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January 31, 2008

Building a Monster 2-Sided Business

A large focus of our analysis currently is on two-sided business model for operators. We recently explored the opportunity for ‘Broadband Service Providers’ (fixed and mobile) from an access and delivery standpoint (we estimated a $250bn opportunity in 10 years time in mature markets alone…subject to some significant change in the industry) and are now researching how operators might build a portfolio of value-added platform, services that build on their early activities in advertising.

As well as identifying key platform opportunities and strategies and sizing the market, part of our work has involved looking at existing two-sided plays within and outside of Telecoms. Of course, the two-sided business model is not entirely new for Telcos. Fixed players have long since provided Freephone (often 800 numbers) to enterprises wishing to attract consumers. Benefits accrue to both parties - consumer pays nothing for call and the enterprise increases the volume of inbound calls. The normal business model is reversed and the enterprise is charged for receiving the call. This is akin, in the Telco advertising model, to the advertiser paying for a click on a banner or for a response to a short code promotion.

Two-Sided Businesses can be Big…

If not new, however, the two-sided business model is not well understood and is woefully underused in Telecoms. The only ‘pure-blood’ two-sided player (so far) is Blyk. Many other industries possess some very big two-sided companies. Many perform multiple roles within the value chain but here are some that (more or less) specialise:

  • Identity, Authentication & Security - Experian, Equifax, Acxiom, Verisign
  • Advertising & Marketing - Google Search, DoubleClick, Yahoo!, MSN
  • E-Commerce - Ebay, Dabs.com (interestingly bought by BT), Amazon
  • Order Fulfilment (Off-line) - UPS, DHL, Maersk, Post Office
  • Order Fulfilment (On-line Content Delivery) - Akamai, Limelight, Kontiki
  • Billing & Payments - Visa, Paypal, Amazon payments, Google Checkout, Western Union

…or Even Monstrous

One company we have explored is Monster Worldwide which has come to dominate the on-line recruitment market.

OverviewBrings job seekers and advertisers together by providing listings of jobs for prospective candidates to search and a CV list which employers can search for suitable people to fill their jobs. Also provides advertising space on the portal and newsletters.
Business ModelCharges employers for listing jobs, searching CVs and placing ads - their need and willingness to pay is high. All services free to job seeker - could be unemployed and price sensitivity is high.
Pricing (US)By City/State in US - single listing in New York City is $395. CV Search is $10k/annum for 20k searches or US$1.8k/month for 1.5k searches.

Key Stats:

  • Turnover: $1.1bn in 2006
  • 186 million job seekers in 2005 (12% of all internet users) who:
    • Spent, in aggregate, 178 million hours on Monster sites
    • Viewed job postings 2.1 billion times
    • Applied to jobs 107 million times
    • Posted 16.4 million new resumes, averaging 40,000 new resumes every day
    • Created 14.5 million new accounts

The company has grown from humble beginnings to the undisputed number 1 online employment solutions provider. Back in 1994, a small employment company called Adion developed a facility whereby job seekers could search job database using a web browser. Initially, the site was populated with job descriptions from the newspaper segment of Adion’s business with the permissions of the companies advertising the jobs. By December 2005 Monster Worldwide was part of the NASDAQ 100 (joining the same time as Google).

Monster’s strategy is to exploit (and drive) the growth of on-line recruitment advertising forecast for next 3-5 years:
Recruitment%20Advertising.png Monster benefits from online recruitment growth:

  • More volumes of seekers and employers = more revenue
  • Better economies of scale = increased margin

It is further looking to drive scale through acquisition:

  • Affinity Labs - runs vocational communities for people in certain occupations (Law enforcement, Healthcare, Education, Government, Technology):
    • Increases job seeker and employer numbers
  • Tickle Inc - personality testing firm:
    • Increases the portfolio of online services offered by Monster

Monster’s strong on-line presence in US has resulted in the company leveraging its brand through off-line partnerships with publishers of printed journals and newspapers. This dual on- and off-line strategy looks set to continue with expansion into European markets likely in he next few years.
Monster%20offline.png

Monster offers a few key lessons to operators looking to develop a 2-sided business model:

  1. The offspring can sometimes grow larger than the parent. Monster was a small off-shoot of a recruitment agency but grew to engulf not only its parent but its parent’s parent after Adion was acquired by TMP. A two-sided play which currently looks insignifcant (and likely to cannabilise the core business), just might be a whopper in 10 years time.
  2. Business model and pricing strategy is critical. Employers have money and a stronger need to get the right person for their job. Making the service free for candidates built scale fast (making employers more willing to pay - Monster charges a premium over other on-line recruitment platforms). This was similar to Google with search - free for searchers to build scale, then charge advertisers for access to them. Operators have an existing (paying) customer base and need to think long and hard about the best pricing strategy for both customer sides (service provider upstream and end-user downstream).
  3. You don’t have to be an internet player. Monster is looking to extend its on-line platform play into traditional off-line media (magazines, TV, etc.). Operators have an opportunity to compete with a similar dual-channel strategy with, for example, marketing and advertising enablers being used to support on-line and off-line campaigns.

[Ed - we’ll be analysing more examples like this and extracting lessons for telcos over the coming months. We’re also inviting some of the leading platform players from outside telco to stimulate the April event for industry strategy directors]

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Meet Telco 2.0 at Mobile World Congress

The Telco 2.0 team has a busy schedule at the Mobile World Congress 11-14 Feb in Barcelona. If you’d like to organise a meeting with our analysts please let us know. Or you can bump into us at:

Monday 11 Feb - CMO Forum. Invitation-only event for 150 Chief Marketing Officers. Focus: “Mobile as a True Marketing Channel - Realising the Opportunity”. We’ve designed the programme for GSMA and will be facilitating it using our ‘Mindshare’ approach.

Tues 12 Feb - The Government Mobile Forum. Gathering of Ministers and Heads of Regulatory Authorities from more than 50 countries. Focus: ‘Regulation in the New Communications Age’, looking in particular at the policy impact of mobile broadband. We’ve integrated some of our ‘Mindshare’ approach to stimulate debate.

Tues, 12 Feb - Yankee Group and TelecomTV’s Anywhere Cocktail Reception
* When: 17:30 to 19:30 * Where: Mobile World TV (TelecomTV) Studio, Stand # 7C95, Located in back of Hall 7 * RSVP: Please RSVP by Wed, 6 Feb to Dan Bar-Lev, Yankee Group senior regional director.

Wed, 13 Feb, 2008 - GSMA and Telecom TV Mobile Planet Film Wrap Party
* When: 17:30 to 20:00 * Where: Mobile World TV (TelecomTV) Studio, Stand # 7C95, back of Hall 7 * RSVP: Please RSVP by Wed, 6 Feb to Rachel Bailey or +44 (0)207 448 1081

Wed, 13 Feb - the ‘Joined Up Roadshow’: The Two Sided Business Model and how to build a world class mobile medium
* When: 1700 to 1930 * Where: Openwave stand, just off the main avenue, AV93-97 * Details: Location here . RSVP us for this event please.

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Platform businesses: Competing with Big Tech

When you’re lost in the cycle of product development, marketing and customer support it’s sometimes hard to see the big picture of the forces reshaping the structure of the telecoms industry. In particular, telcos are in an unfolding position of co-opetition with what you might call ‘Big Tech’ — the IT technology, commerce and services giants. These increasingly overlap with telco functions. Many of these companies have platform business models. These create value for end users as well as upstream suppliers, and extracting revenue from joining the two sides together. Think Google, Amazon, Sun Microsystems or Salesforce.com. Companies like IBM specialise in construction and servicing of platforms, even if they don’t always feel the need to own them.

We strongly believe that telcos need to form a platform around their own unique assets. But what drives the economics of platforms, how should the telco platform be positioned against those IT platforms, and what lessons can telcos learn from them?

Mass-produced IT processes for a mass-production world

It’s often been suggested that various so-called network industries exhibit increasing returns to scale; whether or not you accept Metcalfe’s law, it’s empirically obvious that the Internet years’ most significant companies have been ones that made their first priority to build scale and volume. For all the above examples, their businesses are all centred on very large IT platforms and their economic models often involve selling at very low prices, or even giving services away, in order to pull in more volume.

More broadly, it’s arguable that the history of IT saw a long phase — from the 1950s to the 1990s — in which first mainframe and then LAN computing benefited big firms, and the bigger the firm, the greater the productivity boost. IT reduced the cost of aggregating information, and therefore increased the maximum efficient size of organisations; it also permitted greater internal specialisation and the Taylorisation of many kinds of commercial and clerical processes. If you are a supermarket chain, a world-wide container shipping line, a government, a bank, or a car manufacturer, it was great. You had the capital to build the sort of IT system that made all the distinctive innovations of Japanese management practical: just-in-time delivery, lean production, global supply chains, and kanban tracking.

Spreading the benefits

Since the mid-1990s, the trend swung the other way; the Internet, and more specifically the Web, realised the potential of PCs as a decentralising technology. Small firms and individuals could now benefit; but even so, many of the real business benefits still accrued to the biggest spider on the Web, Google. Together with the other big spiders, Google had the ability to make investments in development and infrastructure big enough to create truly impressive business systems. Google aggregates vast numbers of tiny advertising opportunities up to a scale at which they are saleable. Likewise, Amazon’s mammoth IT and fulfilment infrastructure lets it aggregate more titles than any other bookseller in history.

But if you are a one-truck owner operator, you still can’t gather anywhere near the same amount of information Maersk or DHL can about where the next load will come from. Furthermore, you can’t afford to build something that could. One of the biggest barriers for everyone is the need to invent the functions the Web doesn’t have:

  • no authentication,
  • no awareness of location, presence and availability,
  • no awareness of social or legal constructs like age or jurisdiction,
  • and most of all, no awareness of money.

Market makers in information come to dominate

These absences are all opportunities for platforms to intermediate transactions and relationships. Each represents an information asymmetry, with buyers and sellers of data needs to find each other. Historically, highly profitable institutions have grown up to permit large numbers of small enterprises to aggregate such information and get rid of transaction costs: consider stock exchanges, banks, Internet exchange points, or GSM roaming hubs like Starhome. It is, in fact, the very purpose of a market. We also know that such enterprises display strongly increasing returns to scale — business follows liquidity, rather as container ships followed traffic in the 1970s, creating a small number of giant load centre ports around the world.

One of the important points this raises is that scale is doubly important; not only does traffic go to traffic, but the elimination of transaction costs implies that the marginal cost of production must itself be very low. This is characteristic of mass production. Telcos were the first businesses to handle information goods using standardised flow processes and large amounts of capital goods to achieve very low marginal costs at very high scale, the characteristic features of mass production; but beyond their staple voice business, they seem unable to get beyond extremely cumbersome and expensive job-production. Everything is a one-off.

The telco platform fills the gaps around the Internet

Equally, the big systems at Google, Amazon, IBM, and Salesforce.com are one-offs, hugely expensive engineering masterpieces. But the characteristic feature of IT post-1995 has been that really gigantic scale in infrastructure brings down the marginal cost of transactions to a level at which very small enterprises can participate. This doesn’t apply, however, to a whole realm of business processes where the things the Internet doesn’t provide are vital. Here is the opportunity for the 2-sided telco platform. Telcos have key capabilities that directly address those four Internet deficits we mentioned, by growing out of their existing assets and customer bases. The purpose of a telco is to facilitate communications.

The question is how to make these available in a readily usable form; the platform is the answer. Operators aren’t product innovators, and few will ever become successful media companies. They job is to re-package their key capabilities: transporting data, enabling payments, removing trust barriers, and offering B2B value-added services. These are sold via a platform business, which only works if you get three things right:

  • Create appropriate technical APIs, which match the platform user’s problem. Don’t offer a location dip API, do offer a service to delivery companies looking to schedule parcel drop-offs only to occupied homes.
  • Offer commercial terms of business in a transparent and efficient manner. Do not expect the platform’s users to go bizdev deals with hundreds of carriers to get global coverage.
  • Offer organisational and operation systems. Sales, training, education, care, professional services and technical support.

Removing the friction from the digital economy’s supply chain

Telecoms companies are in a position not just to compete with Big Tech, but to address a whole swath of the economy that falls beneath Big Tech’s minimum efficient scale; trading with both sides of billions of transactions, reducing the cost and friction for both parties and taking a tiny slice of each. This may seem utopian, but emerging platform businesses like Amazon are already moving towards this. Amazon’s portfolio of services now includes the ability to sell through their portal, to deliver through their infrastructure, to store information in their servers, to process it through EC2, to organise customer-support workflow through Mechanical Turk, and to bill for it through DevPay. Watch out! But even they don’t have the inherent potential that lurks in the telco databases and networks…

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Mobile Planet Party Invitation - Barcelona, 13 Feb

…and…cut! That’s a wrap! Our friends at TelecomTV and GSMA have extended a party invitation to Telco 2.0 blog readers who are coming to the Mobile World Congress in Barcelona. It’s to celebrate the launch of a new film celebrating 20 years of GSM and the social and economic impact of global mobile communications. It’s a supreme networking opportunity.

TelecomTV’s Guy Daniels, the film’s Director, travelled the globe with a film crew and is set to gather the last footage at Mobile World Congress 2008. Join TelecomTV and the GSMA at the film’s official wrap party. Munch on popcorn, drink beer and talk to some of the industry players that appear in the film, as well as those who contributed to its production. To view the Mobile Planet trailer, please click here.

  • What: Mobile Planet Wrap Party
  • When: Wednesday, 13th February, 2008, 17:30 to 20:00
  • Where: Mobile World TV (TelecomTV) Studio, Stand # 7C95, back of Hall 7, Fira de Barcelona
  • RSVP: Please RSVP by Wednesday, 6 February to Rachel Bailey at or +44 (0)207 448 1081
  • The Telco 2.0 team will be there in force too…
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January 30, 2008

Separation, Success, and Failure

We’re usually very keen on the notion of vertical separation in the telco industry. The idea is to chop the underlying network assets out of the telco in order to permit others to use them. This stops the telco locking out the competition by owning the access bottleneck. But there are many different options:

  • structural separation, often used to describe almost any separation, transfers the network assets into a new organisational entity,
  • operational separation does this and also places them under separate management control with their own profit-and-loss account, and
  • ownership separation removes them from the telco entirely.

Within those categories, there are many more shades of detail. Julian Salanave, director of telecoms markets and strategies at IDATE, recently gave an excellent presentation [PDF] on the parallels between these and some other industries.

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Source: IDATE.

Learning from others’ mistakes

It’s not only in telecoms that these strategies have been used; other network industries, specifically energy distribution and rail transport, have also experimented with them with wildly varying degrees of success or failure. The analysis of failure is always a useful practice; not for nothing does aviation put so much effort into understanding the details of accidents. Britain experienced two of the extreme examples of success and failure within five years of each other; the success was Openreach, the failure was Railtrack. (We examined the similarities between telecoms and the difficulties of structurally separated energy distribution in our recently published report on the future of broadband.)

Forcibly separating rail infrastructure, finance, operations and maintenance

We all know about Openreach, an example of operational separation at incumbent BT. Railtrack was an example of ownership separation on the railways. This in itself is not unknown; US long-distance passenger services have been operated under ownership separation since the early 1970s, where Amtrak operates the trains over individual railroads’ metals. More recently, the European Commission has been keen to push structural separation at least between trains and track. Italy and France have both undertaken the challenge, but Britain went first.

In the early years of the rail industry it operated as a privately funded infrastructure, and had many parallels with the dotcom boom. (The economics have been well documented by Andrew Odlyzko, who also has a forthcoming book on the parallels between the railways and the Internet). Then from 1948 to 1996, UK railways were a fully vertically-integrated, state-owned industry: British Railways owned trains, track, stations, signals, property, maintenance, R&D, the full monty.

The privatisation plan foresaw total transformation. Each major route or suburban network would be tendered for as a franchise, the trains themselves would be sold to private investors who would lease them to the franchisees, and the railway infrastructure would be privatised as a single company, Railtrack. The railways’ central functions were either shut down (like BR Research) or sold separately (like BR’s train-building arm BREL). In a sort of second privatisation, Railtrack outsourced the entire engineering function. Maintenance was subcontracted, as was new construction. Top management would rely on consultants for engineering advice.

It was as if the only engineers left in any position of power was the regulator, and they only engineered powerpoint charts, not train engines.

The new business model

Railtrack’s income stream came in the first instance from charging the train operators for access to the track, plus a government subsidy. It also had fringe revenues such as retail rentals on major stations, property development on railway-owned land, air rights, and the like; the original directors saw this as the main growth play. At the same time, the train operators received both fares, and (with two exceptions) subsidy. Profits at Railtrack accrued, of course, to shareholders.

The whole point of separation was to isolate non-competitive and non-marketed segments of the industry and let competition reign in the others. This implied that Railtrack, being a monopoly, must be regulated. Similarly, the individual train operators were rarely in genuine competition with each other or other modes of transport. So from the beginning, the internal market was more a case of political science than economics. The actual trains (many dating from the 1960s) were sold off at knock-down prices to leasing companies. These were run by ex-BR managers who promptly worked the system to make millions for themselves, by renting them back to their captive train operating customers.

Misaligned information, risk and incentives

Nobody had an overall responsibility for the functioning of the system; the internal restructuring of Railtrack led to a loss of institutional expertise so serious that the cost of trackwork went up by an average factor of 3.14 and stayed there. Further, Railtrack management adopted radical new practices — replacing regular inspection of the track with “fix-on-fail” — that the old BR Engineering directorate was unlikely to have sanctioned.

Critically, there was no independent safety engineering authority, nor an R&D function.

The upshot was a serious breakdown in safety. It’s one think to separate the ownership of the trains and tracks. It’s quite another when express trains start to fall off broken rails at over 100mph. This was combined with the above-mentioned surge in costs (known in the business as the Ford Factor), and abysmal operational performance.

The only genuine competition was between Railtrack and the train operators; as they were subject to regulatory fines for poor performance, their contracts with Railtrack stipulated that they could recover these under penalty clauses if the problems were the fault of Railtrack. This took no account of the fact that a train could cause damage to the track, or vice versa, or that the two sides uneasily shared control of railway stations and timetabling. It made more sense to invest in lawyers than lines.

Rather like sub-prime mortgages, separating out the parts had diffused information, responsibility and risk too far.

Turning full circle: re-aligning incentives

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Source: IDATE

After 2001, Railtrack was returned to public ownership, under a new special entity called Network Rail. Perhaps the ultimate testament to the disaster was that Network Rail immediately began to reintegrate various functions, and each step was associated with a reduction in costs. Simply, the informational asymmetry between Railtrack, the contractors, and the train operators was too great for anything like normal oversight to work. The coupling between the trains and the track was too close for this degree of separation to function. The current arrangement has seen Network Rail progressively regain powers of co-ordination over the train operators, in-house responsibility for maintenance, and responsibility for the timetable.

Lessons for telecoms regulators

Railtrack-like problems can and do exist in telecoms, even though the degree of coupling between packets and layer-one (physical) infrastructure is minimal. (You can hack into a router; you can’t hack through a cable without using an axe). We see them every time there’s a backhoe outage, especially when it turns out that the alternate fibre path was actually in the same dig next to the road as the primary. It’s very difficult for ‘train operators’ — ISPs, applications service providers, and others up at layer 3 and above — to know enough about what’s happening with the underlying infrastructure.

Similarly, we see this difference between bitstream or LLU and the alternative of vertical integration. When the exchanges, digs, and customer premises access belong to a competitor, rather than a neutral third party, this matches the problem of the train operators’ adversarial relationship with Railtrack.

Another problem, one which dogged Amtrak and the British train operators in the Railtrack years, is the question of incentives to expand. You can’t offer more trains or faster trains or longer trains without sufficient train paths, but there was a major disconnect between infrastructure costs and the funds an operator with a franchise up to 10 years could raise. Like all profit-making monopolists, Railtrack’s incentives were to restrict supply and ignore technical innovation; but it’s the very nature of infrastructure that there is no way for the Schumpeterian process of creative destruction to work on it.

Our recommendation is for regulators to be careful what they wish for. Verizon’s FiOS alone has connected more homes than the whole of Europe. We think they’ll open the platform up because it’s good business. As a regulator, focus on making connectivity more fungible by encouraging development of these wholesale markets. The ownership model doesn’t matter per se, it’s whether the network gets built and what you can do with it that counts. What that means in practise is enabling Apple to offer paid TV downloads that don’t count towards your usage cap, and for your employer to pay for your VPN traffic. And if anything’s the lesson of Railtrack and Openreach, it’s that being too religious about any particular structure is dangerous - in theory nothing could have been clearer in terms of separation than putting trains and track in different companies, but in practice…

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January 29, 2008

Customer data: Goldmine or Quicksand?

Whilst Google profitably accumulates ever more data on their users, telcos sit and do nothing with the customer data and digital identity assets they have. Meanwhile, new technology throws open the race to monetise the relationship with the customer.

In our preview of 2008 we suggested that operators should be paying a lot more attention to digital identity, specifically the emerging OpenID standard. This is an issue that fundamentally relates to business models and structural change, and is far too important to be treated as a technology issue. (We’re doing an in-depth exploration and sizing of the telco as a platform provider in our forthcoming report “The 2-sided telecoms market opportunity”.)

Before we have a (very) brief primer on the technology and it’s implications, why is this important? Digital identity sounds so abstract and technocratic. Surely you just sit this one out, and let your CTO manage it all? Or just outsource the IT nightmare and go back to thinking up new price plans and segmentation strategies?

From freephone numbers to free phone numbers

It doesn’t work that way. The Internet unpicks business models, and reassembles the fragments into new value chains. If you’re reading Telco 2.0, chances are business models are a problem you’re concerned about. If you want to understand the value of the identity business, look outside telecoms to music. The media moguls failed to understand the unbundling of the A&R, promotion, and distribution into services like last.fm, MySpace, and iTunes. The rights, medium and content were previously tightly integrated into a shiny disc. MP3 swept that all away. They thought the disc had the value, but it’s just a distribution mechanism. It was the (distinctly abstract) rights that mattered. All they had to do was sell the rights to the user for a fixed fee! Get out of the distribution business, offer all-you-can-eat music for $10/month, by any means you choose to get hold of it, and get the rights societies to fairly divide the spoils. Then sue the cheaters, as nobody will have any sympathy.

Likewise, chunks of the telephony and messaging business model will be unbundled and recycled. At the core of this process are SIM cards, phone numbers, and the directory servers that link them all together. The value isn’t in the phone call or switches or trnasmissions equipment. That’s just a distribution mechanism for human conversations, and if talk is cheap, ones and zeros representing talk are even cheaper. The value is in the permission to contact the user, being a gateway to that user, and knowing the relationships the user has. Owning the directory positions you to re-intermediate all kinds of other business processes and create value.

Operators have more and better identity assets than they think

We see operators as having unique identity data in three areas:

  • The physical devices the user has.
  • The numbers, addresses, handles or user names or aliases the user has.
  • The customer’s personal data, such as name and address.

These are the gateway to four further categories:

  • The user’s context, such as location.
  • The digital artifacts the user accumulates, such as pictures and messages.
  • The interactions the user has with inanimate objects, such as 2D barcodes, or web browsing history.
  • The relationships the user has, with people and institutions.

These assets are critical to enabling the telco to remain as value-adding part of the digital supply chain. Without action by operators, the process will be one-way, with Web players invading the functions of operators, and nothing happening in reverse. This is not a desirable outcome for either side, as network operators have deep wells of customer data that ought to be part of an online platform business, and that Web players will find costly (or impossible) to replicate. Furthermore, it is part of a fight-back strategy that picks on one of the weak points of the Web 2.0 players: if anyone is closed, it’s them. In contrast, the phone system may be vertically integrated, but it’s as open as they come.

So we’ve covered off why this is important. Now let’s take a quick look at what the technology does, and how it relates to the future network operator business model.

OpenID: What is it?

For once, the technology is the easy bit. Normally you register for a web site or service, get given an identifier (username or phone number) and some security credentials like password and favourite pet name are exchanged. Technologies like OpenID just decouple the parts, so that the service that issues your identity and authenticates you can be different from the one that relies on that capability.

The site that issues the ID is the provider, the one that relies on it is the consumer.

There is a minor change to the user experience, in that the user needs to instead register the identity they want to use as a URL, not a username. To make it concete, say I’m a Vodafone customer, and Vodafone offers OpenIDs for all its users. My mobile number is +4477771230123, and my OpenID is then http://openid.vodafone.com/4477771230123. I can go login to an OpenID site like Google’s Blogger using that as my user ID, and I’ll be redirected to a Vodafone web page to enter my password, and then sent back to Google’s service, with some cryptographic magic in the background to make it all secure.

This is different from earlier incarnations of universal or federated identity. Microsoft’s passport service tried to be a universal identity service, but no amount of business development effort was going to make every website and user dependent on Microsoft to work.

Another model was from the Liberty Alliance, which would let you log in at one site, and then carry on to other sites and services without having to re-authenticate using a different username. However, outside of the enterprise it turned out to be technology chasing a problem that wasn’t there. The user still wasn’t in control — the bizdev folk were. And who says a customer of Hertz trusts Hilton?

So we’re now into the “third generation” of public digital identity solutions, which is traditionally when a technology starts to mature and become dangerous. OpenID is very close indeed to solving some important problems.

Why should I care?

It’s very simple. As a provider of OpenID services, you’re in a position to broker introductions and promote revenue-generating capabilities of your telco platform. OpenID is an extensible technology. So when the user authenticates themselves, and gets passed back to a merchant, you’re in a position to add in some extra data. Specifically, you pass the entry point to a directory of web services you as a telco offer.

The list of possibilities is huge, from address verification to credit checks to location based services to age verification to payments and onwards. Furthermore, you can also be the broker to enable the website to interact with third parties such as the user’s bank. Subject to some non-trivial issues around privacy, contract and support, your imagination is the limit. Like the concierge of a hotel, you’re in a powerpul position to broker all kinds of business relationships and interactions. You’ve established yourself as the hub of a digital ecosystem. One where the operator has a natural advantage, since every paid-for form of network access comes with an online identity of some sort, if only for a self-service portal.

All this could be done manually, of course, without OpenID. We’re just taking the friction out of the process of discovering relationships and services. Can you imaging how the Web would look if every link required you to manually convert a domain name to an IP address? Well, that’s the kind of world we live in when it comes to identity. The seams are very visible. Why are all these websites asking me for personal data my ISP already has?

What next?

A few operators like Orange are experimenting with OpenID. Google and Yahoo are becoming OpenID providers. It’s dead cheap and easy to become an OpenID provider.

Becoming a consumer of OpenID logins is a little more involved, since you need to educate the customers about the possibility, as well as customer care. It also does involve some non-negligible risk. What if the OpenID provider the user chooses goes out of business? What about phishing attacks that try to scam the user into revealing this password? What if the OpenID provider is temporarily down?

All these are addressable concerns. There are also some rival ideas and technologies, as well as complementary ones. It doesn’t really matter which ones win. OpenID isn’t inevitable, particularly when the operator community hasn’t twigged the possibilities it offers and created the commercial incentives for all websites to accept your phone number in some form as an identifier. Yet something very similar is bound to occur, because the status quo of a zillion user IDs and logins, and lots of friction, is going to be something that gets competed away.

In all cases, the first rule of business success applies: you’ve got to turn up to the game if you’re going to stand a chance of winning. Google will be there. So will Microsoft. Will you?

[Ed - how to do this will be a major part of the debate at the 4th Telco 2.0 Exec Brainstorm in Aprlil - see detailed agenda just up on site].

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January 28, 2008

Ring! Ring! Hot News, 28th January 2008

A very selective tech downturn: as the stock market tanked, Nokia reached its world-domination target of 40% total market share. They celebrated with a recreational acquisition, buying Norwegian mobile-Linux specialists Trolltech. This brings not only their Linux technology, but also their cross-platform development environment Qt on board; this is presumably a means of hedging against Google Android et al. The mobile development race continues.

Meanwhile, a closer look at the figures for handset market share suggests one thing. It’s not just that Nokia is doing well; Motorola is doing catastrophically.

From the end of 2006 to the end of 2007, they lost an enormous 10 percentage points of market share, which means that Samsung have now overtaken into second place. That’s a distant second, though; 14 per cent versus 40. Not surprisingly, the Q4 numbers were dire; revenues down 33 per cent and a $1.2bn loss for the devices business. The company was marginally in profit overall, but how long can they tolerate the handset side sucking the blood out of the enterprise, digital home, and networks operations — which actually had a reasonable quarter? Software has been Moto’s achilles heel, so time for a “back to basics”: pick an OS (not seven), write a better UI, and get it integrated with the PC and Web 2.0 online applications. Please.

Meanwhile, things at Palm aren’t great either; but then, it’s a long time since they were even tolerably average. The troubled PDA firm just shuttered its retail operation and axed 1200 staff in order to “concentrate on delivering its next-generation product”; why don’t they just open-source the old PalmOS?

Last week’s awful results at Sprint-Nextel resulted in a management bloodbath, with three C-level execs getting their cards. At the same time, AT&T announced impressive figures; net income was 51 cents a share on revenues that were almost double last year’s (although part of this is because the 2006 figures didn’t yet consolidate BellSouth). Sounds great — until you realise that if your profits increased by a little less than double when your revenues doubled, your margins actually fell. There is nowhere left to hide…

AT&T reckons it sold 2 million iPhones. Steve Jobs reckons he sold 4 million of the things; so where are they hiding? A rough guess is that O2 and Orange have got rid of maybe 600,000 in Europe; so that leaves quite a lot of ghosts. However, is it really that implausible that about a third of the first gadgets to be marketed direct-to-consumer in a PC-like model were sold to people who wanted the gadgets, not the service? Oh, and in completely unrelated news, a ‘jailbreak’ for the latest iPhone firmware is now out.

The chipset industry bathes in prosperity whilst the markets burn. Both Qualcomm and Texas Instruments saw roaring sales. In fact, what with good results from Apple and IBM the week before last, you might even be forgiven for thinking there wasn’t much wrong with the tech sector at all. Somebody must be buying all this stuff, right? Even a European ISP thinks it might make a profit this year; although we’ll believe that when we see it.

Speaking of ISPs and their business model, Time Warner, as widely reported, is experimenting with going back to metered access. Brough Turner has a modest proposal for an alternative so P2P applications can play nicely with your network: come up with a standard to make it easy for applications to find locally stored content and fetch it at an appropriate time. This exactly fits our view that telcos are in the logistics business for data.

Meanwhile, the 700MHz auction finishes the week on $3.7bn; does anyone else feel mixed horror and wonder that it’s so cheap?

Vodafone’s drive to buy growth in emerging markets may be on again; it looks like they may have an opportunity to take full control of Vodacom in South Africa as a side-deal to Oger’s offer for Telkom SA.

But don’t get your hopes up, if you’re a telco; the platform is being built, and not by you. Amazon last week announced a significant new plank in its emerging platform, DevPay, a payments and customer management API for businesses built on Amazon Web Services. Let’s round it up; you can now get sales and order fulfilment, call-handling through Mechanical Turk, database capacity, processing power, and payments from them as services. We’re not seeing anyone even getting close to this in the telcosphere; watch out for our upcoming platforms report. Similarly, but far less significantly, Facebook is offering a JavaScript library for Facebook applications outside Facebook, if you see what we mean; it’s a useful step, and one that leads away from “social networks are where your data goes to die”. In telcoland it’s coverage that wins, in webland it’s the reach of your relationship — and in both cases, the one with the best service distribution wins by default.

But it’s no DevPay. Neither is more bigger YouTube now. Remember — in Telco 2.0 the dosh in locked up in the enterprise market.

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January 24, 2008

Open Internet Access on Mobile - framing our thoughts

Last week Mark Lowenstein, former strategy VP at a major US telco (now Managing Director at Mobile Ecosystem) presented some issues around ‘Open Internet Access on Mobile’ on INmobile.org, the private community for senior executives in wireless. They prompted a ‘Telco 2.0’ response from us. We thought the exchange, captured below here, would be useful to our readers [note: normally INmobile.org discussions are private, but Mark allowed us to reprint his comments here…]:

Mark said: “Open access [to the internet on mobile] is going to be a key area of development in 2008. Its strongest proponents point to the PC industry and the experience we all have on the Internet. I’d like to raise some issues we all need to consider as the framework for open access is developed over the next couple of years.

First, we have to keep in mind wireless industry economics. It costs hundreds of times more to deliver a megabyte of data over a wireless network compared to residential broadband. There is no technology on the horizon that radically changes that framework.

Second, customer service is an aspect that open access proponents have under-considered. If you experience a problem in the PC world, you know that getting help can be cumbersome and costly. Having a problem on Facebook or MySpace? Try actually reaching a human being for help on these “social networks”. By contrast, wireless operators today are the default for all manner of customer service, even when problems have nothing to do with the actual service provided by the operator. How is this going to be handled in an “off-portal” world?

Third is the area of privacy and security. We’ve experienced tremendous growth in wireless data, and have been relatively untouched by the spam and virus problems so pervasive in the PC world. Can you imagine the backlash if there’s a high profile instance if minors [children] - the majority of whom now own cell phones - start receiving the sorts of inappropriate messages we all see daily in our e-mail inboxes?

Finally, we have to think hard about what the user experience in an “open access” world is going to be like. Consider that a superior user experience in today’s digital world tends to come from the most closed and tightly integrated offerings. I think of three examples here: iPod/iTunes; Blackberry; and console gaming.”

The Telco 2.0 response:

The context for all the changes Mark cites is the move from a one-sided consumer-facing business to a two-sided platform business model (this is the focus of our current research, of course, and the next Telco 2.0 Exec Brainstorm in April in London - sign up before 12 Feb to get discounts on seats!).

The issue of cost (‘wireless industry economics’) can be dealt with in three key ways:

1.) Raising the price of “all you can eat” data plans to better reflect their true cost. Users are currently buying a non-revocable option to ever increase their usage, without the compensating increases in price. It makes an accounting profit, but only because you’re never pricing in the true cost of that option.

2.) Allowing application partners to package up data and bundle it with their applications in a manner that reflects the application’s average usage pattern (time, geography, ‘burstiness’, etc.), but with the user only seeing a fixed “all you can eat” fee for that one application. Importantly, we must enable that product to be easily sold and provisioned in the context of the partner’s business — not just via your own online portal or call centre.

3.) Treating the issue as a logistics problem for data. Content that is not time-critical should be sent via some other means to the device (broadband/WiFi, Bluetooth, sideloaded). The carrier’s job is to develop these capabilities, make it simple for all users, and sell that logistics capability to the upstream partner. When I post a letter to London from Edinburgh, I don’t need to think about whether it’s going by plane, road or rail. The postal service just delivers it for when it’s needed. It doesn’t fly every letter, because that’s inefficient. For this to work you need to stop seeing wireless as a silo, and better integrate it with the PC and home networking.

Customer service costs can be lowered by:

- Adopting the above re-bundling strategy, and charging those application partners a reasonable fee to support their applications (we’re currently in the middle of trying to size the addressable markets here. Contact us to find out more).

- Tiering your service level, possibly via multiple brands. So my personal ISP (Zen Internet) is a premium ISP that’s more than happy to help with any PC problem. There’s a good chance Zen will be bought by BT, so BT will add another brand and segment to its portfolio.

- Working to eliminate more of the root causes of customer confusion - even if it means, say, assisting website owners to reword their download installation instructions to stop confusing users. Be creative, and take responsibility (and credit) for the customer experience.

- Building much better self-help forums for users to search and also help each other. Make better use of the technology we have. Nokia, Microsoft, and many others support millions of users without massive call centres, because they make it easy for users to find answers to problems. Open up your support and incident databases.

- Be humble. Give the users credit when it does go wrong. Apologise. Make every contact into a retention opportunity.

- Turn it into a VAS sales opportunity - Apple make tons of money from AppleCare. Offer premium support for a fee, throw it in for ‘free’ to your more profitable customers.

The privacy issue is multi-faceted and there’s no easy, simple answer, since it’s made up of many related problems. However, there are some specific steps that can be done to make things better:

- Provide facilities that proxy interactions with users. For example, say a partner wants to send a bulk SMS that’s inappropriate for minors. Offer a premium API that will accept that message, and only pass it on to accounts that have registered for unblocking adult content. (This is a general principle of keeping highly private data like age, location, presence ‘inside the telco’ and only offering secondary functions that don’t compromise privacy.)

- Make it more obvious when you’re acting as a trusted intermediary. For example, one patent I filed at Sprint was to turn the carrier logo on the handset from a printed one to an LED. Then when Sprint was presenting an interstitial page ( e.g. for single sign-on, PIN entry to buy content, release of personal profile details) the light would come on, letting you know that it’s really Sprint you’re interacting with. Re-intermediate the experience as part of the platform offering. Become a trustmark, just like the VISA logo.

- Expose your assets that enable authentication whenever you can. Make it easy for apps to access the SIM, or network authentication, or even select account details. Rather than worry about open access ruining your model, think about how you can take your assets into the open access space and how partners can integrate them with their applications to enable a more secure experience.

The overall user experience issue was largely addressed by DoCoMo with i-mode — separate ‘approved’ applications that have gone through testing from ‘unapproved’ ones where you’re on your own. Apple do this, with a ~$4/unit fee for iPod accessories to be “official”. However, the economic model can be modified to lower up-front certification costs for application developers in return for a share of any future revenue streams from their application.

Furthermore, many channel partners will be there to assure the overall user experience is a satisfactory one. You don’t just throw open the doors; you select your initial partners carefully and see what works and what doesn’t.

Summary:
* Old model: Product company
* Feared model: Pipe company
* Best model: Platform company

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January 22, 2008

Sprint-Nextel: 1.0 thinking in a 2.0 world

As you may have read in our news post this week, as well as elsewhere, Sprint-Nextel is in deep trouble. Since this is a story that has been well-covered in the industry press, we’ll just briefly recap the main points, but dig deeper into the business model aspects.

The basic facts of the situation are:

  • Sprint grew up with three lines of business: local access, long distance networks, and mobile networks. It pursued a “One Sprint” strategy to try to cross-sell these before giving up, spinning off the local division as Embarq, and re-focusing on the core wireless business (with added enterprise appeal from Sprint’s long distance network). Combined with the Nextel merger (see below), this “Grand Old Duke of York” approach to business strategy demoralises the troops as they are marched up the hill only to be told to march down again.
  • Verizon and Cingular were making headline-winning numbers every quarter with net additions to their network. Sprint turned to, ahem, sub-prime users to try to beef up its numbers. This led to a bad debt disaster. (Sound familiar?)
  • At the same time, Sprint made several execution errors. Specifically, a massive write-off on a new billing system (that none of the customers cared about), and a disaster around customer care. The “micro metrics” driving behaviour of customer service reps were wrong, leading to customer dissatisfaction. And the “macro metrics” that focused on cost saving also killed the long-term value of the brand — some core activities were outsourced to IBM, in a relationship that was never easy to manage. Too many customer care reps were based in India and simply didn’t care whether the caller was happy or not.
  • Nextel’s success was based on it’s excellent push-to-talk application, giving it high ARPU and low churn. This turned a disadvantage (i.e. poor trunked radio spectrum) into a true advantage and differentiator. It’s a textbook example of the benefits of vertical integration, with Motorola providing a total solution of handsets, network, and application services. However it was in a technology dead-end due to their technology roadmap having no obvious next step. They were also short of spectrum and capital to build another nationwide network. Thus the merger of unequals.
  • Finally, no matter what the strategy, execution matters. Tomi Ahonen has one of the more colourful write-ups of the most recent PR fiasco where rather than apologise, Sprint offloaded customers who complained too much about the products and processes being broken.

That was the Business Week way of looking at the sources of Sprint’s predicament. What about the business consultant angle?

Well, we can go back to our textbooks and see that Sprint and Nextel had fundamentally different business models.

Sprint has in the past been a product innovator and technology leader — from the fibre-powered “crystal clear” long distance network, to the (failed but before-its-time) ION home service, to the all-digital CDMA network. It was the first to market with voice recognition dialling, wireless web, picture messaging, and plenty of other services.

Nextel’s business was one based on customer intimacy. It had a very well-defined target demographic, principally blue-collar workers and highly mobile clerical staff. The product lent itself to team use, and thus the sales and support process was frequently different to a standard family plan or large enterprise deal.

When you mix oil and water you get, well, just oily water and watery oil. Sprint and Nextel’s different cultures live on in what are effectively two independent entities, now requiring either strength-sapping immune therapy to merge completely, or surgical separation despite some shared vital organs.

Looking more specifically at the strategies for a Telco 2.0 world, how did they fare?

One part of the business is certainly headed in the right direction, albeit slowly. Sprint has had a healthy MVNO business, spreading the risk of capital investment. The Clearwire co-operation is also a step in the right direction. Lacking the scale and Baby Bell regulatory advantages of AT&T and Verizon, this approach needed to be pushed harder. Sprint needed to take a far more radical and aggressive approach to sharing capital investment. The network assets could have been hiving off network assets into a common entity, and getting more cash from cable, content and municipal co-owners made a priority. Google shouldn’t be investing in 700MHz spectrum, but in an mutual industry-owned wholesaler.

As a product company, Sprint really lost its way when lots of the founders cashed out during the failed Worldcom merger. It’s supposed to be Sprint PCS — Personal Communication System. The idea was to be about people and communication. By the time PCS Vision was launched, it was about downloads, games, and music. The “content is king” siren call claims another victim. Nobody in the industry seemed to draw the obvious conclusion from Nextel’s success — make it easy to get in touch and chat with each other. Rather than use the faster IP networks to deliver video clips of Paris and Britney, use it to enable new messaging applications. Visual voicemail should have been old news five years ago.

We’ve covered off the pipe and product aspects of the Telco 2.0 stack, but what about being a platform company? This is in a way the saddest part. Sprint made a real effort to create an open application platform back in 2002-3. I’ve got the developer conference t-shirt and wheely bag to prove it. The project was canned in a bought of corporate in-fighting and acrimony. Nextel had a vibrant developer community, which Sprint failed to maintain. The staff left, the developers departed.

As Sprint bulked up (with the purchase of Nextel) they didn’t execute in the integration or exploitation of the Sprint wholesale platform. Assets like the backbone network failed to become the bedrock of a winning content distribution business. Forays into home networking were sporadic and inconsistent. Then when Sprint proposed a WiMax future, it just took focus off the execution and integration task to hand.

Sprint should have been the ultimate personal communications and content platform, with the capital risk spread across many retail brands and partners. Instead everything depended on Sprint’s own marketing and customer service teams getting it right. Which didn’t happen.

Meanwhile Verizon had put it’s M&A effort in years earlier, and already fully integrated the networks earlier in the decade and were just buying smaller assets for network in-fill. AT&T did a near text book integration between AT&T Wireless and Cingular. And T-Mobile re-grouped itself, stopped Jamie Lee Curtis ever getting to offer the 40,000 minutes a month plan before it was too late, and successfully rebranded itself around a more youthful segment and funkier handsets.

Game over, really.

Our prognosis? Wait to see SK Telecom buying the assets and using Sprint as a testing ground for Korean WiMax…

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January 21, 2008

Ring! Ring! Hot News, 21st January 2008

O2 sells fewer iPhones than expected. Here’s a Telco 2.0 teachable moment for you; you know how we keep banging on about the importance of the enterprise and SMB markets? Well, what they need is something like this: IBM has ported the Lotus Notes client for the overhyped gadget, thus making it considerably more useful. No wonder that, during a week of horrible economic news, IBM announced stellar results from a parallel universe of high-end custom integration services built from open-source application servers. Let’s list those ingredients for success again: open platform, integration services, sold to people with the money and the real customer relationship.

Sprint-Nextel, however, had terrible news; 4,000 staff to go, 125 stores to close, and it’s now officially the case that since the big merger so much value has vanished that one of Sprint or Nextel might as well no longer exist. You could have let off a neutron bomb outside head office in Overland Park and saved the merchant banker fees. An ill-advised dash for subscribers at the expense of product and customer quality can really make a mess — a poster child for ‘bad metrics can mess up your business’.

But these are tough times for all telcos. Vodafone claims it’s in pole position to enter the Chinese market; but that could turn out to be pole in a race to the bottom. China Telecom suffered a net loss of subscriber lines for the fifth successive month; the mobile/VoIP pincers are crushing them, too. It’s fair to say, we think, that neither selling downloadable celebrity autographs or pictures of hot babez cleaning the inside of your iPhone are going to fix that.

France Telecom and Lagardere are giving music away; not much margin in that. KPN is in big trouble with the regulator about special discounts for big customers; who would have thought paying your customers to stick around wasn’t good business?

Even Carphone Warehouse couldn’t get beyond flat like-for-like results. No wonder T-Mobile is looking from their backhaul bill to the rest of Deutsche Telekom’s DSL empire, then back to the backhaul bill, then back to the DSL… And it looks like Nigeria is getting its first MVNO.

Telcos have to respond: AT&T launches SIM-only service, which is at least competitive. It’s a pity about the detail; if you go to their website, you’ll notice that it’s described as a “3G 64K SIM card”. We hope that’s the card memory capacity. In KBytes.

Less depressingly, DirecTV commits innovation. Their subs will soon be able to control their DVR set top boxes from mobile devices; that sounds like a good idea to us, and one that’s been implemented in a simple fashion using a stripped-down website. What we particularly like are products that make the best of several delivery systems, combining into a whole that is more than the sum of the parts — as opposed to shoe-horning one media experience into another. Why don’t more mobile operators do this well? Relatedly, HBO has announced video-on-demand over IP; but you won’t be allowed to put the video on a mobile device for later consumption, because that would be wrong. The unavoidable conclusion is that you’d really be better off buying a Slingbox and doing an ‘over the top’ media-shifting solution yourself.

Over at Nokia Forum, they’re having a coding contest; nobody could accuse them of being seduced by shiny gadgets and fancy graphics, either. What are they offering prizes for? The best inter-process communication framework for multiple run-time environments, that’s what. Wild and crazy guys.

And if you’re an operator, and the rest of this broadcast hasn’t depressed you yet; Brough Turner reckons mobile VoIP will boom in the next two years.

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January 16, 2008

Ribbit! The amphibian of telco voice platforms

We’ve been putting together a directory of all “2.0”-type players for our forthcoming Consumer Voice & Messaging 2.0 Report. One newcomer, Ribbit, is offering an early foretaste of what the future environment for developing voice and messaging services might look like.

Ribbit reckons it’s “Silicon Valley’s First Phone Company”. Silly us, we thought that was AT&T. So what is it? The actual product is a VoIP softswitch, available either as a standalone installation or a hosted service, which offers an unprecedentedly extensive collection of APIs for developers to work into their sizzling lashups. Then, there’s a Flash toolkit intended to let the front-end developers design interesting user interfaces to the system’s voice functions, whether on desktops, laptops, or mobile devices. All very Telco 2.0, really.

Perhaps the most impressive thing about Ribbit is that one of the existing applications for it integrates it into Salesforce.com, the hugely successful web-based sales/CRM system; you can’t get more platform-based, enterprise-focused, or two-sided than that. We’re sure there’s huge scope for creativity and user-driven innovation here; but there are some issues that worry us.

Ribbit’s managers are very keen to beat up telcos. Who isn’t? But all the aggression they direct towards “the phone company” may yet come back to bite them. If they want to have nothing to do with carriers at all, relying fully on IP and third-party SIP carriers for their PSTN integration, that’s all well and good; but it may be a bad business decision. The enterprise VoIP market is crowded, and trying to chop out a niche there means competing with Cisco Systems, Nortel, and Microsoft - all of whom have the advantage of huge installed bases of equipment already in the enterprises they’re trying to sell to. Further, the tech-clued firms who are most likely to be interested in Ribbit already have other options - notably Asterisk, the open-source IP PBX, and Red Hat’s JBoss comms platform.

On the other flank, there’s the risk of being cut out as telcos begin to introduce new services; location, availability, social graph, and other contextual or user data are exactly what these enterprise developers will want to build into their systems. They will be keen to use existing telco APIs rather than build their own capabilities from scratch. If Ribbit isn’t in a commercial position to use them, there’s no gain in using it rather than either a telco service or roll-your-own. And given the initial telco-hostile tone, should Ribbit prove to be highly successful, telcos will doubly have a reason to fear an intermediary platform getting all the developers and intermediating the commercial relationship.

Success, therefore, will come from being able to work both in the telco sea as well as the Web 2.0 land.

Further in the future, though, highly reconfigurable telephony is likely to lead to radically different product and business models for telcos. For example, civil engineers stamp out custom bridges off well-tested models based on span, load, and topography. Your telco consulting services arm will be building custom communications experiences, with the software equivalent of a flexible manufacturing system. Custom back-ends, process flows and user interfaces will be generated from tools and models. Each is created appropriate to the application and user context. Most devices will have a completely “soft” and re-configurable user interface. (Indeed, if you can create the service and the user interface as required, why not the hardware too? It may sound crazed, but projects like the RepRap might soon make it a reality.)

“Minutes” on the network will be the least important part of the business model. But counter to previous wisdom, the money’s not in telcos launching dozens of services all the time. (Ah, so you’ve been reading the same SDP vendor brochures too?) It’s in supplying platform and services capabilities to upstream partners, who have the knowledge and intimacy of the end user.

Even before then, flexible manufacturing systems using commercial rapid prototyping systems and standard electronics could mean that Ribbit’s Flash toolkit could become, well, a very flashy toolkit. It’s perfectly possible to build a profitable business around custom handsets of volumes of 10,000 or under. There’s likely to be a thriving market of niche communications tools and devices. We’d focus on where the operators and technology competitors are technically weakest — the user interface — become the toolsmith for that. At the moment the commercial model for the back end platform is too uncertain, and competition too fierce. A toolkit for building the presentation layer could work across all the major back-end platforms, and could be Ribbit’s premium service — if, that is, they find a sound enough business model to get there.

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Apple Digtal Media Platform - Showing Signs of Strain

The Apple Digital Media Platform has been one of the runaway hits of this decade and driven a 400% gain in Apple’s share price over the last three years. Yesterday, Steve Jobs announced the entry into the movie rental business and a new version of the Apple TV Set Top Box. The bigger story which went unmentioned is that business model underlying the platform is showing real signs of strain and the players are showing signs of restlessness.

Apple (AAPL), Google (GOOG) and Microsoft (MSFT) Three Year Share Performance

Apple (AAPL), Google (GOOG) and Microsoft (MSFT) Three Year Share Performance

The Apple Digital Media Platform is a classic example of a multi-sided business model. As the user base increases, the more appealling and less risky it becomes to develop new hardware devices. As more hardware devices are sold, the more appealing it becomes for people to develop accessories. As the user base grows, content owners realise that it becomes an interesting distribution channel to sell content. As more content becomes available then more users are driven to the platform. As volumes increase then margins paid or royalties received from third parties can be increased.

In other words the Apple Digital Media Platform exhibits a high degree of positive network externalities or displays a virtuous circle .

Apple Digital Media Platform The multi-sided Apple Digital Media Platform

The software platform itself has evolved from the inital release of Quicktime in 1991 on the Mac and in 1994 on Windows. It has always been available for free to users. The interesting strategic decision was to make Quicktime available for Windows from very early on, even when no revenues were being earnt.

The probable reason for this decision is that the Mac has a very small market share compared to Windows and Apple needed to have the broadest possible market available to make it appealing for content creators to make their content available on the Apple Digital Media platform. In these early days, the QuickTime platform was only of value in so much as it created extra sales of Mac hardware.

This changed in 2001 when Apple launched the ipod device and itunes software. This software allowed the synchronisation of music content between the Mac or PC and the ipod. Apple was now generating revenue from having Quicktime and the itunes software available on the PC as it now had a much larger addressable market. Effectively at this stage, Apple was effectively adopting a highly unusual give away the blades (software) and sell the razors (hardware) strategy.

This strategy should be compared and contrasted to the Games Console platform players who have adopted a strategy of discounting the hardware (consoles) and charging a premium for content (games).

It should be noted that at this time illegal file sharing had just kicked into gear with Napster reaching its peak popularity in 2001 and despite its closure it spawned many other yet more creative ways for the music lovers of the world to break the law.

It is therefore hardly surprising that in 2003 when the iTunes online store was launched it was welcomed with open arms from the record companies especially considering that tracks were to be charged at 99 cents with DRM and Apple wasn’t trying to make any profits from the download service.

The only internet infrastructure company making any sort of money from the iTunes stores was Akamai who Apple had chosen to build the Content Delivery Network and assure that tracks reached their destination in a timely manner. This relationship exists to this day and to my knowledge no ISP has ever directly profited for the Apple Media Platform.

As the iPod grew in popularity it began to attract the trivial (eg protective casing) and not so trivial (eg external loudspeakers) accessory providers. Apple designed a standard interface across all the ipod range to make life easier for the accessory makers. Apple apparently charge accessory providers a royalty for using the “Made for iPod” seal. The royalty rate is not in the public domain, but is estimated to be as high as $4/device.

This accessory market has grew to an over $1bn market. Accessories are also important for iPod independent retailers as they tend to have higher margins than the iPod itself. It is estimated that for every $3 spent on iPods $1 is spent on accessories. It also helps the independent retailers to differentiate against the Apple owned retail stores who don’t tend to stock all the accessories. Apple estimated that in FY2007, direct sales were a huge 57%.

The iPod has scaled huge heights with 52m sold in FY2007 compared to just 7m Macs or $8.3bn in ipod revenues compared to $10.3bn Mac revenues. Another example of the positive network externalities is that the iPod is creating positive momentum to Mac sales with a full 50% of Mac sales in FY2007 being new to the Mac. Undoubtedly a large proportion of these new users are attracted to the Mac because of the style and panache the ipod has added to the general Apple brand.

Apple launched in 2006 the hugely anticipated iPhone and has managed to sell 4m of these in the first 200 days. Apple claims this is equivalent to a 20% share of the US smartphone market in 3Q2007. The iphone adds a new twist to the model in that Apple have decided to grant exclusive rights to a single network operator in each country. This has enabled Apple to get a share of all voice and data revenues from the service. This share is estimated to be around 30%.

One of the few recent failures was the initial launch of Apple TV set top box. This has been redesigned and relaunched along with the addition of a movie rental business. Video capability was added to QucikTime back in 1999 and recent iPods have feature small screens for viewing content. 125m TV Shows and 7m Movies have so far been downloaded from the iTunes store.

Apple has recently broken through the 4bn music tracks downloaded level and now accounts for an estimated 70% of the worldwide digital download market with 85% share in the crucial US market.

Sales of Offline and Online Music 1H2007

Sales of Offline and Online Music 1H2007

It is hardly surprising therefore that tensions are starting to emerge with the record companies who are having rather a hard time of making money with the overall market declining in both revenues and volumes. The record companies seem to be fighting hard against the Apple DRM lock-in which currently allows Apple to tightly integrate both hardware and software and keep non-approved third parties out of the chain - there is very little interoperability.

All of the four major labels are allowing Amazon to distribute non-DRMed tracks at variable pricing. In fact Amazon has arranged a huge promotion with Pepsi to try and kick-start the platform attracting users by giving away up to 1bn tracks. This is similar to some of the earlier iTune promotions. We think for record companies although this reduces the dependence on Apple, it does not alter the fundamental deficiences of a “per track” business model.

More interesting solutions are the subscription services which has allowed digital sales in South Korea to overtake physical sales. All mobile operators have cheap all you eat subscriptions which are very popular with an estimated 1 in 6 subscribers taking out packages. Even the hugely popular online Cyworld game has managed to sell 200m tracks. However not everyone is positive, john Kennedy, the IFPI chairman recently warned “”Is Korean music market a panacea for the digital music market internationally or a case study in the devaluation of music?”.

A similar story exists in Japan where mobile sales far exceed online sales. In addition Japan was the only region in the world where Apple actually saw falling revenues - drop 11% to US$1bn with only 300k Mac sold.

Universal Music Group is experimenting with subscription offers for the Neuf Cegetel ISP in France with an all-you-can-eat offer and also Vodafone and Telenor are experimenting with subscription offers for all the major record companies with the Omnifone platform. These are real challenges to underlying economics of the Apple platform. It cannot be long before Verizon fights back in States with some sort of innovative offer, especially as arch-rival AT&T has exclusive rights to the iphone.

The Mobile Industry is a classic cheap razors and expensive blades market: handsets are subsidised with expensive calls and ultra-expensive texts. Operators throw off prodigious amounts of cash which can be used to subsidise and market new applications. Apple are trying a model of both expensive razors and blades with limited distribution - we do not believe this strategy will work for the mobile mass market.

The other big issue for Apple is that long term platform rival Windows is finally starting to gain some traction in the mobile market as the operators are starting to realise that perhaps Microsoft are not as evil as everyone thought at the turn of the century. Certainly some mobile operators are already using Microsoft as a way of challenging the revenue share that they have to pay to Blackberry in the corporate messaging market. The Microsoft platform is extremely open compared to both the Blackberry and Apple platforms and also they don’t (yet) want a share of the ongoing revenues. Microsoft may be historically one step behind Apple in terms of technology, usability and more especially design, but they have always been one step ahead with the business model.

And this is all before, Google really enters the market with its advert funded model. A lot of people, we speak to about both the iphone say the most brilliant application is the maps which was written by Google and uses Google data. There is no way that Google will not port that application to every handset under the sun ultimately financed by some sort of advert funded model. In fact, there is already inferior version available for Windows, PalmOS and Symbian-based handsets.

In other words, Apple faces a lot of pressures from all corners of the platform.

In the short term, most of the platform pricing issues can be overcome with a little bit of tweaking to the model. Apple has larger issues in the medium term as the powerful content owners begin to ensure that there is competition in the digital distribution of their products. We do not believe the movie content owners will allow Apple anywhere near an 85% market share and over time the music companies will bring Apple share of digital downloads down as they strike subscription deals with the ISPs and Mobile companies. In the longer term, device makers will catch up with Apple usability features and we believe Apple will never have more than a niche share in PCs, mobile phones or set top boxes.

However all is not lost for Apple shareholders, the market segment who are attracted to the Apple digital lifestyle will tend to be higher income and prepared to pay a premium for their products which should allow a profitable future but at much slower rates of growth than in past few years.

The main lessons to be learnt from the Apple platform for the Telecoms industry are:
- it is relatively easy to continually innovate and add features to platforms over time; - multi-sided markets can be very profitable growth drivers;
- wholesale intermediaries tend to have increasing returns to scale, thus market concentration; and
- it’s better to enter a new market with a disruptive business model than a disruptive product proposition

One of the themes for Telco 2.0 in 2008 is two-sided markets and their potential impact in the Telecoms industry. We are planning on releasing a research report in March which examines the platform opportunity for operators. And this is, of course, the core focus for our 4th Telco 2.0 Executive Brainstorm on 16-17 April.

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January 15, 2008

Vodafone Betavine: Nice Platform…but Where’s the Commercial Framework?

We are busily beavering away on our latest research project, The 2-Sided Telecoms Market Opportunity, some of the findings of which we will be presenting at the CMO Forum at the Mobile World Congress in February. The final analysis will be a key input to our own Telco 2.0 event in April. As we’ve pointed out in previous posts, this report seeks to explore the opportunities for building a 2-sided (platform) business beyond advertising (the current area of industry focus).

As part of our research, we have been exploring a number of successful ‘platforms’ from outside Telecoms (Google, Amazon, Ebay, Monster, The London Stock Exchange, Betfair, Maersk), to understand what capabilities and strategies are required to build a successful 2-sided business model.

We have also been looking at existing platform efforts from telcos. One example of this is Vodafone’s Betavine.

Good Start But Show Me the Money!

Betavine is exploring several issues directly relevant to a platform play for a two-sided telecoms market:

  • Developer relationships and fostering of third-party activity on a Vodafone platform
  • Opening up of core APIs (location, WAP push, SMS, etc.) to enable developers to create applications and deploy them on the network and devices

These are central to developing a platform strategy: Vodafone’s R&D team are providing the environment where end users and application developers can interact using a Vodafone platform.

The problem, at the moment, is that this is a TECHNICAL platform but it fails to address the COMMERCIAL requirements of developers: there is no incentive for them to develop products and services because they cannot monetise their efforts. The Vodafone Betavine team claim that the platform is about fostering collaborative engagement and that if developers come up with exciting services, the necessary commercials will follow.

But, as the exchange below illustrates, this is putting the cart before the horse:

Betavine%20exchange.png

The whole exchange is found here.

The point here is that to build the required scale for a platform business to be successful, the right incentives need to exist on both sides of the platform. Developers (or other providers) need to see value in the platform as a distribution method and consumers need to see sufficient volume of products and services to make using the platform attractive.

Until platforms such as this move outside R&D departments and into commercial areas, they will remain marginal activities.

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Ten things you need to know about the future of broadband

“…our business is about scope and scale and having superior incremental margins. If you are looking to tax content and bundle device, application and network, it isn’t going to work. You had better be good at moving information if you want to be a network service provider.” - Jim Crowe, CEO, Level 3 at Citigroup 2008 Global Entertainment, Media and Telecommunications Conference.

As some of our readers will know we’ve just completed a major 6-month study into the future of broadband, including an online survey responded to by over 800 industry insiders, interviews with leading figures and actors in the industry, and desk research into comparable networked industries like container shipping and power distribution. We’d like to share some of the key findings with you, which very much echo Jim Crowe’s comments above.

  1. Telecoms is a logistics business for valuable data. It’s about providing personalized delivery of that data, and removing the ‘customs barriers’ (such as network provisioning, authentication) to that delivery. This is much more complex (and profitable) than being a ‘dumb pipe’, but doesn’t mean being an applications or media business (which telcos are notoriously bad at).
  2. Broadband is just one of many distribution systems for data. Others include broadcast, physical media, circuit voice, SMS, content delivery networks, and edge caches (which capture and retransmit broadcast content, e.g. networked DVRs). The successful broadband services provider of the future will be able to mix and match multiple delivery systems, just as logistics companies blend road, sea, rail and air.
  3. A key enabler for this will be home hubs, media servers and set top boxes. Whoever gets to deploy and manage these boxes will be the winner. These boxes will be critical to being a ‘logistics solutions’ provider, as they are the ‘ports’ at which all the different delivery systems must dock. The best examples today come from Iliad and Sky in Europe, who have the best blend of multiple delivery systems, features and content. Mobile devices and networks will also need to evolve new provisioning, authentication, policy and retail models.
  4. Telcos will make increasing amounts of money from wholesale, not retail. Media companies, employers, merchants and government will pay broadband service providers to deliver content and applications on their behalf. So you’ll watch YouTube without worrying about fair use limits (on ‘unlimited’ ISP plans), or going over your usage cap. Google wants you to watch and watch without having to think if there’s a meter running. Wholesale markets tend to be concentrated, since the whole point is that buyers (like Google) don’t want to have to personally interact with dozens of sellers (like telcos). That means only a few large telcos or aggregators will prosper.
  5. The ISP product suffers from severe economic problems. A few users are diverging in their usage from the rest, driving capital and operational cost. These users are different from day to day, so you can’t shed them. Attempts at traffic shaping to manage cost only work with a policy of ‘radical honesty’, such as that from PlusNet in the UK. Retail prices are lowering to the point where additional usage is being priced below the cost of transit for that traffic.
  6. Nonetheless, The ISP product will continue to grow, but the emphasis will move elsewhere. Users will increasingly buy (or use ad-funded versions of) applications with all ‘postage and packing’ charges included, for all the networks and places they wish to use that application or content. Amazon’s Kindle is just the start of a major shift in how we retail broadband services.
  7. Voice will be the catalyst. There will be a rapid rise of non-traditional voice services as voice is embedded into the general online experience. You’ll be able to call your date from your mobile dating application, without knowing your date’s mobile number, and with the whole cost of that call being borne through your dating application subscription.
  8. Telcos will move towards ‘two-sided’ business models, which involve not just wholesaling bulk capacity, but increased personalization of delivery to their own retail ISP end users on behalf of their ‘upstream’ partners. This will include using location and presence to enable everyday business processes (e.g. parcel delivery, healthcare services), advert insertion, or e-commerce services like credit checks.
  9. This is part of a larger ‘platform’ business model which involves opening up the telco to exploit under-used assets. This is a much bigger activity than just enabling a few APIs, and requires considerable restructuring to achieve. For example, you need a sales force to find these new wholesale customers!
  10. Network neutrality is a completely mis-framed debate. It assumes that the user has access to a single telco product, ISP access pre-paid by the user. The real market will be vastly more complex, with users having access to many ‘virtual’ networks, some overlaid on the Internet, some private. All the bogeymen about blocking and throttling are just the shadows of welcome improvements in the wholesale markets. This exactly mirrors what has happened in the financial markets over the last 20 years, where vertical integration ended and lots of wholesale markets grew up to repackage and resell debt and other financial instruments.

These topics and what to do about them will be hotly debated at the next (4th) Telco 2.0 Executive Brainstorm in April, the theme for which being: “Is there $250bn in new ‘Two-Sided Telecoms’ Business Models?”…

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What’s Next in EU Regulation

Profit in telecoms has often been as result of pleasing regulators as much as paying customers. Our many non-European readers may be unfamiliar with the interesting shifting dynamic of the European regulatory scene. Traditionally, national regulators have retained most of the regulatory levers; there is no real European equivalent of the relatively powerless state Public Utilities Commissions in the US, but the relationship between the states and the Feds is mirrored by that between the national governments and the European Union. Despite this, the politics could hardly be more different.

The first three years of the current European Commission (the EU’s executive branch) have been marked by unexpected activism on the part of its regulators, especially in telecoms and anti-trust. Many observers had expected that the Barroso commission would be marked by conservatism and slow decision making, as the commissioners struggled to get their confirmation hearings complete at the European Parliament. Parliamentary objections looked like they might hedge much of the activity of several commissioners; two appointments were turned down flat, and Competition Commissioner Neelie Kroes was forced to promise to recuse herself from a very long list of issues due to her conflicting interests, which included directorships of every significant company in the Netherlands and a few others besides.

Amid all the fuss, you’d have been forgiven for thinking that Viviane Reding would turn out to be a reasonably uncontroversial steward of the union’s Directorate-General for Media and the Information Society; certainly no-one was particularly incensed at the Luxemburgish journalist’s appointment. However, neither conflicts or obscurity held them back; Kroes and Reding have probably been the most visible and effective of the commissioners, and their confrontations with the telecoms and IT industries have been positively bruising.

So far, as well as the anti-trust cases with Microsoft and Qualcomm, we’ve seen radical intervention on roaming charges (with further action on data roaming to come), market access, unbundling, and now radio spectrum. The DG Media and Information Society is one of the world’s most aggressive authorities on the issue of spectrum refarming; it wants to grab back and relicense the entirely of the UMTS Extension (2.5GHz) band, and to make a start on reopening the GSM 900MHz bands for possible use with 3G and beyond. It’s also keen on structural separation in the fixed world, although it’s much less so on muni-fibre (you ask Amsterdam).

This gap in what looks like a very Telco 2.0 regulatory policy is explained by the Commission’s strong commitment to free markets. The EU is often considered to be “technocratic”, “socialist”, or “dirigiste”; this is an artefact of US/UK misperception. The founding texts, going back to the 1957 Treaty of Rome, explicitly ban state aid to private industry and declare the free movement of goods, services, labour, and capital, as well as the freedom to establish a business anywhere in the union, to be rights. Hence the scepticism with which it regards cities setting up as telcos.

On the spectrum issue, this misperception is currently leading to an unnecessary conflict with the UK regulator, OFCOM, over the exact details of the proposed relicensing of the 2.5GHz band. In a succession of policy papers and consultations, OFCOM has made it very clear that it is keen to reuse this spectrum subject to technology neutrality, that is to say that it will not be dedicated to any particular radio air interface. Instead, OFCOM wants to establish a set of rules based on radio-planning criteria that will prevent different technologies from interfering with each other.

The Commission, however, is keener on establishing a pan-European spectrum allocation for new wireless technologies, by which they mean first and foremost WiMAX. At the moment, the WiMAX spectrum position is still far from ideal; although 2.5GHz is in use in North America, the allocations are fragmentary and only two companies have contiguous nationwide spectrum, Sprint-Nextel and Clearwire. 2.5GHz bands have been reserved for WiMAX in developed Asia, but in Europe there is no such consensus; Germany has allocated 2.3GHz and the UK 3.6GHz. Reallocating the UMTS Extension band, left open by the increasing certainty that not only did the carriers overpay for spectrum but they also hugely overestimated their needs, is a major opportunity to create a world standard at 2.5GHz.

Of course, that’s precisely what those technocratic planners in Brussels did with GSM and UMTS, and the precedent is much in their minds. There is much to be said for European harmonisation; even more for harmonisation around a policy already in use in Asia and North America. But the kicker here is that there is much less to argue about here than a lot of people think.

“Technocratic planning” of GSM created a spectacular boom in competitive and entrepreneurial activity; much of which was predetermined by decisions taken in the planning process, such as provisioning lines to SIM cards rather than handsets and sticking to 900MHz. Equally, a harmonised 2.5GHz wireless broadband allocation worldwide would have all the same advantages, whether or not WiMAX is the one net to rule them all; if the radio noninterference rules can be shown to work, there’s a lot of scope for a meeting of minds here.

On the other big issue, structural separation, it looks like every regulator in town is aligned; only Germany’s Federal Networks Agency (BNetzA) may still be weak on this crucial Telco 2.0 issue, being still inclined to let Deutsche Telekom keep competitors off its planned VDSL deployment. OFCOM, and DG Media & Information Society, are no doubt watching BT’s fibre deployment in Ebbsfleet very closely; 2008 may be the year of separation in Europe, as the so-called “northern alliance” (the UK, Ireland, Holland, and the Nordic countries), most of the new member states, Italy, and possibly France are likely to line up for structural separation whatever the Germans say - telecoms is, after all, one of the EU’s issues covered by qualified-majority voting.

There’s also the prospect of a single European Telecoms Market Authority instead of the current situation where responsibility is shared between the EU and the national states. For reasons well made clear at that link, this would probably be a very bad thing; the ETMA would be an uneasy and inelegant hack, jammed between the Commission and the Parliament in a very dubious constitutional position. The proposal must be read as part of the Commission’s traditional desire to centralise and “communitise” as many policy fields as possible.

What does this all mean for operators and their suppliers? A historic ability to manage the relationship with the ‘home’ regulator will be of less value. Your lobbyists will be just one team among many with considerably more divergent interests. Your business model needs to be one that succeeds in unfavourable regulatory conditions over which you have little control. We would therefore rate BT or FT’s survival chances above those of players in markets where structural separation and forceful regulation have yet to take such deep hold. Verizon and AT&T may have got a holiday with their vertically integrated fibre plans, but don’t think you can copy that model over here; Deutsche Telekom and the BNetzA are looking very lonely indeed.

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January 14, 2008

Ring! Ring! Hot News, 14th January 2008

This year, we’re focusing on seven themes in the industry; Investment and Market Valuations, Disruptive Threats, Two-Sided Business Models (a key theme in the forthcoming Platforms report), Adjacent Markets, Core Products and End-User Needs, and of course Regulation. So these news posts will be centred around these concerns.

Despite everything, it looks like Sprint is going ahead with the big WiMAX rollout; launch is scheduled for mid-April, and a gaggle of new contracts have been issued to hardware vendors like ZyXEL. The mob that is the Apple fanbase is working itself up over the thought that this year’s Macworld might see the launch of a WiMAX-capable device of some sort — apparently they’ve got ad banners reading “There’s something in the air”. There’s conclusive evidence for you.

However, it’s true that Sprint is looking at bundling WiMAX connectivity with devices, just as it wraps EV-DO data in the price of the Amazon Kindle (“In Amazon, book reads you!”), so perhaps there’s something in it. Meanwhile, China Mobile doesn’t want the iPhone.

It’s been a regular barrage of WiMAX news this week; the ITU has accepted it as a standard, and it looks like there’s a FDD radio air interface coming for use on legacy spectrum allocations. Libya is getting a public WiMAX network, using ZTE kit. Tunisia gets WiMAX. Russia gets WiMAX. Colombian state telecom is going to invest heavily in wireless Internet access; probably WiMAX. Sprint and T-Mobile USA want spare TV spectrum for their backhaul; fixed WiMAX anyone? Potential WiMAX operator Frontline Wireless, which was angling for a cut-price slice of the US 700MHz band in return for public-safety services, has gone bust. In Vietnam, however, they’re ripping out CDMA networks to shift to GSM; so is Rogers Wireless.

And we remember when a Very Important industry figure told us that WiMAX “wasn’t a commercial reality” at last 3GSM…

Speaking of commercial realities, it’s been a sub-theme of a lot of Telco 2.0 work that not only is ARPU falling around the world, but it’s increasingly irrelevant as a measurement of success in telecoms. Vision Mobile agrees, in a blog post you should read now. Even if you’re an Indian operator who just saw their customer base grow by 62%.

Bangladesh, meanwhile, has found a way of making fixed-line ARPU go up; harass VoIP users and soak down the GSM operators for interconnection. Microsoft, for its part, is pushing into the telco revenue base by threatening to charge users of Live Messenger; good luck with that.

The first efforts to get Google’s Android working on an actual gadget, rather than a software emulator, have succeeded. iPhone hackers, however, are still struggling and waiting for the promised SDK. Symbian S60 hackers might be more interested by the unpublicised accelerometer API Nokia is apparently planning to use for their next GUI.

Watch out, then. Because a mobile user interface that involves waving your hands about could combine with this scheme to blitz football crowds with Bluetooth ads, causing a weird software-mediated terrace ruck. That’s not taking any account of rootkit-ridden electronic photo frames and the like.

BT is reportedly relieved that OFCOM isn’t going to force it to roll out fibre; perhaps it was because the company just announced plans to wire up all major new developments with 100Mbits/s to the home. Ebbsfleet in Kent will provide the lucky guinea pigs; it seems that BT is going to maintain the structurally-separated Openreach model on fibre, letting customers pick one of multiple service providers using the new infrastructure. Good for them, we say.

Finally, Peer-to-peer IMS? That’s just…unnatural.

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January 10, 2008

Key Winter/Spring Events

In a crowded schedule there are a few events in Q1 that Telco 2.0 are involved with to varying degrees and which we’d recommend to our readers. They address one or more of our 7 key focus areas for 2008: Market Valuations, Disruptive Threats, Adjacent Markets, Two-Sided Business Models, Core Products and End-User Needs, and Regulation:

1.) The 3rd annual Telecom Finance and Emerging Markets Summit (Renaissance Chancery Court Hotel, London, January 23-25) is an interesting conference and awards event that brings together operator organisations with senior TMT financiers, private equity and venture capital firms, legal counsel, and other professional intermediaries in the sector. This year it will repeat its popular M&A panel to debate the impact of the credit crunch and identify which geographies and technologies will see most growth. Find out more or register here.

2.) The inaugural eComm 2008 (Computer History Museum, March 12-14, Mountain View, California) is run by the most fervent group of communications enthusiasts you are ever likely to meet. It mixes up visionaries, emergent technologies, real-world startups, cutting-edge academic projects, incumbent telecom players, garage based hacks and policy debates to create “the ultimate three-day conversation”. 60+ diverse speakers from companies such as BT, FlickR, Google, IBM, Intel, Microsoft, OpenMoko, Orange, Twitter, Skype, and Yahoo! …and Telco 2.0 (presenting the results of our major market study on new business models). More info/register here (Use the discount code ‘telco20’ to receive 15% off).

3.) CMO Forum, GSMA Mobile World Congress (Monday 11th Feb, Barcelona). A invitation-only event for 150 mobile Chief Marketing Officers. The focus is “Mobile as a True Marketing Channel - Realising the Opportunity” - essentially exploring in-depth the ideas outlined here: ie. how to scale the use of mobile as a medium for content and advertising and much more…We’ve designed the programme and will be facilitating it using our ‘Mindshare’ approach. (To apply for an invitation contact us here)

4.) The Government Mobile Forum, GSMA Mobile World Congress (Tuesday 11th Feb, Barcelona). This is a gathering of Ministers and Heads of Regulatory Authorities from more than 50 countries. It’s focusing on ‘Regulation in the New Communications Age’, looking in particular at the policy impact of mobile broadband. Again, we’ve integrated our ‘Mindshare’ approach to help clarify thinking. (To apply for an invitation contact us here).

Then we have preparations for our own Telco 2.0 ‘Executive Brainstorm’ in April in London (“Is there $250bn in ‘Two-Sided Telecoms Business Models’?) and the Global Mobile Money Summit with the World Bank and GSMA, part of ITU’s Telecom Africa jamboree in Cairo in May, and possibly a first Telco 2.0 event in the USA in June…Busy times.

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2008 Preview: Platforms, Partners… and Predators

As is traditional at this time of year, we’ve been reviewing everyone else’s crystal ball visions, as well as giving the tea leaves at the bottom of our corporate mugs a gentle swilling. Here’s what we think the future might have in store for us, with a bias towards European and North American communications markets. We’ve picked 21 of the biggest trends we see unfolding, but nothing is neatly segmented into calendar years, so we’re not wagering too much on the timing of any of these events.

Key highlights we discuss below include how:

  • investors are following the wrong KPIs.
  • the network doesn’t just stop at the central office or cell tower any more.
  • ‘open’ turns out to be easy to say, hard to do.
  • enabling boring business processes brings bountiful bundles of cash.
  • new networks don’t need old revenue models.
  • hardware goes soft, and we don’t just you’ll get a new leather pouch for your mobile.
  • telco plumbers go well with IT electricians.
  • telcos may be aspiring media stars, but our panel voted ‘no’.
  • we say goodbye to ‘ISP’, hello to ‘MSP’.
  • ‘two-sided’ sounds like an insult, but turns out to be a compliment.
  • ‘wholesale’ and ‘sexy’ mysteriously get conjoined.
  • nobody gets to be neutral on network neutrality.
  • spectrum is like clean air: everyone wants it, nobody wants to pay for it.
  • regulators find themselves coupled with telcos on a waterbed.
  • privacy trumps piracy.
  • everyone pretends to be environmentally sound when all they want is to work in their dressing gown.
  • ‘mobile’ turns into a four-letter word.
  • iPhone meets my phone
  • emerging market voice and messaging isn’t just cheap and cheerful, but dangerously different
  • voice gets absorbed by the Internet borg
  • everyone wants to be a telco, except telcos

Investors & investment metrics

Key trend: Legacy financial models diverge from current reality and future KPIs

Traditionally, mobile operators have been judged based on ARPU, churn and cost per gross addition. Fixed operators, including cablecos, have been judged on uptake of broadband, and upsell to premium video packages. All are being measured on bundled offerings, in both penetration of the base and scope of the bundle.

All of these are flawed to some degree, and investors will need to re-think the models they use to measure the performance of operators, for four reasons:

  • Firstly, the imperative for operators is to move towards a more “horizontal” structure. These metrics only relate to the retail icing on the platform and pipe cake.
  • Secondly, users aren’t behaving themselves any more. They’re juggling multiple SIMs, handsets and accounts to create their own “unbundles” to meet their personal needs.
  • Thirdly, these metrics are irrelevant to emerging two-sided business models that seek to make money from upstream partners for services like advert insertion and payment processing.
  • Nobody believes the numbers the operators publish anyway.

In 2008, investors will start to demand new and better metrics.

Disruptions and Threats: Who will eat my lunch?

Key trend: Everything in hardware begins with “Nano”, “Pico” and “Femto”

The long-term trend is for “shrunk” versions of everything to be pushed out to the network edge. 2008 is too early for femtocells to really take off, as the technology is still a bit mushy every time we take it out of the oven. But home hubs are really “femto data centres”, set top boxes are “nano media libraries”, and your mobile phone is about to become a “pico web server”, as the valuable contextual and user data it contains is needed by other online services.

It’s the little boxes at the network edge beholden to Sky, FT, Iliad, BT and Verizon that matter, as storage, local access and processing resources get pushed ever closer to the user. The winning operators in 2008 are the ones who can deploy and best manage all these devices at the network edge, just as if they were a part of the “core” network.

Forward-thinking regulators will understand that network unbundling has suffered an end-run.

Key trend: Everything in software begins with “Open”

Whilst it’s nice to see The Economist preaching ‘open’ half a decade after we started, the words during 2007 from Verizon, BT, France Telecom and others will start to be matched with action in 2008 (although more hot air to be expected and crates of salt are needed too).

In the past, the disruptions in telcoland were largely hardware-based: wavelength multiplexing, IP routing, 3G, even WiMax. In future, the value increasingly comes from the data generated by and carried by the hardware platform. The war is over who defines and benefits from that data. That war will be won by the search engines, portals, social nets and software and IT vendors. Yet they need access to the under-exploited resources of the operator: network, customer data and billing.

The paradox is that telcos can use this to this to their advantage and remind regulators how the “over the top” players are busy creating data islands with no bridges where the only value-add is selling peoples personal data.

Nonetheless, the era of a few telcos and vendors huddled in business hotels in scenic locations for long period, dreaming up technology standards, is done. Time to get used to playing to someone else’s technology standards. In particular, when someone asks you “so, what were you doing in 2008”, the answer is “ignoring OpenID and OpenAuth for as long as I dared”.

Key trend: Mashup madness

Big, lumbering, slow IT integration is out. Cheap, quick, lean is in. The complexity of the operator platform is going to be hidden behind a raft of web services. Developer partners won’t need to be able to spell IMS, let alone implement it. Instead, the scalability, security and manageability of the increasingly mature web technology platform will take care of it all. The purpose of all this? The platform idea was originally to just enrich 3rd party applications with additional telco capabilities like location and billing. The focus will now move to enabling business processes between users (both enterprise and consumer) and the merchant and e-commerce value chain (advertisers, marketers, payment processors, fulfilment and delivery).

Just can someone come up with something snappier than “Communications Enables Business Processes”, please?

Key trend: Shiny new network, shiny new business model

For mobile operators, there’s the 700MHz auction in the US, a crop of new WiMax operators around the globe, (someday!) Sprint’s Xohm, and “digital dividend” TV spectrum all over. These aren’t going to be GSM and CDMA network clones. Expect to see the money pass around between the device, content, network provider, user, and a raft of third parties in many and interesting new ways.

Sony’s Mylo, and Amazon’s Kindle will be just the vanguard of a torrent of connected consumer electronics devices. But none will be sold with a traditional ISP plan.

Key trend: Liquid media meets liquid hardware

The “meta trend” of Web 2.0 is that all parts of the media value chain are unbundled and re-combinable. Media is “liquid” in that it isn’t attached permanently to its authoring tool, presentation format, aggregation service or distribution system. My newsletter email is redirected to my RSS service which I read on my mobile browser. Messaging services like Twitter decouple the senders from the receivers.

As Dean Bubley notes, the same same is happening in hardware. More users want to buy the devices independently from the mobile operator plan (although the mass remains wedded to the expensive hidden finance charges of handset ‘subsidies’). They want to use a USB radio independently from their laptop. The hardware is being unbundled, and soon we’ll have the technology to recombine the parts in new and interesting ways. Expect to be viewing those pics you took on your mobile on your TV screen in the none-too-distant future. In 2008 it’s still talk, but the technology will take a leap towards reality.

Adjacent markets: Whose lunch can I eat?

Key trend: IT services as an upsell to offering connectivity continues to prove a winner.

BT’s move into IT services begins to look like a stroke of genius. As every operator starts to reach the natural limits to growth of its own services, and needs to open up, there’s an immediate up-sell of business consulting and IT/network integration services. In general, carriers with an enterprise focus (e.g. Vodafone) are in a better position, with an existing sales force, trusted brand, and enterprise-focused capabilities. Whilst Web 2.0 consumer technology gets the headlines, the money, as always, is made from business to business.

Key trend: Beyond IT services, nothing else does - entertainment, healthcare, education, mobile payments, e-commerce all fail to gain significant traction as stand-alone lines of business

Many operators will hanker after becoming something other than a plain old phone company. Few will succeed. The real reason is that they will continue to follow excessively vertically integrated models, without yet having the technology platform, organisation structure or partner channels necessary to realise their ambitions. The future for operators is as logistics services providers for valuable data. That means understanding of the businesses they supply, but not necessarily involvement: the chicken was healthily involved in making the cooked breakfast, the pig seems over-committed.

Overall, diversification attempts in mature markets will fail over and over. But in emerging markets the story may be different, since there may be no existing incumbent industry to integrate with or compete against.

Key trend: Enter the media services provider

There is one exception to the general failure to successfully become media companies, TV services, or lifestyle service providers. The media bundle can be unpicked, and the rights separated out.

One strong trend we expect is the re-packaging of those media rights with ISP plans. It’s time for the music industry to stop firing rocket grenades at its own shoes and start selling music rights to anyone who will pay for them, even if they then spend all day sharing those files with friends. Which is all good news for those rights societies seeking to send the cash back to the artists and agents.

Particular things to watch this year in the content space are disintermediation, as content owners go direct around telco intermediaries (be it portals, IPTV EPGs, or any other kind of gateway); and re-intermediation, as wholesalers and distribution intermediaries start to offer services, and substitute their own gatekeeper functions.

Two-Sided Markets

For more on the definition of two-sided markets, see here.

Key trend: Telcos flunk advertising, but start to see the bigger picture.

Due to a lack of scale and competence, 2008 remains a disappointment for telcos entering the advertising value chain. However, we’re nearing the depths of Gartner’s trough of disillusionment, and the plateau of productivity beckons for 2009-10. Slowly operators will understand the need for scale, and understand their true assets. They’ll keep at it, partly through sheer fear of Google, but more because they can see the bigger picture: advertising is just one first step in the e-commerce value chain, and telcos are going to be suppliers of customer data and processing capability at every stage of that chain. They just haven’t yet figured it out, or the right partnership and business models.

Possible events/evidence: Industry bodies like the GSM Association start to talk seriously about creating operational entities to manage their combined advertising inventory and insertion capabilities, and giving the media buyers what they really need. Delivery won’t come for another 1-2 years (at least).

Key trend: Wholesale becomes fashionable, Wholesale platforms are positively sexy

Where many sellers meet many buyers, you typically find a middleman unbundling and reaggregating content or connectivity. These businesses often have high margins, due to strong market concentration because of increasing returns to scale of trading hubs.

The telco platform is going to need intermediaries to bring together connectivity from many networks, and re-package it for content, device and application partners whose competence is in areas other than bizdev with a thousand telcos and consequent integration headaches. The growth in telecoms is going to come from rich wholesale services to “upstream” partners.

The hottest job in an operator will be the head of wholesale, which will be a nice change compared to the unloved obscurity this position has previously commanded.

Regulation

Key trend: Network neutrality returns, and the beast must be confronted

It’s US election year, and politicians will be looking for ‘progressive’ soundbites. Plus the European Commission is starting to throw its weight around with populist moves. After going quiet for a while, network neutrality will be back on the agenda on both sides of the Atlantic. Many will be promising things they barely understand and can never deliver.

The good news is that the telecoms business is growing so complex and layered that the chance of any enforceable regulation making it onto the books and retaining any meaning by the time it gets there is near zero. The market bottlenecks will have moved to content delivery networks, home hubs, set top boxes, and personal area networks. The evolution of wholesale markets, and the lower importance of the ISP product, will make the whole thing moot.

Key trend: Spectrum, spectrum everywhere, but not a drop to drink

There will be endless talk about spectrum reform in 2008, but little action. The UK will take an aggressive pro-market stance, the EU will take a progressive transnational stance, and the US will take whatever the highest-paying lobbyist says it should.

Key trend: No free lunch for regulators

Regulators start to see the futility of controlling voice termination fees - which only give rise to a “waterbed effect” as more and more revenue is generated from data & other services. You can squeeze one area, but only at the expense of rising prices in some other inelastic part of the business.

End user needs and behaviours

Key trend: Privacy replaces piracy as the news maker

Facebook didn’t understand their own business. The whole point of a social network service was privacy. Unlike previous “My web site” services like Geocities, you could control who could see what. Privacy issues, such as lost data records, sale of user data, and non-portability of user data, are coming to the fore of users’ minds. The debate will go beyond industry insiders and start to attract regulatory and political attention.

Telcos sit on a goldmine of valuable user data. Who calls whom, from what context, and when. In 2008, the gold will remain firmly in the ground. But the “paradox of privacy” is that such data is best not processed “at the edge”, since it can’t be passed around to others. Rather, the mountain has to come to Mohammed, and by the end of the year there will be the first signs that a few leading operators “get it” and that they’ve a critical role to play here.

Key trend: Work, shopping, education and health become ever more place-shifted

Driven by a mix of environmental and lifestyle concern, there will be a sea change in attitudes to making short journeys everywhere to interact with all private and public workplaces and services. The driver for upgrading access infrastructure will move back from content to communications. To pilfer Mars’s confectionery marketing slogan, “broadband today helps you work, rest and play”. If you want to work from home, you need fast symmetric bandwidth. It isn’t telepresence, but webcam conferencing will start to become socially normal, not geeky.

Key trend: Users don’t care about your premium mobile network or your premium mobile content or your premium mobile cashflow

The premium for mobility will start to shrink. Users will see less and less value in “mobility”, as they side-load content onto portable devices. They will mix and match services, such as using SMS to say “call me in 15 mins” and getting a call back on the landline. Users will learn to roll their own content solutions, and ringtones will continue their downward march. Only the mega-successful internet applications will be mobilised. Ringback services will temporarily blossom, but users accustomed to the free abundance of the Web will increasingly resist being charged for trivial services offering trivial content.

Core voice and messaging

Key trend: The iPhone backwash starts to lap against the shore

They’ve had a year to think about it and six months to use it. Now it’s time for the non-iPhone mobile operators and rival handset makers to step up to the plate. We’ll see “parity” features being deployed around voicemail, and lots of improved user interfaces. More substantively will be a re-think of the business model. The iPhone has reversed the subsidy model, and potentially will upend the application developer model too. This won’t be a one-off anomaly. Will Nokia’s Ovi be re-cast to provide the online experience needed to complement its handsets, and not just in the media/entertainment functions?

In parallel we’ll see the “divergence” trend accelerating. The best response to an iPhone is to start selling “real” internet tablets to users, and getting them connected up, without the expense and compromises of Apple’s converged product.

Key trend: Necessity is the mother of innovation

The real story of the “iPhone backwash” begins when Nokia’s unsexy mass market Series 40 phones start to move forward. If Nokia can sync this with Ovi online services, they’re an “accumulate” stock pick.

The action is going to be in emerging markets. We think that there will be major surprises as new operators enter with highly disruptive business models that re-think both the end user proposition, service distribution and the revenue model. If you’re looking for the future of voice and messaging applications, don’t look at $1000 iPhones, look at $10 communications devices to change the game.

Key trend: Voice really is just a feature, not a product

If 2007 was the year of Facebook, 2008 will be the year of the Facebook plugin widget. As our online survey confirmed, the future of IP voice isn’t in carrier operated voice services. Rather, it’s in enabling a variety of services to package up a voice capability with network access and online applications. Clever telcos will see opportunities to intermediate for user privacy, service reliability, and ease of provisioning. Stupid telcos will just be disintermediated.

The real significance of Google’s Android mobile OS is that it enables easy replacement of the address book and dialler applications. A decade or two from now, 100% of phone calls will be ‘click to call’, but nobody will think of it that way, just as when you ‘dial’ a number on your mobile, no rotary dials will be in your conscious mind.

Competitive landscape

Key trend: Everyone wants to be a telco (except telcos)

Tension will increase over 2008 between operators and handset vendors, content companies, and search/portal giants. Each of the latter three will make incursions into traditional telco services spaces, and telcos won’t like it one bit. There will be significant conflict along the supply chain.

The answer will be a compromise: telcos will exit a lot of user-facing services, but those services providers will find they can’t deliver the fully integrated user experience without the telco as a partner or supplier. Expect it to take another 2-3 years before a truce is called.

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January 7, 2008

Ring! Ring! Hot News, 7th January 2008

BT strikes in the set-top box market; they’re the first to ship Xbox360 consoles as IPTV endpoints. And there’s more; BT Vision gets an “on-screen magazine” based on the same single platform. We’ve often said that the fixed-line world doesn’t get user equipment, and that this creates interesting opportunities; BT has just leapt right on it. See our case study on Iliad’s Freebox in the Broadband Business Models report.

PS: we’re trying out a new format for Ring! Ring!…

Rumour: are those Chinese 3G licences coming at last? It’s one of the industry’s perennial stories; will China eventually get on with its 3G licencing, or are they still hoping that TD-SCDMA will turn out useful? The real problem now is that even if they get it working, “it” is a moving target; since 2005, “3G” top speeds have gone from 384Kbits/s (if you’re lucky) to 7.2Mbits/s, WiMAX has burst onto the scene (Czech Vodafone may jump straight to it), and if it’s cheap connectivity for the bush you’re after, GSM is cheaper than ever and EDGE (as well as the future Evolved EDGE) will get reasonable data rates out there. Speaking of which, here’s Mobile Monday Mumbai with more on value-added services for the countryside.

Tesco MVNO is angered by spectrum refarming. Tesco Mobile is apparently scared that refarming the 900MHz band will stop O2 offering GSM service; perhaps no-one’s told them that UMTS is significantly cheaper as a way of delivering bulk voice? Meanwhile, the UK Government and the European Union are falling out over the big spectrum review; the EU wants to technology-mandate, while OFCOM wants technology neutrality with interference restrictions.

AT&T gets into CDNing; this is being framed as a Net Neutrality story, for some reason. But part of the beauty of CDNing is that it doesn’t imply the real sin of non-neutrality, which is that making some bits go faster means making others go slower unless you have spare capacity, in which case there’s no point anyway. You just deliver from somewhere else; nobody is being discriminated against. If neutrality and AT&T are your worries, far better worry about their grandiose IMS schemes.

There’s also a cracking Wired article on the fate of your data slipstream. It’s already becoming a feature of many social network sites that they have a really closed-minded attitude to yout data; not only can you not take it with you, but they aren’t at all keen on you building anything interesting with it. (See the great Scoble vs Facebook row.) Now imagine what happens if and when a mobile operator gets a clue and does something interesting with their CDR stream; we’re going to have this problem writ telco-large. This is the issue Keith Wallington of Truphone so presciently raised at the Telco 2.0 Executive Brainstorm in October. He reckoned it would be at least as important as number portability.

Sony tinkers with Mylo; but far more interestingly, introduces Skype on the PSP. Our Broadband Business Models survey showed expectations of a surge in “embedded voice” in the next 10 years; that’s voice communication included as a function in unlikely devices like games consoles. There’s even a BT angle…as the FT reports, there may be a video/voice messaging service coming for PSP players who are also BT customers.

Tiscali, meanwhile, has decided that what it needs to go with its low-margin ISP business is….a low-margin discount MVNO. Clearly.

The other Sony, of course, is the media-entertainment giant; interestingly, it looks like they are becoming the next crack in the DRM fortress. Despite having historically been the most aggressive DRM proponents, they’re going to start selling music without it; anyone remember the Sony rootkit? How things change.

A war is breaking out for leadership among the mobile development platforms; everyone’s getting open. The OpenMoko Linux distro just announced a new version of its Neo1973 gadget that won’t require you to compile the kernel; phew, frankly that was only a couple of steps from asking your users to fab the chips. Meanwhile, they’ve got their first major customer; it’s not a mobile phone vendor, but GPS specialists Dash Navigation. We wonder whether their next satnavs will have some voice capability. The Register is doing a series comparing the rivals here; OpenMoko is first up, with Google Android coming soon.

But they’re still proliferating. Evolving: here comes Yahoo! with its own mobile webdev platform. An SDK is expected soon.

Giant electronics show CES is on this week, so the Web is littered with gadget stories; here’s another version of the perennial “project your mobile screen on things” idea, if you care. Sony Ericsson and Motorola launched new gadgets; Microsoft’s next version of Windows Mobile will support touchscreens; Nokia put more memory in the N95. Woo.

Far more significantly, something called “Pudding” has invented something evil. It’s software that listens in on your phone calls! Software that picks out specific keywords! Software that listens to your phone calls, picks out specific keywords, and uses them to send you advertising! And they claim it works for VoIP and Web-voice/callback operators, too. It was nice when it was only the government who listened to your phone calls…but seriously, this sort of thing is a kind of strange attractor for telcos. It holds out the prospect of lovely ad revenue, whilst also playing to their natural centralising instincts; and it’s going to be absolutely loathed and despised by all good people, which is why it will probably fail (to say nothing of the fact that if you’re speaking on a mobile phone, by definition you’re not looking at the screen).

And you can be certain the government will want the logs. Nokia’s Gabor Torok, meanwhile, points out that mobile advertising may cannibalise operators’ data revenues, rather than substituting for voice revenues; it’s traffic and has to be carried, after all, so data prices must come down to make it work. Alternatively, you could fork out the capex for a huge dynamic charging/rating/DPI system. Hmmm.

His colleague Robin Jewsbury, meanwhile, considers the parallels between those new mobile development environments and the golden age of Unix. What is the equivalent of the Internet for mobile, he asks? Could be the Internet, perhaps.

David Lynch, meanwhile, is not happy about mobile video:

Curiously, Osama bin Laden doesn’t agree with him.

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

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