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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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