telecoms’. In the sessions we tested a new definition of ‘Telco 2.0’ (see slides below) which we’ve been working up over the last few months (esp. following the summer research programme on business models). It seems to be going down very well: “new and progressive” is a common refrain. “We’re doing some of this already, but you’ve clarified the commercial rationale and described a coherent end goal.”

Our focus has been to try to make it very SIMPLE without being simplistic. We’ve found that there is a growing number of people (vendors, trade bodies, pundits, senior industry execs) saying similar things, but we are all using different (and incomplete) ways of saying it. We are starting from different points, or drilling down too quickly into our different domains of expertise.

There’s a lot of talk of ‘the new business model for telecoms’ but no clear and shared definition of what it is. “It’s a bit like the G-spot”, we said flippantly on a panel the other day, “everybody thinks they know what it is, but no one can quite put their finger on it.”

So, we feel that in an industry that thrives on standards, we should create a standard for describing ‘the new business model’. Here is a very short TV interview that describes the concept at high level. And below is a short slide deck that we’ve been socialising among leading figures in the last few weeks, which hopefully starts the debate. Please do share it around, and email us back with comments and ideas (watch this space for details of the wiki!). Our next project - from now to our next ‘Executive Brainstorm’ in April 08 - is to bring this to life by analysing the potential use cases and business cases, and looking at the practicalities of implementing the concepts. ie. to start to build a roadmap for the change that’s needed…

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Market Dynamics - UK Broadband, Q3 07

This is the first in a new series from Telco 2.0 looking at commercial developments in important Markets. We start with Fixed Broadband in the UK because it is consolidating fast and the players are starting to differentiate their bundles through Value Added Services.

In the future, we will be examing other interesting markets around the world: fixed, mobile, media, technology, mature and emerging.

Let’s kick off with some key stats just in from UK players for Q3 2007:


The main feature of UK Broadband in Q3 is the continued consolidation of the market: at the beginning of 2007 there were approx. 1.6m customers (11.5%) using smaller ISP’s and now there is only 650k (4.1%). This consolidation has been driven both by ISP acquisition and the cost advantage of facilities based unbundlers. For example, Tiscali’s market share gain has been driven by the acquisition of Pipex and Sky is the fastest growing ISP and offering prices that no reseller could match.

The UK market example creates a real dilemma for regulators across the world: prices are reducing as the market consolidates into an oligopoly creating huge barriers to entry through economies of scale for new entrants. The other feature is that approximately 30% of homes in the UK, which are outside of the economic area for unbundlers and cable TV, will be left with far lower choice and higher prices. The extreme example of this is seen in Hull, which is the UK’s only municipal network and owned not by BT but by KCOM. In Hull broadband prices are higher than elsewhere in the UK and choice is limited to one supplier.

Although the UK market is clearly in the “land grab” stage of market evolution, we are seeing a couple of ISPs position themselves for the next phase of market evolution where a differentiated product set and targeting specific market segments will be vital. The clearest example here is BT which is differentiating itself with storage, security and video solutions whilst at the same time using its Plusnet subsidiary to launch services targeting the gaming niche. The biggest niche of all is the SME sector and here we see both Tiscali and Sky retaining different brands, Pipex and UKOnline, to offer different product and services for this sector.

Another market evolution is the emergence of third party wholesale services. The best example of this is that Sky use Google as their email provider paying them a fee for the service and sharing the advertising revenue generated. We at Telco 2.0 expect to see the emergence of much more of these types of “outsourced” services in the coming months.

The other clear story emerging so far is that fixed and mobile convergence is not proving to be a successful strategy in at least terms of market share, both Virgin Media and Orange market shares have gone backwards over the current year. Interestingly the two main mobile players, 3 and T-Mobile, who have championed a Fixed-to-Mobile broadband substitution policy with cheap datacards and dongles and reasonably priced access charges are the two mobile operators having the most success. We at Telco 2.0 believe that this “Fixed-Mobile” broadband substitution trend will continue, but accept that it will appeal to more than a small niche of the market.

In summary, we see the market continue to consolidate with choice of providers becoming more limited especially in rural areas. We also see the beginnings of the next stage of the market with more and more services targeting specific niches being offered over broadband and the emergence of a healthy wholesale market for some of these services.

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November 14, 2007

Q&A on ‘Future of Broadband’ analysis

Following our earlier post on the ‘Future of Broadband’ keynote presentation given at the Telco 2.0 event last month, we’ve responded below to a sample of the questions we captured in real-time from the participants via our ‘Mindshare’ collaborative technology.

We’ve grouped them into 7 sections (Retail, Wholesale, Regulation, User Proposition, Business Models, Infrastructure, Other Industries). (Note: More detailed reports and summaries from the rest of the Telco 2.0 event brainstorming will be available privately to event participants in the next few days).

1. Retail pricing and packaging

Q: Why is Korea going back to metered? Goes against the theory of the carrot…
A: Transit and network capacity upgrades ultimately do cost money, and low-use price-sensitive users aren’t going to cross-subsidise the others. Also usage patterns diverge over time (compared to dial-up’s massive spike of 2-3 hours online at a constant low bitrate) making one-size-fits-all pricing ever less attractive.

Q: Given that devices will need to be open to any network, who will subsidise the price to the end user? … The current subsidy models in some markets are responsible for putting technology into the customer’s pockets that they otherwise would not be able to afford — cf the popularity of Nokia N95 for example.
A: Not true. An artificial bundling of a credit scheme, device and service can be picked apart. Plenty of other expensive consumer electronics are sold on credit or hire purchase.

Q: Some hotels (e.g. Marriott) already have FREE WiFi as competitive differentiator…
A: So wouldn’t they like some more revenue from mobile operators to allow direct roaming, and also for the operators to avoid having to buy spectrum and backhaul for all that EV-DO traffic?

Q: In fact, today I can sign up with BT Openzone and roam onto other WiFi hotspots in lots of hotels, airports etc. Same for mobile phone use abroad. So does this model already exist?
A: Partly, since the credential follows the user, but try signing onto a hotspot with both your laptop and mobile at the same time and you might find that the number of simultaneously provisioned devices is limited. Mobile roaming is still a line-based approach, not a user-based one where every device you have is on the same account. The “Connected user” concept [see previous blog post for description of this] is a long way off unless you’re willing to settle for one converged device.

2. Wholesale markets

Q: In the “connected user” sale scenario, what incentive is there for (say) a hotel to provide WiFi Internet access to each room if the guest has paid someone else for “connectivity”?
A: Rather than getting 20% of the guests paying full retail you get 10% instead and then 70% of the other guests find their laptop and mobile automatically roam onto the wifi network and the hotel gets wholesale revenues for that. Plus they don’t have all the billing, care and collection costs.

Q: Who pays whom for what on what basis? e.g. I pay an aggregator a fixed monthly fee for unlimited access. The aggregator pays an ISP (on what basis?). The ISP pays the hotel chain (on what basis)… Isn’t the new aggregator just another player in the value chain to share the limited pot of money?
A: No, because there’s huge transactional friction in today’s market and taking that friction out creates value and aggregators share in that vale creation.

Q: You don’t pay for the soap or the sheets separately - it’s a bundle.
A: Yes, but the soap maker is selling part of the soap at retail to users at supermarkets and pharmacies, and the rest on wholesale markets. (I bet even Marriott gets its soap via intermediaries who manage all the logistics of stock management etc.)

Q: Please further quantify how 50% market growth [through new wholesale markets] can be achieved
A: It’s just based on the hypothetical question of if we removed all the friction in the wholesale markets, what would the impact be. The how indeed remains an open question.

3. Infrastructure

Q: How to ensure sufficient incentives to invest in infrastructure?
A: We’ll be controversial and say we need to stop funding passive infrastructure directly from services. It’s a different business - part of a multi-utility plastic piping company working on a 25 year planning horizon and not driven by Moore’s law. The money comes from property development businesses, business taxes, as well as user fees.

4. Business models

Q: How should ISPs cooperate with alternative distribution models such as Content Delivery Networks to maximize the value for their subscribers?
A: Probably by banding together and getting scale either as competitors (directly supplying content sites) or more likely as channels (supplying Akamai) but in a better collective bargaining position.

Q: At the moment it seems that internet content providers are getting a “free ride”. How can we change this?
A: Nobody is getting a “free ride”, just the delivery charges are being paid in a strange way that is separated from the value the end user value gets. (“Connectivity” is an input, not an output that the user directly desires.)

Q: There seems to be a recognition that new business models are required yet a lot of investment is going into existing business models - such as for IPTV. When is this going to change?
A: As soon as the markets understand there’s a “2.0” alternative the focuses on upstream (partner) revenues and not downstream ARPU.

Q: Does the [STL Partners] presenter suggest that the retail access should be turned into wholesale given the container comparison?
A: Only in part; for example, your ISP might offer a bundled (or itemised) access to Joost with a business arrangement to host/cache the content very efficiently and not count usage against a monthly cap. Joost would be party to this business relationship. Thus some of the traffic is moved from the ISP retail bucket to the BSP [Broadband Service Provider] wholesale bucket.

5. User Proposition

Q: Need to address privacy issues of user identity
A: We’re going to make a rare prediction and say that OpenID (or something similar like Microsoft’s card technology) will become a de-facto standard over the next 5-10 years and many of these identity issues will be solved. Remember that once upon a time things like directories were a “hard” technology problem.

Q: Is there a business model related to people who will not want to be hyperconnected? Is it possible to make them pay for this disconnection?
A: Yes! A great paradox of low cost distribution is an ever-increasing market in data and tools to filter out unwanted messages. One day you will pay more to filter calls than to make them; just as today you can easily spend more on software and hardware to manage email spam than to route the good messages.

6. Regulation

Q: How do you define market dominance in a market that needs to be developed, before it can be dominated. Article 82 = headache
A: Today’s unbundling regimes favour oligopoly over monopoly; the real need is “packet unbundling”, where the pipe may be dumb but the accounting is smart, and every packet can be billed to a different (upstream or downstream) customer according to a multitude of different business models.

Q: As a user I buy connectivity from an end to end provider. They pay hotels, cafes, broadband providers for connectivity. So, it would be a bit like Oyster (London public transport payment) card then, yes?
A: Yes, a little. Many bus companies are part of the Transport for London system, but their operating license states they have to participate in the common payment system. Likewise, smarter regulation could make a big difference here in telecoms. For example, look at how roaming works: rather than bidding for my business when I land in a new country, operators are forced to access me indirectly through an uncompetitive wholesale market. A particular market structure was baked in with the SIM technology. These new B2B wholesale markets are immature enough that the playing field could be tilted towards more vibrant competition than the typical two fixed access incumbents or four wireless ones would suggest.

Q: Given the pace of technological and market change, isn’t it unrealistic to expect a regulator to have some sort of oracle-like view of the future and to be able to steer the industry in that direction?
A: Yes, but given that today’s industry is highly regulated, it’s inevitable that even a more laissez-faire approach means interventions, even if simply by omission, to act against those with historic market power. However, a great deal of regulation does appear to have the accidental effect of entrenching existing industry structures.

Q: What are the implications for regulation? Given this much commercial disruption, should the regulator just sit back and wait to see how the market evolves, or should the regulator play a more interventionist role, helping to facilitate the shift towards greater exploitation of wholesale markets for example?
A: Unfortunately, there’s no “neutral” bit of land for the regulator to squat on whilst waiting. Even doing nothing is in effect taking a position favouring the status quo.

7. Beyond telecoms

Q: What are the forces that drove the changes in the shipping model and what are the parallels in the telco business?
A: The standardised container/packet enables easy and efficient interchange between modes of transport. So the margins move to the interchanges (e.g. Googleplexes, edge cached set top boxes) rather than the interconnect between them. Also the value-based pricing regimes break down as it’s impractical to open up every box/packet.

Q: What upsell opportunities do you see in the network business if you compare it to a transport or container company selling insurance for what they are carrying?
A: The opportunity is to be like, say, BT Global Services where you have in-house delivery capabilities (scale and low cost) but will put together highly tailored “logistics” solutions for delivery of business processes that cross many transport (network) types.

Q: Where is the UNLIMITED issue in the container industry… does the analogy really work
A: Precisely - you buy capacity on demand. However, you can bet that large logistics companies do commit to capacity in advance, which is effectively the same as “unlimited*” (i.e. capped).

These questions, and many, many more are analysed in the our forthcomng report. More details here.

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November 13, 2007

CDNs: A Logistics Service for the Digital World

One of the key lessons of our current research activity is that Telcos (fixed and mobile) and CableCos need to better understand CDNs (Content Delivery Networks): in particular how they can improve operator economics and help enable a better service for customers (upstream and downstream). Here is your CDN primer (it builds on our previous article):

In the global economy, physical goods are usually produced in one country and consumed in another. The transportation which delivers the goods from the producer to the consumer is becoming an increasingly complex affair especially as the producers and consumers tend to be on different continents. There are a multitude of possible routes whether by road, sea, rail or air and a number of borders to cross. Today, most physical goods companies operating in a global company will buy in third party services from a logistics expert to assist in delivering goods in a cost-effective and timely way.

In the digital world, content is produced in one place and consumed in another with more and more the transportation system being the internet. The problem is that the internet itself contains no guarantee of quality and therefore the user experience is extremely variable and the even bigger problem is that it is horribly complex to deliver an improved user experience. Furthermore, as any large scale content producer will attest it does not require a single skill set to fix, because the problem is both computing and networking. Just as in the physical world, experts are around to help and in the information world they are called “Content Delivery Networks” or CDNs.

In the physical world, most logistics companies don’t own any of the big shipping containers or ports, they do however book capacity on the ships, have agents operating in the ports and occasionally own warehouses providing temporary storage for goods in route. In the digital world, most CDNs book capacity on the major internet routes and have servers, providing temporary storage, located at strategic points which are determined by using the intelligence of its agents.

The key to success of any CDN is applying its intelligence to deliver digital content faster and cheaper than the content owners could do themselves. This is in effect the same as most wholesale services in the world expect of course in the digital world the maths is more complex.

Akamai is the Grandfather of Content Delivery Systems and for anyone thinking that they are new phenomena should remember that the seed for Akamai was planted in 1995 when Sir Tim Berners Lee, who invented the World Wide Web, foresaw congestion would be a problem with the internet and challenged colleagues at MIT to invent a better way of delivering internet content. The company and technology has survived the bubble era and in fact today is more important now than ever as the internet itself become more complex and the more content than ever is delivered.

ak_2.PNG Source: Akamai SEC Filings
*Operating expenditure exclude goodwill amortization and write-offs in 200 & 2001
** Cashflow equals Cash Provided by Operations minus Cash Capital Expenditure, both plant & property and internalized capitalised software
*** The 2007 estimate is based upon actual 9 months results to Sept-07 and the estimate for 4th Quarter based upon actual 3rd Quarter Results.

In 2006, Akamai had a turnover of US$429m and Operating Profit margin of 19.4%. This year my estimate is US$614m turnover and margin of 21.1%. Turnover and Margins do not seem excessive especially as it is considered that Akamai deliver 10-20% of the daily world internet traffic. The business does display scale properties, but not excessively so. The feature of 2007 is that growth is still strong, but also fixed asset investments have increased as Akamai is obviously building its platform out to cope with the increase in demand coming from traffic increases.

Akamai is actually considered the premium CDN and accordingly charges a premium for services. Dan Rayburn of streamingmedia.com provides frequent estimates of CDN pricing. For example on August 2007, he estimated that prices ranged from US$2/GB for a 1TB/month commitment to US$0.12/GB for a 100+TB/month commitment. Of course, prices vary according to contract length and additional services purchased, but pure content delivery and traffic offload from your existing datacenter is easily affordable for many content providers.

Current “Dan Rayburn” Prices:

Cost and Volumes based upon common CDN objects:

The growth of Akamai has led to an influx of new industry entrants. Some entrants have focused on specialized needs within a particular industry eg CacheLogic looking at software updates and others have focused upon leveraging their downstream assets eg Level3 developing a CDN on top of their of their fibre network. We expect other specialist CDNs to appear focusing on regional market challenges eg a CDN for Africa. This exactly mirrors the market structure of logistics companies in the physical world.

The current key ingredient for success is the cost and quality of delivery of every bit and this is purely reliant on the quality of each operator platform. Most CDN platforms effectively rewrite some of the internet protocols, for example the notoriously imperfect BGP protocol, for intra-platform communication. The main service from Akamai has evolved over the years and is now a complete platform which is typically integrated into the core content provider applications.

The closer the platform is to the end-user the better the performance to the end user. Most CDNs try to be hosted deep within networks. This has a three fold benefit to the network operator: first they get revenue for the hosting, secondly it reduces their backhaul costs and finally end-user experience is improved.

In summary, we like CDNs at Telco 2.0 and think all network operators, including mobile, should be looking at integrating them into their networks for the following reasons:
* they deliver a benefit to everyone: users, networks and content owners
* they offer an perfect example of how people can innovate on the internet and build and offer services on a wholesale basis
* some advanced CDNs, such as Akamai, provide a glimpse of the future as services evolve into platforms.

There is much more detail around internet delivery systems and their relative economics in the forthcoming Broadband Business Model 2.0 report, including pure P2P systems such as the BBC iPlayer, topology aware systems such as Joost and iptv systems such as the BT Vision service. We also look at non-internet delivery systems such as the hybrid satellite and p2p Sky Anytime service and the cable network based Virgin Media Video on Demand service.

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November 12, 2007

Ring! Ring! Monday ‘Hot News’, 12th November

In this edition of Telco 2.0’s ‘Hot News’ : Viviane Reding wants the power; The iPhone fails to explode in Europe; Who needs Google Android when we’ve got LiMo?; TD-SCDMA gadgets, at last; T-Mobile Shadow under test; 900MHz 3G is here; Sprint and Clearwire fall out; Helio burns yet more cash; BT buys Sonus kit; COLT buys an IMS. Plus, ‘Telco 2.0 Recommends…’: the best from last week’s blogosphere.

Digital Politics and Regulation

Reding wants the power…the power to unbundle all Europe.

Telco 2.0 Comment: Proposed; a single regulator for everything that’s European and telecoms, with you-know-who in charge. It’s a fearful vision if you’re Telco 1.0, and pretty scary if you’re Telco 2.0, come to think of it. Expect much more structural separation if this happens.

Telstra’s struggle with the Australian government goes on…and on…

Telco 2.0 Comment: It’s one of the most poisonous regulator-carrier relationships in the world, so we’re not sure Phil Burgess’s suggestion to “make love not war” is even wise.

Telco 2.0 Strategy

Sprint’s WiMAX JV with Clearwire is dead; it’s an ex-parrot. Can the cablecos resuscitate it? Or perhaps the whole idea is doomed?

Telco 2.0 Comment: It’s been all Sprint/Clearwire, all the time this week - the big JV is off, and both parties are blundering ahead on their own hook. Obviously this is a symptom of the roiling mess at Sprint, but it throws doubt on both parties’ business models, especially Clearwire what with being a pure-play WiMAX network. So far, they are desperately seeking an anchor tenant, and the renewed interest in the cablecos is an effort to find just that. Alternatively, Google might just get involved as part of its carrier-deterrence strategy…or else they might even consider a shared infrastructure model? Now that would be Telco 2.0.

Helio the MVNO burns more cash; SK Telecom is called to the bank.

Telco 2.0 Comment: Just like Earthlink’s metro-WLAN disasters are a cautionary exhibit about the perils of doing big WLAN deployments without any clear business model, their MVNO is turning into yet another exhibit on how MVNOs aren’t necessarily easy. Perhaps the lesson is that being a telco is hard and all the easy options are wrong?

Technology Disruptions

iPhone hysteria in the UK; not!

Telco 2.0 Comment: After all the fuss - the expected iPhone mania in the UK fails to explode. At least, however, O2 can say that their postpay subscribers numbers are going up.

iPhones only exist if you believe in them; for everyone else there’s this script.

Telco 2.0 Comment: Perfect, if not quite a telco mashup - it’s a script that removes all mentions of iPhones from your daily web diet. The problem is the people who want the opposite; one that removes all mentions of everything else and replaces them with “iPhone”.

TD-SCDMA: an actual phone!

Telco 2.0 Comment: Samsung and others have a breakthrough - an actual, real TD-SCDMA device!

Android; does it really exist?

Telco 2.0 Comment: It’s a tough way to put it, but it does express an important truth. Google’s Android is still very vague indeed - whether it is an applications environment, an SDK, a full-blown operating system or what is still a mystery. And what about LiMo, the mobile Linux platform that is actually in some phones? Eh?

Elisa flips on 900MHz 3G.

Telco 2.0 Comment: Spectrum refarming is here, it seems, even if there is currently only one 900MHz UMTS device on the market. A useful reminder that even owning spectrum is no security against the great price plunge.

Portals, Partners, and Platforms

BT buys Sonus kit; zaps 5 kilomanagers

Telco 2.0 Comment: BT buys another plank for the platform, in the shape of Sonus’s access controllers for the edges of its not-IMS IP network. Meanwhile, it continues to reshape itself; this year it actually expects to increase head count, as the 5,000 ex-managers going out will pass a somewhat larger number of new hires in customer service and Global Services IT coming in. Platforms need fanatical support.

COLT buys an IMS

Telco 2.0 Comment: We got one! We got one!

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Beyond bundling: the future of broadband

This is an edited version of the keynote presentation of Martin Geddes, Chief Analyst at STL Partners, at the Telco 2.0 Executive Brainstorm in London last month. It provides some initial findings from our research into future business models for broadband service providers (BSPs), including our recent online survey. (The summary results will be mailed out to respondents in the next few days.) Those wishing to find out more may want to take a look at our forthcoming report, Broadband Business Models 2.0.

To save you the suspense, here’s the headlines for what’s upcoming for the telecoms industry, based on what insiders are saying through our survey and research:

  1. Operators are going to face a slew of non-traditional voice service competition. To corrupt the words of Yogi Berra, “The phone network? Nobody goes there anymore, it’s too crowded.” The volume may linger on, but the margins in personal communication will move elsewhere.
  2. Content delivery is a logistics problem that spans many distribution systems. Those who can solve the delivery problem by sewing together many delivery services, rather than those focused on owning and controlling one channel, will win.
  3. Wholesale markets in telecoms are immature and need to evolve to support new business models.
  4. Investors aren’t up for more “loser takes nothing” facilities-based competition capex splurges. Time to look hard at network sharing models.

So, read on for the background and evidence:

Background to the survey and research

Our ingoing hypothesis is that telecoms - fixed or mobile — is a freight business for valuable bits. This could be via traditional voice networks. Broadband is another means of delivering those bits. It includes Internet ISP access, as well as other services such as private VPNs and IPTV.

Broadband competes with and complements other delivery systems like broadcast TV, circuit-switched phone calls and physical media.

Just as with physical goods, there are lots of delivery systems for information goods. These are based on the bulk, value and urgency of the product - from bicycle couriers to container lorries for atoms; phone calls to broadcast TV for bits.

As part of our research we’ve also been looking at how other communications and delivery systems have evolved commercially, and what the lessons are for the telecoms industry. After all, broadband as a mass-market business is barely a decade old, so we can expect considerable future change. In particular, the container industry has some strong parallels that may hold important lessons.

Physical goods and the telephone system have developed a wide range of payment methods and business models.

With physical goods we have “collect it yourself”, cash-on-delivery, pre-paid envelopes and packages, as well as express parcels, first and second class postage.

The phone system offers freephone, national, non-geographic and various premium-rate billing features. It offers the user a simple, packaged service that includes connectivity, value-added features, interoperability, support and a wide choice of devices.

Likewise, SMS packages together the service and its transport. It’s wildly popular, bringing in more money globally than games software, music and movies combined.

The problem is that this has come within closed systems that don’t enjoy the rich innovation that the open Internet brings.

Internet access, by contrast, offers an abundance of goods but is relatively immature in the commercial models on offer. Broadband service providers typically offer just one product: Internet access. And they generally only offers one payment mechanism for delivery of those online applications: one-size-fits-all metered or unlimited, paid independently of services used. (There are some important exceptions — you can read more here.)

As a small example of how the Internet under-serves its users, when a small non-commercial website suddenly gets a surge of traffic it typically falls over and is swamped. That is because there’s no commercial incentive for everyone to pay for a massively scalable hosting plan just in case of unexpected demand. The telephony system doesn’t suffer this because the termination fee for every call is designed to at least cover the technical cost of carrying the call.

Oh, and don’t expect Google to host it all for free for you either - the error message in the slide above is cut and pasted from a bandwidth-exceeded Google Blogger account.

There is also a lack of incentive for access providers to invest in capacity on behalf of Google to deliver richer, heavier content (where Google collects the revenues).

The question therefore is: How can BSPs find new business models inspired by more mature distribution systems?… whilst at the same time not killing off the innovation commons that is the Internet. BSPs must both create and capture new value in the delivery of online applications and content. Being an NGN or IPTV gatekeeper is not enough.

Fixed voice revenues are declining; mobile voice is peaking; and SMS is slowing down. The theory has always been that broadband ISP services will take up the slack, but in practise margins are thin.

Our research is testing out a wide variety of alternative commercial models. For example, would an advertiser like Google pay for not just the hosting of content (via YouTube, Picassa or Blogger), but also the end-user usage on a fixed or mobile device for receiving that content?

We believe that whilst these alternative models may individually be much smaller than traditional broadband Internet access, collectively they may add up to a larger amount of value.

Survey supporters and respondents

The research would not be possible without the active support of the above sponsoring and supporting organisations, and we thank them all.

We’ve had over 800 respondents, with roughly one third from operators & ISPs; a quarter from vendors; and the rest consultants, analysts, etc. The geographic split is Europe 40%, N America 30%, Emerging 20%, Developed Asia 10%. There is a ratio of around 60:40 fixed:mobile respondents, and mostly people from commercial (rather than technical) functions.

We asked about four main areas:

  • Today’s ISP model — is it sustainable.
  • Future of voice service in a broadband world
  • Future of video service, as the other leg of the “triple play” stool
  • Future business and distribution models

Rather than assault you with dozens of charts and statistical analyses, what follows is the gist of what we’ve discovered.

Furthermore, we’re looking 5-10 years out at macro trends. You might not be able to predict Google, Skype or Facebook; but you can foretell the rise of search, VoIP and socially-enhanced online services. Even in our own industry, there can be large structural changes, such as the creation of Openreach by BT. You could probably have foretold that as vertical integration weakens there would be such organisational upheavals, even if not who and when.

Sustainability of ISP business model

What’s the future business model for broadband?

Around 20% see the current stand-alone ISP business model as sustainable long-term. This includes many senior industry figures, who cite better segmentation, tiered price plans, cost-cutting and reduced competition in more consolidated markets. It may be a minority view, but cannot be dismissed out of hand.

Around a quarter of respondents thought that broadband works as part of a triple or quad-play bundle of voice, video and data - cross-subsidised by its higher-margin cousins. This is the current received wisdom.

However, a majority of respondents say that a new business model is required. These results hold broadly true across fixed and mobile; geographies and sectors.

Which brings us to our first lesson from the container industry. Old product and pricing structures die hard. The equivalent efforts at maintaining a “voice premium” all failed. Trying to price traffic according to the value of what’s inside the container or packet doesn’t scale.

For BSPs, that means technologies like deep packet inspection might be used:

  • for law enforcement (“x-ray the containers”), or
  • to improve user experience (at the user’s request), for example by prioritising latency-sensitive traffic (“perishable goods”)

However, traffic shaping can’t be your only or main tool for the long-term; you can’t reverse-engineer a new business model onto the old structures. It doesn’t, ultimately, contain your costs or generate significant new revenues.

Broadband voice

One of the big surprises of the survey was how quickly respondents see alternative voice networks getting traction. We asked what proportion of voice minutes (volume - not value) will go over four different kinds of telephony in 5 and 10 years from now. Looking at just the growth areas of IP (i.e. non-circuit) voice, you get the following result.

It seems those WiFi phones we laugh at now are more dangerous than previously thought - maybe when 90% of your young customers are communicating via social networking sites, you’ve got some unexpected competition? (Indeed, we note that social network traffic is just overtaking the traditional email portals.)

We were also given a surprise in that respondents saw most of these changes happening over the next 5 years.

Insiders see the growth in voice traffic as being anchored on best-effort Internet delivery, which gets around 1/3 of the IP voice traffic. Using traffic shaping, offering tiered levels of priority, and using traditional end-to-end quality of service guarantees all got roughly equal share.

There are some small differences between fixed and mobile, and mobile operators might like to seriously consider offering tiered “fast dumb pipe” and “slow dumb pipe” that applications can intelligently choose between.

This all suggests that operators may be over-investing in complex NGN voice networks and services. They need to urgently work out how they can partner with Internet application providers to offer “voice ready” IP connectivity without the costly telco-specific baggage of telco protocols and platforms.

So what’s the lesson from container shipping for the broadband voice community?

At the same time as containers where being adopted, some ports doubled-down on the old business model and built better breakbulk facilities - and lost. Manhattan’s quays are gone, Newark has replaced it.

Others waited to become “fast followers”, and lost too. London went from being one of the world’s busiest ports, to zero activity. Dubai did the reverse by investing exclusively in the new model, with a low cost base and high volume. (Shades of Iliad’s approach in France.)

The winners were those who staked out the key nodes of the new value chain.

There are some clear lessons here for telcos and their NGN voice networks. The cost of broadband access technology is dropping, capacity is rising, and the voice component’s value is decaying towards zero. Furthermore, session control (the software part of the voice application) is just another IT function that runs inside a big server, and isn’t something you can charge for above hosting costs. It has the economics of email, and that’s mostly given away for free. So IP voice isn’t adding anything to your triple/quad play bundle, and can only be justified on the basis of reducing cost in the old business model. An IP NGN voice service that’s still selling metered minutes does not constitute a new business model.

Broadband video

The survey results for video are a little less dramatic than for voice and follows received wisdom more closely. Overall respondents endorsed Internet video as far more of an opportunity than a threat. (Only in telecoms can a significant proportion see more demand for their product as a problem! The potential issue is that video could drive up costs without sufficient compensating revenue.) A long slow decline for broadcast TV and DVDs is matched to a slow ramp-up in various forms of on-line delivery. Every form of Internet delivery, from multicast IP to peer-to-peer file sharing gets a roughly equal cut. There were some things to watch out for though…

The opportunity is to become as supplier of advertising, e-commerce, caching and delivery services for a variety of video portals, not just tied to your own. This isn’t surprising; can you imagine a Web where there were only two portals to choose from, both owned by the network owners? The same applies to video.

Economic migration, cultural fragmentation and user-created content ensure that we’ll need a diversity of aggregation, recommendation, filtering and presentation technologies.

Given a choice between building a closed IPTV solution, or an open content platform, the response was well in favour of the latter as the more profitable to run. (The slow ramp up of BT’s Vision service suggests its success is more likely to be based on the “push” of analogue switch-off than the “pull” of the telco brand as a TV provider. Why do no telco TV plans centre around external entrepreneurial talent and innovation?)

Both options beat the alternative of disinvestment in video delivery technology. So fixed and mobile operators are well positioned to help enable and market video, just not “TV over IP”. That’s the steam-hauled canal boat, when you’re supposed to be using IP to build a railroad. It seems telcos are over-investing in emulating broadcast TV and under-investing in the unique nature of the online medium.

P2P and “over the top” are here to stay. You deal with the costs by offering more profitable alternatives, not by punishing your most voracious customers. (See our article on Playlouder as an example of how to do it right.)

In music, Apple’s iTunes captured the key bottleneck in the distribution chain. Could the same happen for online video?

We gave respondents a choice of four scenarios:

  • Direct to user from the content author or publisher
  • A single dominant player
  • A fragmented market dominated by telecoms companies
  • A fragmented market dominated by non-telcos

Our respondents say that the market is likely to be fragmented with many aggregators and non-carriers will dominate. Again, “triple play” doesn’t capture the richness of the business-to-business model required with many partners in the distribution and retail value chain. How will Telco TV satisfy my wife’s taste in Lithuanian current affairs and my interest in gadgets and economics lectures? It can’t.

Our take-away from the shipping industry is that when it comes to shifting bulky stuff around, big is good and bigger is, err, gooder. Networked infrastructure businesses have strong increasing returns to scale. There’s no point in building a new port anywhere near Rotterdam because that’s not where the other ships go. There’s a good reason why Akamai takes the bulk of the profit pool from content delivery networks — their one is the biggest.

Network ownership models

Compared to today’s dominant models (facilities-based competition and structural separation), respondents rated a third ownership model - co-operatives of telcos - surprisingly highly. The two currently dominant models remain on top.

The issue is how to structure the vehicles for mutual or co-operative asset ownership. The financial industry has already created structures that allow shared operational businesses, either mutually owned or as private special entities. Furthermore, they’ve managed to preserve barriers to entry. To become a member of the VISA network, you need a banking license. That costs a lot of money.

Telecoms and the Internet business have some common structures around numbering and interconnect, but could emulate these other models from other industries.

The arrival of containers shifted the balance of profit away from the shipping lines and towards the ports.

In terms of telecoms, it’s where the content is originated or goes between delivery systems that matters - from CDN to broadband access, from broadcast to DVR. That means every Googleplex and content delivery network that gets built puts Google or Akamai at a massive advantage, since everyone wants to peer with them.

Traditionally it has been long distance and access networks that have dominated telecoms economics. AT&T’s early years found it the only owner of a long-distance network and thus able to negotiate very advantageous terms in buying up local carriers into the Bell system. It mistakenly help onto the long distance network just as the bottleneck shifted to the access network. At the moment the US sees a duopoly in access networks, and supernormal profits. Wireless carriers enjoy an oligopoly in most markets as a by-product of spectrum licensing.

However, Europe is moving towards structural separation or open access of fixed networks. Homes and offices offer WiFi or femtocell bypass options for cellular. Over time, local access ceases to be such a bottleneck. Furthermore, there are many physical paths and proliferating technologies and suppliers hauling data between the distant points that want to be connected up — be it transoceanic cables or competing wireless backhaul technologies. So the owners of the transmission networks don’t enjoy the benefits. It’s the owners of the places where traffic is exchanged between delivery systems that do, since those feature increasing returns to scale and dominant suppliers.

What is the product we are selling?

Today operators expect you to go out and buy yet another access plan for every device you touch or place you make your temporary home. They sell “lines”, either physical, or virtual (via a SIM card). Is this really the right way for the future?

All I want to do is connect my phone and laptop to the Internet wherever I am - but I get different prices and plans depending on which combination of device and access technologies I use - yet all from a single vendor. (The first is using my phone as a 3G modem over a USB cable; second is a separate 3G USB modem; third is WiFi.) This creates the perverse incentive when I’m sat in Starbucks to use my phone as a modem for my laptop over the expensive 3G network.

Also, I might be a peer-to-peer download lover, and hopelessly unprofitable. Or I might just want to check my email and surf the web a little on my mobile. How can you rationally price this product? What are the alternatives?

We gave users a choice of 3 alternatives (above) as to how broadband connectivity is provisioned. Should we sell you “unlimited browsing”, but listening to Internet radio is a separate charge? Or should we price access according to the device, but not make the plan portable between devices? A data plan on a basic featurephone would differ in price from a smartphone, Internet tablet or laptop. Or should we just give the user a set of credentials that activates any device or network they touch and bills that usage back to them?

The preferred one was to offer users a connected lifestyle, regardless of devices, applications or prices.

BT’s deal with FON is an example of a step towards this goal. Picocells too have the potential to upend the access line model. In terms of immediate actions, mobile operators should recognise the trend towards divergence and users with multiple handsets. Don’t make me swap SIMs around when I go from my “day phone” to “out on the town phone”. Give them a common number and interface.

New, more liquid, ways of combining together devices and networks for sale would require wholesale markets to evolve.

We asked what impact it would have on BSP revenues if all the friction were taken out of the wholesale market. Anyone who wants to come along and build an application with connectivity included in the price would be able to source their wholesale data from any carrier. You don’t have to be Yahoo!, Google or RIM to negotiate a deal with every carrier in the world, or make one-off special billing integration.

The effect? A 50%+ boost in revenues, which has a commensurately greater effect on profit. How much value is the broadband industry leaving on the table because of its inability to package up and sell its product via multiple channels?

Even more profitable than the ports are the agents who arrange the end-to-end logistics and supply chains for their customers. In telecoms terms, it’s the operator who can assemble a multitude of fixed and mobile networks, content delivery systems and B2B parterships with the application providers that wins.

For telcos, the critical development to enable personalised packaging of connectivity, applications and devices is to build richer wholesale models. The hot activity will be in the B2B markets, not direct-to-user. The failure of most MVNOs has shown that you don’t just want to create “mini me” telcos, but to enable more granular offerings.

Conclusions and summary

Telecoms is going to move to a multi-sided business model. Google are as likely to be paying for the full delivery of the ad-supported YouTube video as the user is. The telco will also feed Google usage and relationship data to help target advertising. Google might use credit data from the operator to manage its own fraud and chargeback risk on its checkout product. Telcos are logistics companies for data, helping the right data to be at the right place at the right time. This is completely different from being a “dumb pipe”, wannabe media company or end-user services provider.

When you buy a new electronic gizmo, it typically comes with batteries included. The battery makers have learnt to supply batteries wholesale to consumer electronics makers, as well as to end users. Broadband needs to evolve to add “connectivity included”, with the right quality and quantity packaged up with the application or content in ways that the user finds easy to buy. Today’s product is selling users a raw unprocessed commodity, which is serving neither the interests of the users, merchants or operators.

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November 7, 2007

Platforms = success in Web 2.0 and Telco 2.0?

It’s one thing to exhort business model change and write about platforms and better telephony and Telco 2.0 all day; but what about the financial results? So, here’s a chart we made earlier. It shows the change in the share prices of 6 major telcos over the last 24 months; from top to bottom, MTN, AT&T, BT, Vodafone, Sprint-Nextel, and Deutsche Telekom. You may recall that we did a similar exercise back in November, 2006; our conclusions back then are borne out by the results.


It should be pretty clear that they fall into two groups; the Group of Success and the Group of Stagnation. If you were feeling dramatic, you could even borrow a soccer term and call the latter the Group of Death, the one in which the teams are most evenly matched; no-one is safe.

MTN’s go-go performance should come as no surprise; they count as the world experts on emerging markets mobile and are also quite innovative. (The anomalous downward spike was from a plane crash involving senior executive staff.) They are following a “Telco 1.0” strategy of vertical integration because that is precisely what the market requires. Forget “horizontalisation” and clashes with the consumer electronics and IT giants; in many markets MTN is one of the largest electricity generators, just to be able to operate its networks. Just as Henry Ford once owned the rubber plantations, all emerging industries require entrepreneurs to facilitate a whole supply chain as well as often to work on demand creation. Nokia sends trucks round India demonstrating its services. These immature markets form natural barriers to entry.

AT&T has been able to reconstitute its old monopoly over large parts of the US. It’s a Telco 1.0 where there naturally should be none. So far, so good — but a change of party in power and some populist corporate bashing could present shareholders with significant political risk. Could AT&T survive with its current cost and product structure if Unbundling 2.0 came to the USA?

BT’s advanced business model and technical strategy have been repeatedly praised on this blog. Most notably, they’ve played a perfect combination of defence (against the regulator to protect their legacy cashflows) whilst restructuring the business in ways that wean the retail and services side off monopoly rents of the copper access network. The shareholders get the cream without the company’s culture getting fat.

On the other hand, Vodafone, DT and Sprint are all in the business of being just another really big telco; even if they are all beginning to think about how to get out of it. All three remain highly reliant on voice minute margins in fiercely competitive markets.

But surely, however far we go with Telco 2.0, we’ll never catch up with Google? Will we?

Think again.


Here’s the same chart, but with Google replacing AT&T. Who would have thought that BT shares have kept pace with Google for most of the last two years? MTN, again, shows them all a clean pair of heels.

And just to ram home the point, here is a chart comparing leading Web 2.0 and Telco 2.0 players. The companies are, again from top to bottom, MTN, BT, Google, Amazon.com, Deutsche Telekom, and eBay.


Yes; Telco 2.0 can beat the pants off Web 2.0. But what is especially interesting here is exactly which companies in each group have prospered; MTN is a special case, but BT is an ex-nationalised, 100% penetration, Western European telco like DT. Amazon.com is in the business of selling stuff over the Web in great quantity and helping others do so; so is eBay.

It’s BT, Google, and Amazon.com, though, who have mastered a platform strategy based on topline IT infrastructure, user-driven innovation, and partnerships.

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VoiceSage and the business of…business

One of the most interesting companies that took part in October’s Telco 2.0 Executive Brainstorm is VoiceSage, a small Irish firm that develops innovative enterprise applications using telco services. This was a major theme of the event - if you want MySpace for monkeys on LG Prada phones, or the nth twist on music downloads, you’ll be fine asking Vodafone or Sprint, but if you ask anyone who gets Telco 2.0, they’re probably working on something for business users.

There is a very good reason for this; compared to telecoms, most of the trades that conventional wisdom thinks will provide growth and margin in the future are tiny. Telcos could completely crush the ad business - eat every ad agency in the world - and notice only a minor blip in their revenues. The telecoms industry could take over Hollywood and barely feel the bump, like some grey-suited monster lumbering over the Los Angeles canyons. For an encore, they could crush their way up the coast to San Francisco and eat the computer game industry. And it still might not be enough.

But if you decide to aim for businesses instead, the game changes dramatically; then, the addressable market is gigantic, being the entire damn economy. VoiceSage specialises in messaging applications; they market to companies with large customer-facing activities, offering improved call-centre productivity, a reduction in the number of inbound calls with trivial inquiries, better credit control, and greater efficiency in customer service.

They consider their applications as mashups, assembled quickly from standard components to meet specific customer requirements. For example, Indesit delivers washing machines and similar white goods; combining mapping, GPS-equipped devices, and messaging, VoiceSage gave them the capability to control their logistics very finely and cut the number of times the delivery van arrives and finds the customer isn’t there, or the customer waits all day for the delivery and the van isn’t there. Further, the system made it possible to trace goods all the way through the supply chain and issue alerts based on specific criteria.

This is why Telco 2.0 is keen on the idea of telecoms as a logistics business; containerisation created essentially two kinds of company in shipping, big infrastructures and logistics organisers. Big infrastructures, both ports and shipping lines, move vast quantities of undifferentiated boxes around the world; logistics organisers arrange things so that Company X gets a box of widgets to a specific customer at a specific time. And the most successful company in the field, AP Moller Maersk, owns both kinds of businesses; docks and ships on one hand, but also customer representatives, salesmen, and serious IT on the other. The analogy with a telco ought to be obvious.

Interestingly, one of the businesses that really could benefit from VoiceSage’s solutions, and others like them, is - telecoms! It’s part of being a telco that one of the biggest OPEX line items is the cost of getting field-service technicians out to the customer premises to install/upgrade/fix/remove lines and equipment, investigate faults, and maintain the infrastructure. Now, if you could only get rid of all the truck rolls that have to be repeated because the truck is late or the customer isn’t there…

Sometimes, of course, the link between logistics and telecoms innovation is more obvious.

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November 6, 2007

Broadband Business Models Survey - Upstream Revenues are Key to Growth

For the 800+ experts around the world who took part in our broadband business models survey, the summary results presentation will be sent out next Monday. We’ll be exploring in depth all the issues raised from the survey (and the Executive Brainstorm) on this blog.

In the meantime, here’s a sneak preview of the survey results:

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November 5, 2007

Ring! Ring! Monday News Analysis, 5th November

Telco2.0 Strategy

Telecom NZ profits down 18 per cent.

Telco2.0 Comment: Barbara Castle once advised someone to “Think, think, think - it’ll hurt at first but you’ll get used to it”. You could say the same thing about structural separation - just ask BT.

O2 reckons 200,000 iPhones will go this Christmas in the UK.

Telco2.0 Comment: They plan to fire the iPhone starting gun at 6.02pm on Friday in the UK, and the hackers are already stocking up on coffee for the unlocking marathon that will inevitably follow. Apple executives were reportedly laughing and throwing handfuls of $100 bills around.

AT&T lets iPhone users get flatrate data roaming.

Telco2.0 Comment: iPhones love to bask in connectivity, what with their push-mail emulation and fancy voicemail. Unsurprisingly, AT&T is discovering that deploying a kajillion of them and then trying to ration connectivity is doomed to failure. They’ll now need to persuade their subscribers not to use this facility…

Technology Disruptions

OpenSocial: blessing or curse?

Telco2.0 Comment: It sounds like the best idea of the year, a standard API for social network applications that would permit both application interworking, so widgetry from Facebook could work on a MySpace page, and data interworking, so a widget on Bebo could pull data from, say, dontdatehimgirl.com and sourceforge.net. But there are a hell of a lot of caveats; it’s unclear just how “open” OpenSocial is, what Google’s commercial rights in it are, or what it’s actually for seeing as there are already good tools for this sort of thing that haven’t been adopted yet. Nevertheless, it’s another example of fantastic things telcos could be doing but aren’t. After all, telcos have more social network data in their CDR piles than anyone else; something like this could allow them to expose their voice and messaging capabilties in new contexts, and extract value from their under-exploited user data assets.

Gphone hype cranks up to a high-pitched chattering whine; more details here.

Telco2.0 Comment: It’s the GooglePhone hysteria yet again; it seems likely they’ll launch something this week, but it looks more likely to be software than a phone. If there is any truth to these reports, it could be a powerful development platform, presumably full of hooks back to the GooglePlex. No fun for the network operators there. At the Telco2.0 conference a few days ago, someone said that “the mobile industry is where PC industry was 15 years ago”. Google presumably wants to be Microsoft.

HP, Tekelec, and BEA do IMS in a box.

Telco2.0 Comment: So somebody still loves it. Anyway, this does sound an awful lot like Brough Turner and Li Mo’s remarks about IMS products that are closed, proprietary boxes that aren’t really IMS at all. In fact, if IMS is to have any value whatsoever, it was meant to get us away from monolithic integrated systems and let all kinds of elements talk to each other.

Blogwar; Dean Bubley vs MobileSociety on IMS.

Telco2.0 Comment: Beers and popcorn, please. Mobsoc comes out as an IMS true believer; Bubley sets out to bust his chops. It may be incomprehensible technobabble, but all your voice and messaging revenue is at stake.

Broadband Connectivity

Sprint Nextel wobbly on WiMAX.

Telco2.0 Comment: S/N seems to be just beginning to realise that building a huge WiMAX network optimised for fast, cheap mobile IP service could be an example of creative self-destruction. For the rest of us, creative self-destruction is just as important as the usual kind; the IBM PC being exhibit A.

Digital Politics and Regulation

Does LBS make the mobile networks the state’s new bloodhounds?

Telco2.0 Comment: Not as much as you’d think, according to Bill Ray’s summary of the law. More importantly, in Pakistan they’re not trying to track dissidents by LBS, they just switched the whole thing off. (However, some accounts speak of “intermittent” mobile service, which sounds more like a peak load problem.)
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November 2, 2007

Making Telco Events More Productive

We’ve been planning the next Telco 2.0 event (15-17 April 2008, London). We want to continually improve and develop it. The feedback and ideas we’ve been getting this week from our alumni have been tremendous. Thanks.

The best idea so far comes from Ivan MacDonald, CEO of mySay , who suggests the appoach below to liven up our panels. “Come on boffins, how can we deal with the Over The Top players…?!!”

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MSP: ISP plus Content

Our good friend Keith McMahon blogs on Playlouder, a British company which plans to offer unlimited, DRM-free music downloads to its customers who buy their DSL service. Naturally, there’s a premium associated with the music, which is the core of the business.

Now, interestingly enough, Playlouder describes itself as a “Media Service Provider” rather than “just” an ISP, which tends to confirm that their content business is part of their solution for the famous broadband incentive problem. The economic value created by widespread Internet use mostly happened after always-on broadband became available and cheap. Flat-rate broadband gives the user every incentive to use as much of it as possible; but the network operator has no corresponding incentive to create more capacity. Therefore, usage tends to increase until the network becomes congested.

Certainly, Playlouder expects their customers to run the copper hot downloading all that music; but they’re paying for it, and presumably Playlouder’s sums assume that the content charge covers the extra traffic, the licensing costs, and some margin. What they are offering, then, is connectivity plus. When we carried out a survey of industry experts recently, the idea of offering inclusive content as a way of managing costs was very popular; you can learn more in our Broadband Business Models 2.0 report when it comes out in December.

Probably some customers who would otherwise be running P2P clients full blast all the time will instead get their music from Playlouder, which converts a big chunk of traffic from the cost side to the revenue side. And even if they immediately start uploading it, well, at least the download was profitable.

Naturally, Playlouder is in a position to run its own content-delivery network, too, placing the servers that deliver the music at one of the economic frontiers within their systems. And they can also make use of P2P, by running their own peers at the same strategic locations. This sort of caching is essentially what companies like Akamai do all the time, as partners of the content creators; there’s no reason why Playlouder can’t do this as well.

So what? Essentially, there are two ways out of the broadband incentive problem; one is to decommercialise the access network, and the other is to find some way of getting more money from the heavy users.Now, the first of these options is essentially municipal or shared fibre; we end the problem by putting in so much capacity that the system will be future-proof, and get over the incentive problem by agreeing to suspend competition.

It may happen, it may not; probably it will be a long time before a large fraction of the user base is covered. In the meantime, though, something must be done - usage tears on ahead, the price war rages, and the hacks that permitted the problems to be skimmed over are worn out. It used to be the downlink that was the problem; now it’s the uplink. It used to be the case that traffic was highly bursty, and statistical multiplexing was the solution; now P2P clients are pulling all the time.

Attempts to constrain usage are very unpopular, and tend to encounter legal and regulatory issues. It’s also arguable that they are a bad idea in principle, as they tend to destroy the stupid network’s option value, the ability of innovators to experiment with new applications without being constrained by business assumptions built into the network. That leaves us with two options; one would be to stop cutting prices across the board, which is impossible, and the other would be to find new ways of capturing value from the user elite. Playlouder and gaming-focused ISPs like GameRail are showing the way; the solution must be one that makes responsible behaviour a more pleasant experience, rather than one based on coercion.

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