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June 30, 2008

Ring! Ring! Hot News, 30th June 2008

In Today’s Issue: WiFi in your car; connectivity included with O2UK iPhones; Nokia buys Symbian and gives it away; LiPS and LiMo; OpenMoko ships; Sony Ericsson struggling; Reding terminates 70% of termination fees; France Telecom hits the silk from the Telia deal; T-Mobile USA launches femtoVoIP; FemtoForum+NGMN=sense; where is the network API? probably not in the IMS; Blyk expands; FISA fight goes on; T-Mobile UK goes down; Vodafone to buy Ghana Telecom?

Just what I always wanted — WiFi in the car. Chrysler’s UConnect product will essentially give some vehicles a WLAN router with a 3G radio modem for the backhaul. The interesting question will, of course, be the business model. Chrysler says there will “be no tie-in to long term contracts”, but it’s going to be hard to get this off the ground without some element of two-sidedness — perhaps by bundling connectivity in the car as an optional extra, or doing something clever with GPS and localised ads.

You’d better hope the WLAN is encrypted by default, or the term “wardriving” will take on a whole new layer of meaning as hackers chase open WLAN vehicles down the freeways of California, trying to stay in range just long enough to finish that torrent download, or to spork the satnav display with a specially crafted packet. All your SUV are belong to us.

That’s if their attention isn’t distracted by one of this week’s wave of shiny gadget developments. For a start, pricing and launch details of the 3G iPhone are leaked; it looks like O2 in the UK will bundle data connectivity with the prepaid version for the first six months. It’s astonishing; you show a carrier an iPhone and they’ll sign anything.

More seriously, Nokia spent the equivalent of two years’ Symbian royalties buying out the other partners in Symbian, before immediately promising to transform the software house into an open-source foundation. We’d say more about it here, but we’re saving ourselves for a much more detailed post on the issue, so watch this space. It’s an interesting thought, however - what would have happened had Psion decided to open-source the whole thing when they gave up on mobile back in 2001? Another one for the “great moments in the failure of British industry” file.

Almost immediately, there was more mobile open source activity — the LiPS (Linux Phone Standards) Forum has merged with the slightly better-known LiMo Foundation. It’s a sensible move on the face of it - LiMo’s membership contained more carriers and developers, whereas LiPS had more hardware vendors, so the merger will help to provide a comprehensive Linux environment from the silicon up.

Compared to LiMo, the plans for the Symbian Foundation look…not very open at all. But there is one mobile-Linux group who are even open-er than LiMo - yes, up to 1000% more bigger openosity now! It’s the OpenMoko community, makers of the Neo1973 and FreeRunner all-open-source, glatt kosher mobile phone. Well, it’s in the shops, or rather, available through a group of selected e-tailers. Pricing in the UK is around £272 from Truebox. We’ll see your iPhone and raise you…

No wonder Sony Ericsson is looking green at the gills. It’s profits warning time; apparently the economic downturn has hit its speciality of midmarket fashion gadgets disproportionately hard. Smartphone sales are holding up reasonably well, cheaper devices are benefiting from trading-down, but the midmarket shinies suffer.

And the carriers have no business smiling, either; here comes Viviane Reding again. The European Commission has published more details of its plans on mobile termination fees — it wants them cut by around 70 per cent. Ouch! It’s enough to make you abandon a misguided monster merger. Like France Telecom just did. We didn’t think much of the attempt to buy TeliaSonera to begin with, and now it looks like it’s a dead’un. It just wasn’t a good idea in the first place…after all, you could be improving your crucial voice and messaging products, like T-Mobile USA. They’re offering a $10/month unlimited VoIP service to all their cellular customers, on condition they get a “router” which we think is probably a femtocell.

It’s a smart move; not only are they competing sharply on price, they’re doing so using their competitors’ costs. And, as we’ve often pointed out, CPE is an underexploited opportunity for fixed operators to astonish their customers and mobile operators to infiltrate the fixed subscribers’ front rooms. So we’re also pleased to see that the NGMN, the carriers’ talking shop on 4G, is talking to the Femto Forum about including femtocell support in the LTE or WiMAX standards.

As well as improving your core voice and messaging products, what else should you be doing? That’s right, exposing key enablers as APIs so third-party developers can create interesting new services, while redesigning your business to gain upstream revenues. Gary Kim of IPCarrier asks where the network API is. He seems to reckon IMS might help. And Blyk has announced its ad-funded virtual operator is expanding into Germany, Spain, and Belgium.

Finally, thanks to Senator Chris Dodd, the FISA fight goes on; T-Mobile UK’s data service goes down, hard; and Vodafone may buy into Ghana Telecom.

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Are faster mobile networks worth the effort?

We were asked to present on a panel at the private marketing innovation conference of a UK mobile carrier last week. The subject was the “Need for Speed”: what are the real drivers for network capacity and speed, and thus where should an operator focus its investments?

Since our answers are generic to all mobile carriers, we thought we’d share them with you here. The format was five questions, addressed by all the speakers:

  • What user behaviour is driving the demand?
  • Which access technologies to invest in?
  • What kind of devices will absorb this capacity?
  • Does wireless displace fixed access for data?
  • How does the customer relationship evolve?

What user behaviour is driving the demand?

The first question noted that customers’ demands for increased speed and capacity appeared never-ending. But what exactly is driving the customer’s seemingly unquenchable thirst for more speed?

We took the view that you have to examine this issue from the perspective of value, not volume. There are three fundamental modes of communication: information-based applications; real-time personal communications; and entertainment (more depth, as always, in our Voice & Messaging 2.0 Report).

The Internet, and especially the Web, is shifting in role from a way of distributing stored information/documents (i.e. hypertext) to a way of interacting with applications. This is evidenced by the general “cloud” trend of software-as-a-service, Akamai’s Edge Computing initiative, online multiplayer games and virtual worlds. Related to this, the bandwidth requirements of common applications are storming up. This is particularly true for the uplink: every photo and video captured disappears into the cloud at full resolution, but not all are ever viewed, and those that are may only be viewed in thumbnail or extract form.

However, it’s not primarily about information, but about ‘presence’ — the sense that you’re with someone despite not actually being physically there. Communications systems try to replicate this ‘being there’. It should feel very strange talking to a lump of plastic at the side of your head that whispers back in your ear. Yet our brains are surprisingly good at smoothing out audio and video artifacts , and the illusion we’re really talking to someone else is maintained. However, consider when you want to share that 10Mb Powerpoint deck half way through the Skype conversation. This is the digital equivalent of pushing a document across the table in a meeting room. To make the illusion work you can’t have a pause. Therefore we tend to need very short bursts of high speed.

Entertainment is all about filling the void in between bouts of communication. It might be able to absorb network capacity, but it won’t be what drives the business model. Furthermore, such traffic is often best delivered by other means — broadcast, edge cached, or sideloaded — and competes against low-cost distractions such as games. Tellywood alone won’t pay your bills.

Which access technologies to invest in?

Next we considered the plethora of different technologies available to fixed and mobile operators (e.g. 3G, HSDPA, ADSLx, Femtos, WiFi, Wimax, LTE, Fibre etc.). Which ones should mobile operators care about most?

Here, the job of the telco splits into two: the wholesale telco, that aggregates networks and provides the ‘logistics platform’; and the retail services provider who integrates and promotes the end user experience. Defining the products and services themselves is slowly migrating away from today’s operators towards other players (e.g. Nokia Ovi, Apple iPhone, Amazon Kindle). Many of today’s operator functions such as billing and customer care may become white-label inputs into these other businesses.

In choosing a network strategy, operators should prefer breadth over depth — coverage always wins. Verizon Wireless trounced Sprint, with identical technology, by emphasising network coverage and quality, whilst Sprint pushed advanced application services. Customers care little or nothing about network data speeds per se. Since femtocells and home hubs extend in-building coverage, and boost speeds too, we’d say that’s where the future lies. Furthermore, most of the ‘dead time’ filled with bulky low-value entertainment also occurs in the home, which makes it all the more important to lower your network costs there.

The wholesale platform needs a wide range of delivery capabilities, just as a physical-world logistics company needs road, sea, rail and air freight assets. This again points towards building ‘edge’ assets through the retail side, which can then be used to create wholesale solutions for partners wishing to cheaply and effectively deliver content and services to users.

The trick is to integrate all the various access technologies to present an experience to users that matches the capabilities and limitations of the different bearer technologies.

What we certainly wouldn’t be doing in mature, highly teledense markets, is rushing out to build new WiMAX macro networks.

What kind of devices will absorb this capacity?

Next we considered what kinds of devices that customers will use to quench their thirst for increased speed and capacity.

The hardware form factor of user devices will change least of all — because much of their design is determined by human ergonomics. Their software, however, is a different question.

The focus will slowly move away from the device onto the data it carries and can capture or display. Wireless Grids is an example of a company that lets you use the displays, input devices, printers, and other resources around you. For this to work, there will be an increasing emphasis on short-range communications and personal area networks. Synchronisation between devices is current a nightmare part of the user experience - solve this and print your own currency. Your ‘phone’ might be a primary source of data, identity, authentication etc. to lubricate these interactions.

Does wireless displace fixed access for data?

For the fourth question, it was noted that the last decade had shown that the “gap” between fixed and mobile networks in terms of data speed and capacity of retail propositions is closing fast (even if the fundamental technology gap remained, as optics leap ahead). The same decade saw an equivalent trend in quality and convenience of voice calling gap close, and displacement occur. So, will the need for fixed broadband data products “disappear” in the same way?

In general, we think not. The comparative advantage of fixed networks will, however, slowly erode without a fibre build-out. In some rural and dense urban areas we may see a switch to fixed wireless. Yet absent some leap in mesh networking, wireless doesn’t look like having the capacity or economics for video delivery. As we noted before, there is also more dead time in the home and therefore the consumption of fat video products will always be higher there.

The focus, however, needs to be on getting a lot more out of the infrastructure we have. Femto roaming, for example, could become a big deal — where carrier A recompenses carrier B for using your neighbour’s femto when you’re down the end of the garden.

How does the customer relationship evolve?

Finally, the mobile business is shifting from selling voice calling and text messaging to connecting customers to the Internet in better and faster ways. Where does this leave the operator’s role in the customer relationship in the future?

Ask your customers — do any of them want a ‘relationship’ with their phone company? Consumers don’t get excited about who supplied the batteries in their phone, so why should they be worked up about the radio network?

Ideally telcos should become better retailers — category management, packaging, promotion, segmentation, distribution. This is hard, as they lack many of the necessary skills and assets. For example, the ‘one size fits all’ mobile retail store doesn’t match the segmentation needs of an increasingly fragmented marketplace.

In reality the game is all about gaining a larger slice from the device makers and upstream players. This will only be done by offering services they both value and struggle to replicate in scale. This is best done by creating two-sided markets (see our report here for more information) to exploit the telco assets better. (It was clear in discussion afterwards that they see limited mileage in trying to squeeze consumers for more value-added content services, and that the growth will have to come from elsewhere.) Otherwise, the best relationship is no relationship, and become a specialist wholesale-centric carrier.

[Ed - We’ll be covering some of these issues in more depth at the 4-5 November Telco 2.0 event in London. Agenda now available here]

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June 26, 2008

Next Generation Access Networks - International Perspective

Following the popular article last week on FTTH prospects for the UK, Benoit Felton of Fibrevolution sent us some excellent material looking at the issues from a more international perspective. He says:

In April this year I attended a very interesting conference in Stavänger, Norway, organised by the OECD on Next Generation Access Networks where I conducted a number of interviews with experts. The end result is two podcasts:

The Stavänger Show - Part One: FTTH Policy focuses on the challenges raised by next generation access when it comes to government policy and regulation. The people interviewed are:

Marvin Sirbu, Prof. Engineering and Public Policy at Carnegie Mellon University; Antony Walker, Head of the Broadband Stakeholder’s Group; Grant Forsyth, Head of EMEA Regulatory Affairs at BT Global Services; Dimitri Ypsilanti, responsable for the OECD Working Party on Communications

The Stavänger Show - Part Two: Deployment Models focuses on the various approaches to NGANs, from municipal open access to incumbent vertical integration. The people interviewed are:

Herman Wagter, CEO of Glasvezelnet Amsterdam; Dennis Weller, Chief Economist at Verizon; Christian Berg, Consultant at Dansk Energi; Richard Clarke, AVP of Regulatory Planning and Policy at AT&T

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June 23, 2008

Ring! Ring! Hot News, 23rd June 2008

In Today’s Issue: 60 years of computing - our Mancunian future; 25 years of DNS, 10 years of a post-Jon Postel world; securing the root DNS; Yahoo! loses clue to the wider environment; Apple’s outrageous iPhone margins; iPhone-RAZR culture shock; 1st VZ ODI gadgets; Moto tries to slim itself fat; Huawei handsets up for grabs; Telefonica leads misguided acquisition rush into China; Chinese bank buys Poland; first WiMAX.eu; Sprint XOHM goes live in September; Sprint offers enterprise e-mail; Nokia builds mapping capabilities; “IMS light”, again; communicating non-neutrality; Isenberg makes stabby over FISA

It’s been sixty years since the very first computer that accepted a stored program, Manchester University’s “Baby”, successfully determined the prime factors of a given number. The beginning of computing is one of those events it’s hard to date - in the UK alone, you’d have to consider the rival claims of the Cambridge Maths Lab, NPL, and Manchester, to say nothing of the code-breaking COLOSSI (although they weren’t capable of re-programming in memory), the US’s ENIAC, or Konrad Zuse’s work in Germany. But Baby’s special claim is because it was both a digital computer, and one which could read a stored program; you can date the beginning of the primacy of software to this point, and hence essentially everything that defines the IT industry and its distinctive culture.

Whilst we’re on the topic of history, it’s been 25 years this week since the first DNS server went on line, just one of the many contributions of the late Jon Postel as co-author of RFC882, which specifies the DNS, administrator of the .us TLD, president of the Internet Assigned Numbers Authority, and editor of the RFCs. This is a fine excuse to link to RFC2468, the tribute to Postel written into the Internet’s standardisation process (Postel’s own invention) by none other than Vint Cerf. And yes, that is as in “2,4,6,8, who do we appreciate?” More practically, the Renesys blog has some thoughts about the problems of securing the root servers, with a handy list of where they should be.

At Yahoo!, the problem is increasingly that executives who should be inside the building are not. Since the collapse of the Microsoft bid, people have been leaving in numbers, starting with the founders of the numerous whizzy start-ups they bought over the last five years - the founders of Flickr and Del.icio.us being the most senior to walk so far. (Can anyone imagine what the walk-out rate would have been like if Microsoft had bought the company?)

Yahoo! might, however, find some relief in the fact that the majority of mobile search requests come from iPhones (German link); perhaps they might cuddle up to Apple. That’s if Apple actually wants them - the latest forecast for the iPhone bill of materials puts its cost at about $100, which implies an outrageous profit margin.

It turns out that a quarter of all iPhone users switched from a Motorola RAZR, by far the biggest single group among them. It seems exactly the same gadget hipster twits who bought iPhones were the ones who flocked to RAZRs three years ago. No wonder they love the things - the RAZR V3 had some of the worst figures in industry history for customer satisfaction, and a reputation for poor quality control to boot. The comparison with Apple’s optical glass, burnished aluminium, and Unix can only be telling.

Verizon, meanwhile, has homologated the first ODI device.

Motorola, meanwhile, reached for the classic response to hard times - sack half the R&D lab. This is now the second major cut in product development and research at Motorola since the crisis began; it’s not the most obvious strategy for a company whose problems stem from a lack of good products. Perhaps they assume that whoever buys the handsets operation will already have their own lab? (hint - Nokia?)

If you want a spare handset factory, though, Huawei is selling a large chunk of its devices operation. The leading Chinese vendor is far better known for its network infrastructure products, and it looks like they are planning to specialise in them, like so many other NEPs. But however low the margins on Huawei gadgets are, you can bet their problems aren’t as bad as Moto’s.

We mentioned that the reorganisation of the Chinese telecoms industry is likely to trigger a rush by essentially all the NEPs to sell them CDMA2K and UMTS gear, and all the major telcos to try to buy into the new big three converged operators. Telefonica kicked it off this week, angling to come out of the China Netcom/China Unicom merger with a 10 per cent stake. There’s something slightly worrying about this business of very expensive minority stakes far from home - it sounds a lot like being a Western oil investor in Russia, and you have to remember the sad tale of BT’s Japanese investments.

Interestingly, this works both ways: here’s a Chinese bank funding a greenfield mobile operator in Poland. In fact, it’s more of a monster vendor financing deal than anything else, as all the equipment is coming from Huawei.

Europe’s first mobile WiMAX net launches in Amsterdam; Sprint confirms that its first commercial WiMAX network will be live in September in Baltimore. More usefully, perhaps, they also started offering MS Exchange and Lotus Notes e-mail for nonfancy devices.

Nokia, meanwhile, opened yet another web storefront; more interestingly, they also bought a rather impressive social mapping application, Plazes.

NEC launched something called “IMS light” (again) at NXTComm - about all that’s interesting here is that the applications they are pitching for it are mostly unified comms. A couple of years ago, the first thing any IMS person wanted to show you was an “interactive video-sharing” service, which were uniformly dire. I remember vividly the one the GSMA showed off with Nokia at 3GSM 2006, which was reduced to semi-functionality by latency - especially amusing due to the number of people involved busy explaining how only they could guarantee acceptable quality-of-service for video streaming.

Relatedly, Telephony Online asks how carriers who want to offer multiple levels of service by application will communicate this to their customers, given the number of people who complain of “slow” broadband within the first month of getting it.

And finally, the US carriers were officially shriven of responsibility for their part in illegal surveillance operations. David Isenberg is furious.

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June 19, 2008

Prospects for FTTH in Britain: considered slow

So, with two major US carriers rolling out fibre to the home, a string of European cities doing the municipal-fibre thing, Iliad fibreing-up their own network in France, and Japan and Korea having long started wiring up whole apartment buildings, how soon will the UK get cracking? Telco 2.0 went to the Broadband Stakeholder Group’s conference to find out.

Background to the issue

The broadband incentive problem tells us how there’s little incentive for network owners to invest in networks when they can’t capture much of the incremental value of the traffic. One way out would be to make a radical cut in the underlying incremental costs of bandwidth, and to stretch budgets further. And that’s precisely what we’re seeing all over the world, as operators upgrade in order to substitute new CAPEX for old OPEX.

There are many ways of doing this: deploying fibre, DOCSIS 3 cable systems, and advanced wireless in the access loop; moving to technologies like Carrier Ethernet inside their networks; and substituting peering for transit whereever possible. Mobile operators are increasingly pulling fibre to their cell-sites in order to cope with a rising tide of data traffic encouraged by the arrival of megabit-plus radio links.

Verizon estimates that it saves up to 70% of OPEX on every link it converts to FiOS. So you’d think the pressure would be on to get the fibre out there in Britain, a country criss-crossed with high-maintenance copper in a damp climate. The UK is also perhaps the guinea pig for the broadband incentive problem. But FTTH is further behind in the UK than almost anywhere else in Europe. So far there is literally no SOHO fibre access anywhere in Britain. What’s going on?

Correlates of Success

The first problem with a UK national FTTx roll-out is that nothing like that has been done before, so no-one really knows what is going to happen, who will benefit, or how much it costs. The BSG, however, has commissioned some research into experience from the existing fibre deployments. You can draw a number of conclusions from this, although it’s worth noting they didn’t include the major PON deployments in Japan, Korea or the US. So it was handy that Benoit Felten was around - we’ve included some slides from his presentation at the event.

felten-1.png

For a start, it seems clear that locally-owned fibre is more likely to succeed. Relatedly, the crucial variable in the success or failure of a deployment is take-up; there is a strong link between community ownership and adoption.

felten-2.png

Secondly, open access is correlated with success. The most successful fibre builds are the ones that practice open or shared access at a low level in the protocol stack. Thirdly, Ethernet is to be preferred to GPON, etc. — it’s not clear whether this is inherent in the technology, or whether it is because the successful open-access, locally-owned builds chose it for other reasons. And finally, layer zero is king. Perhaps the defining factor is how easy it is to get access to civil works, which represent around 70% of costs. It’s easiest to deploy fibre by linking up apartment blocks, especially new buildings where the infrastructure can be put in during construction.

felten-3.png

Unfortunately, this is much more helpful in Paris or Amsterdam than it is in a sprawling British suburb. Here, it’s unavoidable that anyone deploying fibre will have to cover a lot of trench mileage - so who’s going to pay for that? The owners of the existing infrastructure are of course BT and Virgin Media. BT has been politicking with the government for years about the fibre question, and we’ll come to that later. But first, let’s put on record that Virgin didn’t come to the BSG. With their own infrastructure, and no annoying open access requirements, plus a permit from OFCOM to call their co-axial network “fibre optic” in adverts, their plan appears to be simply to ignore the issue. So much for that option. And to be fair, the Virgin Media network seems to be excluded from the options considered in the Plum Report commissioned by the BSG.

The Politics of Openreach

The other national network is of course that of BT Openreach, chartered steward of the copper wires. In their role as wholesaler to all the ISPs and alt.nets, they are the obvious choice. But Openreach, and BT more broadly, is in a very strong bargaining position — and they are determined to extract a high price, in terms of regulatory concessions, State funding of the deployment, and actual pricing of both the future network and their existing one. BT shareholders would expect nothing less. There is a two-level game in progress, on the upper level of which OFCOM, DBERR (the Department of Business, Enterprise and Regulatory Reform - the former Department of Trade and Industry), and Openreach are negotiating about fibre, and on the lower level of which OFCOM, Openreach, and Openreach’s customers are negotiating about Openreach’s regulated pricing. This obviously strengthens the hand of BT, as it can play the two levels off against each other, by demanding higher prices in exchange for fibre deployment or holding fibre hostage to pricing negotiations.

The good news is that Openreach CEO Steve Robertson, going by his contributions at the BSG, is conscious of the telecoms industry’s crisis. Openreach (and BT Wholesale) face a complex optimisation problem in the lower level of the game. They quite reasonably want to maximise their revenue, and doing so requires first of all that they square the regulator. But if they push the price up too far, they will kill the ISPs, even if they don’t fall out with OFCOM first. So Steve Robertson has to simultaneously pursue a maximal regulatory goal whilst also persuading OFCOM that if they give him the pricing power, he won’t push it too far. He appears, fortunately, to be aware that there is a significant risk of ISPs collapsing, which would leave Openreach faced with perhaps two national ISPs, and thus be put in a very difficult negotiating position.

Customers, however, much as they would love to have fibre access, are not being heard in the upper level of the game, so they have no other option than to oppose any increase in regulated prices and hope that something will turn up. OFCOM is marginally more sympathetic to them than DBERR. The worrying thing is that unlike BT, neither Government agency seems to be aware that there is anything wrong. Both OFCOM and DBERR representatives at the BSG seemed to believe that the ISP market is currently in a stable equilibrium with genuine competition, rather than its costs exploding (and being substantially determined by a monopolist), while a price war holds down their revenues to unsustainably low levels.

The Broadband Crisis

A British DSL provider can be modelled as having two substantial costs — BT, and everything else — and one source of revenue, subscribers. Under BT there is the cost of IPStream service, which is billed per-bit, or LLU rental, and BT Wholesale backhaul (which also scales with usage). Under ‘everything else’, we have the costs of electricity, salaries, rent, and capital. Given that there is little difference in the CAPEX requirements of any two DSL providers of the same size, that their requirements for premises and power are essentially the same, and there is a free market in network engineers, it’s fair to assume this will be much the same for everyone. Similarly, the BT bill is largely determined by two factors — the OFCOM-regulated price, and usage. (There is potential for some variation due to different cost-structures, for example the proportion of LLU versus IPStream lines, and the fraction of backhaul which is subject to actual competition. However, these are in the nature of a one-off shift.)

bipgraf1.png

With a small number of ISPs in the market, we have the classical conditions for oligopolistic price stability. Whoever raises prices first, or fails to match a price cut, loses customers to the others. Whoever cuts first will gain volume, but only by losing margin. In the absence of collusion, there is no force for rising prices, but there is the temptation to initiate a price war. So the price tends to be a) stable, b) identical, and c) held down by occasional price wars. (This is not a unique phenomenon to telecoms, and is observed across a wide range of network industries from airlines to power generation, and may be an inherent feature.) The low cost of bandwidth to the end-user encourages soaring usage, so the BT bills go up - but revenue doesn’t. Cost and income are diverging like the blades of a pair of scissors. Hence our argument that the only way out of the crisis is to separate out the access layer through shared, community-owned, or structurally separated ownership, and to create new sources of income through two-sided business models.

bipgraf2.png

It was precisely this that was missing from much discussion. The social and economic welfare benefits of fibre remain unclear, despite much research. Solid data is hard to get. There is little or no discussion at all about the fundamental premises of the ISP business model. Discussion of the costs of fibre was more substantial, but we have little or no confidence in any number whose variance spans from £5bn to £20bn. Customers and FTTH advocates have obvious incentives to low-ball the costs, and Virgin and BT have equally obvious incentives to be very conservative. Also, these estimates only cover the cheaper, urban and suburban 80% of the country, and they are based on data from the US, where the relevant law is different and land is cheap.

From Diagnosis to Treatment

The only way to clarify this is to test reality through an experiment — actually lay some fibre and find out. Francisco Caio’s government review, it is said, may conclude that duct sharing could dramatically cut the civil works requirement, but then again no-one really knows. OFCOM is arranging for a sample of BT’s assets to be audited, which should throw some light on the subject but will also raise the problem of the terms on which such sharing would take place.

Unfortunately, the only actual deployment going on is likely to tell us next to nothing. The build at Ebbsfleet New Town is, as the name suggests, part of a new town, so the fibre can be installed while work on other services requires trenches to be dug. Therefore, the civil works costs will be minimal. As always in Britain, though, the vast bulk of the work will require the upgrading of old infrastructure, of the Victorian legacy — which can’t be done without digging up the wires specifically for this purpose. We’ve faced the issue with our crumbling water infrastructure, and the answer has proven to be extremely costly. Emma Gilthorpe of BT pointed out that even the idea of a local exchange is one of these legacies. They were after all created and sited to provide voice service only, as far back as the days of manual frame switches. KPN, for example, are busy getting rid many of theirs, and moving to street cabinets.

The good news is that some people are experimenting — notably the community and municipal fibre guys. Rural broadband activists who successfully pressed for the deployment of ADSL to their areas are now part of an informal coalition with open-access advocates and some of the UK’s city councils, regional development agencies, and devolved administrations. As a Cumbrian community broadband activist pointed out, during the fight for ADSL, it was routine to find that once the equipment was installed in a local exchange originally considered uneconomic, the demand would follow. And further, if you found it difficult to get ADSL, you’re the last person a hypothetical private-venture build would serve. Reasonably large community projects which should provide more meaningful data than Ebbsfleet are now in the works, including South Yorkshire, an EU-funded project covering about 3% of UK lines, and Cornwall, although this one is in the very early stages.

One, Two, Many FTTHs? A Local Solution

This brings us to a major constraint on the debate. OFCOM, DBERR, BT and many other people, mostly in London, are thinking purely in terms of a massive national network managed by one regulated organisation. They can’t decide what its scope-and-scale should be, who should finance it, how it should repay them, or on what terms it should deal with others. The Telco 2.0 solution is to turn away from the idea that the fibre build must be one ring to rule them all; instead, what kind of a solution would work best for an incremental deployment (like this post), encouraging community, public-sector, or independent business actors to contribute?

BT has expressed a willingness to extend backhaul fibre to reach community-owned local access networks, so it shouldn’t be that hard. Perhaps, at a minimum, BT should create the interconnect option for cities, co-ops, ISPs, universities, government, property developers, or indeed anyone else to go further and pioneer FTTH? It might not be an ideal solution — but it might well be the best one on offer.

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June 17, 2008

Apple’s iPhone: Beware of Poisonous Pips

Amygdalin may sound like a Star Wars character, but in fact it’s a precursor to cyanide found in apple pips. And your daily Gala, Fuji, or Cox’s Orange Pippin isn’t the only fruity offering with a potentially harmful ingredient inside.

The Apple iPhone might just look to some like a dodgy cameraphone that you can’t operate one-handed. But lurking under those curvy plastic corners lies an assault on the pulsating the heart of the mobile operator.

Bypassing operator charges for services has been a pastime for hackers and users since the first networks were deployed. With the arrival of the Internet, going ‘over the top’ is perfectly legitimate. However, there are serious limits to what can be achieved. Sometimes this is because the handset is locked down — e.g. the application can’t access the voice processing path, radio or address book. [There’s a deeper analysis of this in our Voice & Messaging 2.0 report.] But more fundamentally, mobile phones aren’t just little shrunk-down PCs. They have to live with severe constraints, most importantly battery life.

This is important as many of the ‘over the top’ alternatives to traditional telco voice and SMS messaging have foundered on this rock. The application needs to keep activating the radio to poll for new messages.

Radio networks carrying phone and SMS traffic are very efficiently crafted to avoid waking the end user device unnecessarily. When a call comes in a special paging channel is used to signal ‘Wake up number 787919823239832, it’s your turn!’. The phone is an ‘always off’ device, unlike a wired PC which is ‘always on’ as far as the rest of the world is concerned. (SMS manages to get the whole messaging stuffed down this side channel.)

Apple have resisted calls to allow what are known as ‘background apps’ on the iPhone. Letting applications run continuously in the background can suck up battery power, deplete memory resources, and generally make things treacle slow. Instead, Apple have launched a Push Notification service to wake up the phone, and you have to initiate that request through an Apple platform.

Operators should tread very carefully here. Apple could easily offer to integrate with the paging feature of host networks (or kludge it with SMS) to increase the efficiency of this process. The telco then has no monopoly over reaching to the user and activating the phone using the paging service. Apple can bunch notifications from many applications, since they control the whole application ecosystem — and future presence-driven apps are likely to be very chatty. And you don’t have to be too bright to realise that one of the most likely things to be pushed to a phone in future is an advert, mediated again by Apple.

As a by product of having Apple in the middle, it could also solve a lot of privacy problems associated with background applications running, such as location data being passed without your real knowledge. There’s also the potential to filter noxious or intrusive messaging.

In addition, Apple can data mine the application message stream — and it’s been a telco’s dream for years to mediate such flows (what else is IMS for?). No doubt the first use of such data will be to optimise both their own application portal, which incidentally obsoletes the telco’s own efforts and eliminates that as a VAS revenue stream (and turns it into an all-you-can-eat data cost centre instead). If iPhone users do really generate three times the browsing traffic of other smartphones, and a zillion times that of featurephones, then it doesn’t take massive market share (stimulated by the new low price point) for the iPhone to de facto become the mobile web.

On top of this, the MobileMe data synchronisation services captures lots the key user data which could be the foundation for future 2-sided market models.

So Apple have an interesting solution to a real technical problem with their push messaging, coupled to a powerful back end. But under that tasty, shiny skin lies a potentially bitter taste for the operators who swallow the fruit. And Nokia — are you ready to finish your back-end platform yet? The telcos need an alternative, quick!

But, it is not all doom and gloom for operators as Apple has provided a rubber stamp to the subsidy-driven business model. They’ve also ceded pricing power back to the operator: that headline price drop for the device masks a hefty price rise for the service. We are firm believers that control of edge devices — handsets, home hubs, set top boxes, media gateways, home automation systems — is vital for both fixed and mobile operators. The easiest way of achieving this control is by paying upfront for the device and recovering the cost over a subscribers lifetime.

There has always been a fierce debate as to the extent that individual handset demand is driven by the handsets themselves and the attractiveness of the features within them, or operator subsidies and length of contracts. It is a complex relationship with many variables playing a part, and at least now in the Apple ecosystem the chosen operators have one variable firmly within their control.

The other important area of the control is the applications (and most importantly revenue stream from them) that run on the handset, and Apple seems to be firmly in control here and probably more so than either the operator or upstream application developers or content providers currently realise (see above). The operator secures the basic voice and data revenues, but the handset is capable of much, much more - witness the tension between the Nokia Ovi services and the operators.

A key battle ground here appears to be music: it seems these days that everyone under the sun has their own music store, with iTunes being the runaway market leader. However, Apple does not currently have permission here from the major labels to provide over-the-air music downloads, and therefore music for the iPhone currently will have to continue to be sideloaded from the PC. This is a major hole in iPhone functionality, especially when compared to the Nokia Comes with Music or white-labelled Omnifone service,

This just shows that tension does not only exist between the handset players and the operators, but also the content providers want a “reasonable” slice of the action as well. In this case, the music companies probably have a long shopping list of requirements gathered from their years of experience with iTunes.

To their credit, Apple has shown through the acceptance of subsidies that their business model is flexible. We believe that Apple will have to show a lot more flexibility in the future if the iPhone is going to be a real mass-market mobile device rather than the healthy niche it currently occupies.

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June 16, 2008

Enabling Innovative End-User Services - Free Seminar, Next Wed, London

The Telco 2.0 team is supporting an interesting afternoon seminar next Wed (25th June) run by Convergys called “Telecoms & Media - The Retail Imperative”. It’s taking place from 2-7pm inside St Pauls Cathedral in London, in the spectacular Wren Suite. There’s no cost to come but places are limited to senior execs from telco operators and media companies, and there are a very few places left now. More info and registration details here.

Telco 2.0 will be sharing some new analysis. Convergys will be sharing their experience from retail sectors. The whole event is intimate and highly interactive.

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Qualcomm’s Ambitious Mobile TV platform - Blueprint for Others?

Last month, Qualcomm purchased at auction 40MHz of spectrum (1452-1492 MHz, known as ‘The L-Band’) for £8.3m ($16m). Since then there has much speculation about Qualcomm’s motives and the services that they will deploy, focussing upon Mobile TV. The answer tells us a lot about how new platforms and intermediaries emerge, and could hold some keys to the future of a far wider set of services than just television content.

Qualcomm has a long track record of both buying spectrum and vendor financing, in order to seed and kick start the market for new technologies that they have developed. We believe that Qualcomm will use the L-Band spectrum as their personal seed-bed for mobile TV in the UK, and as a potential beachhead into mainland Europe. In addition, 40MHz is more than enough spectrum to deploy not just mobile TV, but also other services in the future.

We believe Qualcomm understand the needs of a platform business much better than other comparable companies, having experienced the ups and downs of initiatives like BREW. We do not expect Qualcomm to deploy either a typical “over the top” offer that bypasses the operators, or a vertically integrated solution. Rather, the story behind the L-Band spectrum is how Qualcomm will try to create a platform which offers opportunity and profit for all the main players in the value chain: consumers, broadcasters, networks and device makers.

Here’s why, and how…

Network Build: plenty of options

Cell sites are typically a major cost hurdle to overcome in deploying wireless networks. For a new wireless entrant hoping to deploy a competing technology, such as WIMAX, getting the necessary planning permissions and building out the cell sites could be a business case killer. Not so for Qualcomm and mobile TV, as every mobile operator in the UK is looking at sharing costs to reduce opex. We’re sure that between the major UK cell site owners (T-Mobile/3UK, Vodafone/Orange, O2 and Arqiva/NGW) there will be enough competition for Qualcomm’s business not only to produce near-ubiquitous coverage, but also reasonable site rental charges.

Most of the UK mobile operators are currently investing lots of money getting more backhaul capacity from their cell sites, especially as increasing 3G data demand are creating much more traffic than historically was required for pure voice and SMS services. This backhaul requirement could definitely be a bottleneck. But for Qualcomm’s mobile tv solution, MediaFLO, there remains the option of delivery the broadcast signals via satellite. FLO stands for “Forward-Link-Only”, and the return path for interactivity is delivered via operators’ 3G networks. This type of satellite delivery mechanism is in fact behind Alcatel’s extension to the mediaFLO competitor, DVB-H, called DVB-SH.

We seriously doubt that Qualcomm would have to employ an army of engineers as outsourced network deployment is a typical service offering from nearly every major equipment vendor and whole swaths of sub-contractors. Qualcomm has even more options for operating the network once deployed with companies such as BT and NGW/Arqiva offering fully outsourced managed operations as well as the usual suspects from the equipment world.

Minimal New Technology Risk

Qualcomm already has a mediaFLO network in the USA providing services to both CDMA (Verizon Wireless) and GSM (AT&T) operators, therefore the technology for handsets, base stations and NOC (Network Operations Centre) is already tried and tested.

The effort in developing the NOC technology should not be underestimated as this is the nerve centre for the whole platform: from taking broadcast signals for the content provider and converting them to mediaFLO; managing non-broadcast data, such as the Electronic Programming Guide (EPG), billing transactions and usage data; and to provisioning services on end-user handsets.

The UK spectrum is at a different frequency to the USA and therefore some work would be required to optimise to the transmitters, but this would should minimal.

Qualcomm has a great advantage with getting services into handsets, in that it is a chip maker in its own right. Qualcomm already produces a UBM (Universal Broadcast Modem) chip which supports not only mediaFLO, but the other major broadcast standards (ISDB-T and DVB-H). The availability of this chip reduces the risk for handset makers in getting-to-market, vitally it reduces the need for many different handsets serving different countries and thereby improves the economies of scale for the handset makers.

Qualcomm also offers technology options for the content providers in supporting multiple different conditional access systems: Irdeto, Nagravision and NDS. Content providers are extremely nervous about piracy and by providing the options that are currently known and in use removes the worry that new age DRM solutions bring - not only the risk of being cracked, but also introducing a new gatekeeper.

Getting the Content

Qualcomm will need to get compelling content onto the platform before consumers will even contemplate watching mobile TV in any form. Here we believe that choice and flexibility for the broadcasters will be absolutely vital - not only in DRM, but also in the business model.

The UK has a wide mix of content providers using a combination of state licence fees, subscription revenue and advertising as their funding method. In addition, pay TV players such as Sky and Virgin Media already play a rich role in aggregation.

We expect that Qualcomm will be very innovative, especially compared to other mobile TV platforms, in making their platform attractive to the content provider community. For instance: the BBC may just wish to rent a set of channels from them to broadcast free to all content; Sky may wish to rent a set of channels some of which are broadcast free to their pay TV subscribers; ITV may wish to rent a couple of channels, but pay for them with a share of advertising revenue; and others, especially new entrants, may wish to have a hybrid type of arrangement sharing both subscription, pay-as-you-go, and advertising revenues.

Again, Qualcomm will be able to learn lessons from the USA market, where the market is at least as complicated as the UK.

What is the carrot for the mobile operators?

Mobile Operators are the key gatekeeper for the whole platform:
- some of them have visions of complete vertically integrated fixed and mobile solutions, e.g. OrangeTV;
- mediaFLO requires a 3G bearer to act as the return path for interactivity and ordering;
- mobile operators usually define the handset specifications to run on their networks and furthermore fund a lot of handsets with subsidies;
- operators’ assets such as customer care, billing (especially prepaid) and authentication will be extremely valuable.

At a bare minimum, Qualcomm needs to find a way of compensating for the handset subsidy, data traffic and any use of Operator assets. Beyond this operators may want some type of deal for content exclusivity over a period of time, which would probably be negotiated directly with the content players, but still requires enabling platform features.

Operators may request a share in any upstream revenues, such as advertising and subscription, especially for the privilege of direct marketing services to their customers with a handset that supports mobile TV.

Of course changing video from unicast to broadcast will remove strain (and therefore cost) on the operators own 3G networks - one day these networks will be filling up and anyway unicast is a hopelessly inefficient delivery mechanism to any reasonable sized audience.

There is also a big case for mobile TV as a future solution to in-car entertainment, whether served by a mobile operator, new start-up or the car manufacturers themselves.

Consumer demand - where the real risk is

Consumer Demand remains the greatest risk of all - the hype behind initial deployments of mobile TV is over. We sense a growing apathy within the operator community for such services.

Italy is claimed to be the most successful mobile TV market in Europe with 700k paying subscribers as at August 2007. Public numbers in other countries are hard to find.

There is plenty of demand for mobile TV, if compelling content is available at a reasonable price. One of the core uses of a mobile phone is to fill dead time. However, we believe that MobileTV will not be an overnight success story - an optimistic scenario would be 20% penetration within 5 years of launch, i.e. 10 million UK users. Most of this would be snack-type consumption and be nowhere near the time that people spend glued in front of the box in the home. Perhaps 20 minutes per day on average is all that can be expected. Since the platform supports rich interactivity, is highly personalised, and offers a return path for marketing messages, the revenues will reflect this accordingly.

Whether this type of demand is enough to sustain mobile TV is seriously open to question, but this level of uncertainty actually favours the emergence of a single platform open to all players in the value chain. We believe this is the Qualcomm proposition.

We also believe that the direct revenues for mobile TV will be hard to determine - hidden within mobile, pay TV and licence fee bundles. The indirect revenues such as advertising and handset prices will also be hidden in bundles that will be even harder to determine.

Spare bandwidth

In the MediaFlo technical specifications Qualcomm claim to be able to broadcast 32 channels in an 8MHz slice. Even if we reduce this to 20 channels, because of the higher frequency of the L-band compared to the UHF spectrum, Qualcomm has tonnes of capacity. We seriously doubt in the medium term that 100 channels of capacity are required for MobileTV.

Because of this excess capacity, we would expect Qualcomm to reserve some capacity for their own use in the future for other services, whether tailored to media content delivery type services, or more general two-way communications services. Qualcomm effectively have their own test bed for next generation services for very little cost, something that other wireless technology companies would only dream of.

One to watch

Qualcomm’s use of the L-Band will be a fascinating case study of the development of a multi-sided platform. The initial interest will be how Qualcomm makes the platform attractive enough to all players to generate enough consumer demand. Observe how Qualcomm tinkers with the platform price levels to create the externalities over time: more content, more value, more eyeballs.

However, the revenues and costs of the platform will be hidden from analysts eyes and therefore to determine whether the platform is a success or not will difficult to determine for a long time to come.

Qualcomm’s history with the BREW platform shows that they have the track record to satisfy enough players to make a platform work - and we have very little trouble in believing that somehow they will make a success of mobile TV in the UK and make it a mass market service.

However, there is a word of warning to all existing players - new services can create new roles for powerful middlemen. Just as Google at the beginning looked like an innocuous search engine and then morphed in some all-consuming monster with an insatiable appetite for advertising budgets…

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Ring! Ring! Hot News, 16th June 2008

In Today’s Issue: Mobile spam horror looms; Gyahoo will eat your ad business anyway; Nokia starts its own ad platform; open-source unicomms for prison warders shames telco engineers; roaming in Africa; Reding on the rampage again; Swedish military intervention; MTN-Reliance sporked by brothers’ brawl; Clearwire’s world domination plan; Nortel ducks for LTE; Sprint-powered jukebox; the end of WAP; Carphone in trouble; AT&T caps hogs; BT fibre - not all it’s cracked up to be; when number portability works too well

Computerworld asks - are we on the edge of a mobile advertising disaster comparable to the spam phenomenon? A close reading of the story would suggest that their definition of a disaster might be quite close to a mobile advertiser’s definition of success - however, Telco 2.0 would point out that in telco terms, advertising alone is just not that big a deal and operators need to look to facilitating a far wider set of interactions between users and enterprises.

Rich Karpinski of Telephony Online says the Google-Yahoo cooperation means that Google will end up dominating the entire field of online advertising, and telcos had better look to an agreement with Google. He also wonders how telcos might work with Microsoft’s efforts in this field - regular readers probably know we think they’d be better off working with Microsoft’s core enterprise applications to provide better voice and messaging and communication-enabled business processes.

Meanwhile, Nokia starts its own ad platform, which along with the Nokia Maps 2.0 features they showed at Mobile World Congress this year could be a major challenge to Google’s efforts at location-based advertising.

Speaking of enterprise voice and messaging, there are reasons to think Microsoft’s unified comms efforts aren’t the last word. Here’s a specialist appliance for the open-source IP-PBX, Asterisk, so clueful enterprise IT departments can roll their own. Its makers say that quite a lot of customers wanted to replace their expensive NEP-made boxes with something running on a commodity PC-based server, but struggled to achieve reliability — so only ones with very special requirements found it worthwhile to date. Oddly enough, the examples given were prisons.

This quote about it should scare you though:
Kerravala said that the open-source and development aspects of the product could be a bit daunting for a telco operative within the company. He suggests that, for the product to work best, IT and the telco expert should work together to make it work best, as an IT manager would be better-versed in open source and would be able to craft the code necessary.
Isn’t there some kind of hate speech anti-discrimination law against such dated Bellhead stereotypes?

Vodafone’s Receiver magazine is off doing a little social anthropology around mobile phones in Africa. Interestingly, the example of Celtel’s abandonment of on-network roaming in favour of integrating all its African networks is used to hint at something similar in Europe. Well - why not? It’s not as if Viviane Reding is going to let you keep a roaming premium much longer.

The Swedish army has decided that, yes, a merger between TeliaSonera and France Telecom would be tolerable. Told you this deal would be complicated. It’s slightly amusing that the Swedish military has pronounced just as France Telecom backed out, but considerably more amusing than this proposal to data-mine all telecoms traffic in Sweden. Even though Telia runs the armed forces’ communications network, it’s apparently moving servers out of Sweden in order to avoid being spied upon…by itself.

In other megamerger news, the MTN-Reliance deal is threatened by a dispute between the brothers who own Reliance Industries. One of them claims he has a right of first refusal over Reliance Communications, dating from when it was spun off from Reliance Industries, and he expected he could place more reliance in his brother’s word… oops.

US WiMAX operator Clearwire has been pushing optimistic numbers around Wall Street. Now the long-rumoured cableco+Sprint+Intel joint venture is ready, they reckon they’ll cover between 60-80 million people by next year and 220 million by 2017, aiming for 30 million subs by then, with ARPU of $49. The stock market isn’t so sure: Nortel shares leapt after the company said it was concentrating on LTE. Well, they also said they would resell Alvarion WiMAX gear.

However, Sprint is signing up wholesale mobile-data customers: meet the mobile broadband-powered jukebox.

T-Mobile, meanwhile, announced the switch-off of its circuit-switched data WAP service. Not a moment too soon…but perhaps charging users by time, with swingeing overage rates, might be the wave of the future. After all, there’s bad news at Carphone Warehouse as growth in DSL tails off and all those free laptops come home to roost, and AT&T is looking at capping its DSL users.

According to the BBC, BT’s Ebbsfleet fibre trial seems to have some sort of differential quality of service based on content:

BT pointed out that while 10Mbps would be a baseline minumum for customers, download speeds would increase depending on what the user was doing, such as downloading a movie. And while the capacity is shared, customers would still get speeds of more than 50Mbps when required, said BT.

OK, but we liked this:

But a BT spokesman said that the speeds would be “very decent”. “Higher in fact that anyone currently needs,” he added.

After all, how long can it take to download 640Kb of data to the world’s five computers?

Finally, a Vodafone Ireland customer has discovered a way of porting anyone’s number. Fun, and games.

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June 15, 2008

Two-sided markets: what are they?

This is the first of a series of articles celebrating two years of Telco 2.0 blogging, and focused on our favourite hot topic, two-sided markets. In this first article we’ll be going into some depth exploring what two-sided markets are. (For a shorter high-level introduction, look here). Later, we’ll explore why they matter, and how these ideas can be applied to the telecoms industry. By opening up their platform we believe there is about a $350bn/year opportunity in a decade’s time, as telcos transform into logistics businesses for digital supply chains. A sizeable chunk of that opportunity is in the form of two-sided markets.

The bottom line is this: Two-sided market theory tells us about how platforms work economically. There are many such ‘platforms’ from operating systems to stock exchanges to nightclubs. The theory models the pricing and demand for certain types of platform services which involve interactions between two distinct groups. Specifically, it studies the allocation of prices for using platform services between those two sides, where typically one side is a ‘seller’ and the other a ‘buyer’. The platform typically attracts one side by giving away services below cost (or free) to attract the less price-sensitive users on the other side.

Telcos are busy creating platforms at the moment to open up their networks and other OSS/BSS assets, but the assumed business model tends to be one-sided: we’re buying an IMS/SDP/NGN platform so we can launch new services. We think there will be a significant shift towards 2-sided market models in telecoms — with the telco as a facilitating platform for a much broader range of interactions between consumers and businesses. This will seriously disrupt current market structures and pricing for broadband and voice/messaging. (Video is already enmeshed in a 2-sided structure based on advertising revenue.) So it’s worth being clued up on what’s going on.

A new discipline

The study of two-sided markets is relatively new — with most research done in the past 8 years or so. Aspects of them, within specific industries, have been examined in isolation for several decades (e.g. trading hubs, phone networks). More recently, there was an insight that several apparently different kinds of platforms shared common features. These platforms supported different kinds of interaction, which are not mutually exclusive:

  • matching users from two groups to enable them to transact (e.g. a job search site).
  • building audiences by assembling content and services to attract viewers or users (e.g. Google search, telephony system).
  • collectively managing knowledge bases (e.g. Wikipedia).
  • forms of demand co-ordination or cost sharing (e.g. credit card network, operating system), and may be combinations of the above.

There have been two recent triggers for more academic research (and money to pay for it):

  • the Microsoft anti-trust cases, where Microsoft enables two 2-sided platform markets: Windows and Office.
  • and the EU’s legal action against credit card interchange fees between acquiring merchant banks (who accept your card) and issuing banks (whose credit card you hold).

In both cases, the problem is whether the fees levied by the platform, and the pricing of certain aspects well below or above cost, are in the public interest. Put crudely, conventional economics said ‘no’, and 2-sided market analysis says ‘yes’.

Just another consulting fad?

There’s been no shortage over the years of old ideas re-packaged in new buzzwords to sell business consulting. So are two-sided markets really something new? Do the models predict anything useful? Joel West, an academic and business consultant, casts his sceptical eye over the question, and comes up positive. Also, the data does broadly seem to fit the theory [PDF] when you look at how real platforms work.

We also agree that there’s some real substance here. We’ve trawled through a lot of the academic literature. (Despite being armed with a maths degree, it’s quite remarkable how economists can obfuscate a few simple ideas with some formulae.) Some of the assumptions in the models are simple to the point of being simplistic; if Google attracts more Chinese users, does any advertiser in Norway care? Most two-sided pricing models think so, because they assume the value to advertisers is linearly proportional to the number of eyeballs performing search. There are also many, many variations, so it’s almost as if every industry needs its own model derived. Open questions also remain, such as the appropriate balance between platform membership and usage fees. Nonetheless, important common themes do hold — and they have serious implications for strategy, pricing and regulation.

Furthermore, we have identified many areas in which telcos can creatively apply their assets to create new two-sided markets. [More details are in our report The 2-Sided Telecoms Market Opportunity.] Therefore the importance of these ideas is only likely to rise.

So, what are two-sided markets then?

A condition, a continuum, or a landscape?

The real world is complex, and there isn’t a clear divide between “one-sided” and “two-sided” market models. It’s tempting to say that there’s a continuum between two types of business:

  • One-sided merchants, who acquire goods from suppliers (sellers), combine and modify them, and re-sell them to users (buyers). The sellers and buyers don’t interact with one another, and the merchant takes on all the inventory risk of buying from the suppliers. Most of telecoms works this way: telcos buy spectrum, hardware and IT kit, and sell it as a voice or broadband service.
  • Two-sided platforms, where the buyers and sellers interact directly, facilitated by the platform in the middle, which offers some kind of needed resource to facilitate the interaction. There are more limited examples of this in telecoms, such as i-mode, freephone services, and advertising via IPTV.

It turns out that even this continuum doesn’t quite capture the richness, as rather than being a single point destination, two-sided markets are a messy tangle of many similar, but distinct, business models.

What are the key defining characteristics? As noted in this paper, there are three conditions:

  1. you need the right configuration or market structure — only a few arrangements of interactions qualify.
  2. you need certain externalities — benefits to one sub-group based on participation of another
  3. you need a rather subtle third criterion, which they term non-neutrality, but is probably best thought of as an imbalance or asymmetry between the two sides that the middleman can use to capture some of the value of the interaction. There appear to be two different ways of approaching this issue, which we’ll explore below.

Configuration: Two-sided markets need two sides

As noted above, a central plank of a two-sided market is allocating the cost of using the platform between the two sides. ‘Free’ appears to be a common feature of two-sided markets. It’s tempting (but wrong) to use this symptom to identify the cause. When you go to McDonalds, the straws are ‘free’. Yet someone, somewhere, is making a good living producing billions of disposable plastic tubes able to withstand the lung-collapsing low pressures required to slurp a McD’s milkshake. The burgers, fries and industrial corn syrup solution cost you directly. The latter group ‘subsidise’ the straws. However, we don’t have “burger buyers” and “straw slurpers” as two distinct groups who wish to interact. Straws are merely a complementary good to milkshakes, and it’s not worth the transaction cost of someone ringing you up an extra one when little Freddy drops his onto the floor.

When we look at telecoms bundles with ‘free!’ written all over one of the products, you’re not looking at a two-sided market just because there appears to be some cross-subsidy going on. There have to be two distinct groups interacting, and the platform has to intermediate in some way.

In these cases it’s obvious we don’t have two distinct groups, but it’s not always that way. A more subtle example is telephone calls, where we have ‘callers’ and ‘callees’. Termination fees are how the platform in the middle captures value. However, we don’t generally have persistent identities as makers or receivers of calls, so it’s not a full-blown two-sided market. It does, however, mean low-use prepaid users, who are mostly “callees”, find it worth having a mobile phone, and explains the higher penetration in calling party pays countries, and boosts profits for telcos.

This “shades of grey” is a recurring feature among two-sided markets.

Configuration: The two sides have to interact

Another feature of two-sided markets is that the two sides have to interact via the platform in some tangible way. I rely on that eBay seller sending me the goods I’ve bought; eBay doesn’t have it in stock in a warehouse. The telco inserts an advert on behalf of a brand owner, and the viewer directly sees the brand message.

Again, there’s a murky middle. Unlike traditional retail, companies like Wal-Mart and Home Depot rent shelf space to Procter & Gamble or Black & Decker, who then decide what to stock on the shelves, but carry the inventory risk. The theory is that these market specialists have a better idea what to stock when and where, and can co-ordinate national marketing campaigns. Wal-Mart provides the distribution/supply chain platform, together with payment and business intelligence services. (Sound familiar? Telco platform is distribution plus B2B VAS.) When you pick the Handycam digital camcorder off the store shelf, it’s like you’ve entered a mini Sony store, and you’re having a direct interaction with Sony Corporation. The store is acting as a sort-of 2-sided platform, rather than a one-sided merchant — but only in a subset of the products on offer.

Externalities: Quantity is quality (at least for one side)

The next key ingredient is that at least one side of the platform needs to deeply care about the number and range of participants on the other side. The canonical two-sided market example of a (heterosexual) nightclub, where you want the maximum number of members of the opposite sex turn up (and preferably as few as possible of your own to vie for their attention). (Rumour has it that the nemesis of gay nightclubs is too many girls turning up to ogle the pretty boys and have an unmolested dance. Surely a pricing problem if there was one!)

Likewise, I do care how many games companies develop for the Xbox or Playstation when I choose which games console to buy, because that tells me how likely it is that there will be a future flow of digital distractions.

However, when I went into my local supermarket this week, I bought some eggs. There was a wide choice of eggs: big or little; organic or standard; free range, barn bred, or super cruel. Waitrose had bought all these eggs off the egg farmer. But I don’t really care how many farmers Waitrose buys its eggs from, as long as I have a choice of types of egg. And the egg farmer really doesn’t care how many shoppers pass by, as long the eggs are sold. It’s a one-sided merchant.

Asymmetry: Who pays, matters

Potentially the central defining characteristic of a two-sided market is that it matters who pays the piper. In the nightclub case, you need to get the right mix of boys and girls, which typically means charging the girls less. (Still, whilst the boys may be paying the piper, the tunes are probably still awful.)

Take taxes on labour as a counter-example, where the structure of who pays? doesn’t matter. A government can be considered as a coercive ‘platform’ facilitator of labour markets. A payroll tax raises the cost of employing someone, so employers lower wages offered to compensate, as well as receiving lower profits. It doesn’t matter whether the tax is levied on the employer (e.g. FICA in the US, or National Insurance in the UK) or employee (income tax). Wages will adjust in both cases and the burden on the employee and employer is the same. The structure doesn’t matter. (Unfortunately most of the public don’t understand this, as assume that employers pick up the tab for payroll taxes.)

Why this pricing structure is important is that the volume of transactions will depend on the price to both parties. Google had a massively better search product, and in principle could have sold search alone. (Indeed, they nearly did just become a technology licensing company.) Instead they gave away search and ended up amassing an irresistible audience for text ads.

It’s worth noting that adverts are a special case of a 2-sided market. Advertisers want lots of eyeballs, but eyeballs generally want no advertisers — the other side is on negative value. So Google’s unobtrusive placing of highly relevant adverts minimised this effect. (Indeed, they have got to the point that the ads are positively desired and some Google services now have little arrows in the advert box letting you ask for more ads!) Users pay a ‘negative price’ to overcome the ‘negative value’ of the adverts, by being given valuable content and services for free. That said, Google did become the world’s #1 brand by investing only in customer experience, and never spent a penny on adverts — not that their customers seem to care.

Unlike the case of advertising, for most 2-sided platforms both sides find positive value in interacting with the other side, and there is in principle scope for charging either side. For example, in the Internet universe, Monster.com charges employers, but not prospective employees. In contrast TheLadders.com offers $100,000+ jobs, and asks employees to pre-qualify themselves (i.e. signal intent not to waste recruiter time) by paying a fee. This signalling is yet another example of corner cases that make 2-sided markets complex.

Nice theory, but we can’t use it

Unfortunately we’ve found academic definitions of this asymmetry features, like this classical paper [PDF], to be nearly useless in practise. I’ve no idea how the price allocation between ISPs and media companies affects the demand for content delivery networks. (To date, the ISPs get Akamai installed for free, as it happens.) It seems to have no a priori predictive power when analysing new 2-sided markets.

A more practical definition is given in this paper [PDF], and it’s one we find far more useful:

…there is a continuum of intermediary types between a pure [one-sided] merchant and a pure two-sided platform, depending on the extent of control over buyer-seller interactions left to sellers. “Control” can be thought of as encompassing three important dimensions:
  • control over strategic variables (pricing, advertising, distribution, etc.);
  • sharing of economic risk (is the risk borne by the sellers or by the intermediary?) and
  • “ownership” of buyers (how salient are individual sellers’ “brands” relative to the intermediary’s “brand” when buyers make their affiliation decisions?).
A pure two-sided platform leaves control to sellers, whereas a [one-sided] merchant takes over full control.

So in the case of eBay, sellers set prices, sellers take the risk of buyers crying ‘foul!’ even though they sent the goods out, and at no point does eBay take on any inventory risk for the goods. It’s a pure 2-sided market.

It’s not hard to tick the boxes against these criteria, whereas trying to second-guess some piece of abstract game theory is pretty much impossible.

Asymmetry: The middleman has to stay in the middle

As noted earlier, the two sides couldn’t be completely isolated from one other by the platform (that’s just a standard one-sided producer-wholesaler-retailer model.) Conversely, they can’t cut the middleman out completely either. A further criteria is that the middleman’s pricing structure — designed to maximise the number of participants on one side and also to increase the returns to the platform — can’t be negotiated away by the two sides. So with a nightclub, if the gents could get away with free entry just by putting a girlie wig on, the platform would fail. And you don’t want the boys and girls pairing off in the queue waiting to get in, either.

Is an ISP a two-sided market between websites and end users? Shouldn’t telcos be giving away broadband and charging Google and Amazon to reach the customer base? In the case of an ISP, if they blocked Google for non-payment, I’d just proxy all my requests via another site, or set up a VPN to bypass my stupid ISP. The ISP couldn’t make the charges to the upstream party stick. (Another reason not to pass network neutrality laws.) So ISPs don’t form a two-sided market, since the two sides can collude to bypass the platform charges.

Turning theory into practise

We’ve looked at the basic structure a two-sided market requires: two groups, a platform offering some resource they both want, a desire to have a large choice of parties on the other side to interact with, and an imbalance in the desires of the two sides that the platform can exploit through differential pricing. We’re already at a long list of qualifiers, but what’s almost alarming is the list of variations and complicating factors that are seen:

  • Whether the parties have a single interaction vs. multiple repeated interactions with the platform and each other
  • Whether there is a direct sales alternative to the platform
  • Whether there is competition between parties on one side for the attention of the other
  • Whether ‘negative’ pricing is possible to encourage participation (e.g. if the nightclub paid girls to come, would the boys arrive in drag?)
  • Whether the parties have the ability to switch roles (as with telephony)
  • Whether there is a ‘signalling’ element to pricing, such as with an exclusive club
  • Whether users are willing and able to ‘multi-home’, using multiple platforms simultaneously (e.g. Visa, Mastercard and Amex).
  • Whether there are Information asymmetries between buyers and sellers (e.g. the quality of goods vs their description on eBay).

The good news is you don’t need a PhD in economics to run a business, either one-sided or two-sided. All you need to know are some foundational principles — like raising prices lowers demand — and a bit of common sense. In the next article we’ll look at some those principles, and how they relate to a significant growth opportunity for telecoms operators.

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June 12, 2008

Skydeck: Robin Hood of customer data

A key Telco 2.0 theme is getting more value out of customer data. Nearly all of that data remains locked up inside the telco, with a few side businesses around paper and online directories. Could operators suffer from an ‘over the top’ problem with their data assets in addition to the network? We’ve found an interesting example.

One of the more interesting start-ups we’ve seen pass by our eyes is Skydeck. It’s a concept we’ve pondered over a beer or two in the past. Users are investing some of their most valuable assets — time and money — in making phone calls. By definition, telephony can’t be completely automated away. You (almost always) need at least one person burning a moment of their life on the call, even if the other end is a computer. In theory, this call data is extremely valuable, if also very sensitive.

Ideally the call history would be exposed in a way that could be used to improve the service features and user experience, such as intelligent call routing. In practise this is hard because the telco is terrified of privacy and liability issues, and bound up in regulations, and thus is loathe to pass it to anyone but the user. Hence, cue Skydeck, which liberates customer data and returns it to the people.

What Skydeck do is to scrape the call detail information from your online bill. (Presumably to do this you have to take the risk of giving them your account ID and password — it’s in closed beta testing, and we’re not in the USA so don’t qualify to become users.) Skydeck then use this information to do three things:

  • Sort the address book by who you actually call. On its own this isn’t so important. But in future we believe that the address book will be a quick view into what’s going on in your social and work circle. Whilst a mobile application can read the call logs, your PC can’t; and your mobile can’t read your landline call history. Skydeck fills the data gap.
  • Make your call history easily searchable. Skype does a reasonable job of this, and ultimately we’d expect this kind of data to end up in some kind of personal productivity tool to make it easy to find the document you were editing and discussing on the call.
  • Billing services, such as notification of remaining minutes and impending overage, and personal time accounting.

Where this kind of service would become really interesting is when you start to correlate the call data. Do you really want to take a call in the middle of dinner from a number that makes thousands of outbound calls a day and the phone gets slammed down within seconds in most cases? Google have made $178bn market cap largely off the back of correlating hyperlinks with the PageRank algorithm. Much effort has been expended in R&D labs on latent social network analysis (and the spooks are top of the class), but nothing much has emerged as tangible product, as long as the raw material has remained buried.

The Skydeck product as currently marketed is a technology solution in search of a burning customer problem. It can’t do ‘real time’ data. Users may not wish to open up their accounts to a third party. The business model is not obvious yet. However, that’s not to say it isn’t a good idea or won’t be successful. Each of the above capabilities will find its segment. “Customer data wants to be free”, and if they don’t succeed, somebody else will.

This isn’t an isolated case. Dean Bubley points out that a great deal of useful data remains trapped in the handset for want of data standards and distribution systems. A whole data portability initiative is being brewed by the less evil Internet services to allow users to have their own data. There’s lots of data looking for the exit.

The lesson for operators is that ultimately they need to actively enable the kinds of services that Skydeck wants to offer. The reason is simple: you can charge application partners for it, and near 100% margin.

Telcos not only have data on the users, but also a lot of hidden metadata — i.e. data about data — which is costly to obtain. For instance, BT don’t just know my parents’ address, but have a copper line physically going there, have sent bills to the address that got paid for 20 or more years, and once sent a service engineer too. (The DSL doesn’t work if you plug it into the phone filter, mum.) So BT doesn’t just have an address, they know it’s their address to a much higher standard than many alternatives. Likewise, network-based location comes with a different trust model to something that passes from GPS chip through user software.

Maybe social networks will let you import your call history to auto-discover buddies. But did Paris Hilton really spend two hours on the phone to me yesterday? Time for a telco to sell a signed digital receipt for the phone call! Telcos can packaging the data up conveniently for partners, unlike the hack that Skydeck are forced to follow. You can charge extra for the metadata. You can charge to provide a secure privacy-protected environment in which those outside services can interact with the data to do useful things — but without necessarily being able to take it outside the telco bunker.

Or you can do nothing and let someone else capture all the latent value, just like Google did.

[After we wrote this article, ReadWriteWeb posted up a good interview with the founder of Skydeck, Jason Devitt, that’s worthy of your time.]

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June 11, 2008

Video - Achilles heel of the mobile ISP

There has been an ongoing online and offline debate recently about whether video is going to create some kind of “exaflood” of data with bad consequences for the telecoms industry. We’ve got a different point of view to most observers on the matter: video doesn’t ‘kill the Internet’, but it does kill the traditional stand-alone ISP business model. To see what’s happening, though, you don’t need probes in Internet backbones, but rather in ISP balance sheets.

Demand is rising, but unevenly

Overall, Internet backbone traffic is growing surprisingly slowly. However, it is worth noting that demand shocks are occurring on the fixed-line Internet (see our analysis of the impact of the BBC’s iPlayer here). Furthermore, mobile internet usage is seeing spectacular growth (we’ve seen 600-2000% growth figures quoted, direct from operators), with the overwhelming majority coming from PCs running the same video-hungry software. P2P traffic is becoming less of an issue as legitimate sites such as YouTube and Hulu take off. The most significant difficulties are is also in mobile networks, especially as they start to take the strain of home PC use.

A pricing problem, not a traffic problem

When users buy an ISP plan, they are buying a ‘call option’ to communicate in future at a marginal price of zero. The ISP is relying on very few of those options being called. Now, the mere arrival of legitimate video sites, and the potential of a demand shock creates a pricing crisis. The value of those options is rising, so shouldn’t the retail price? Even without a single extra packet traversing the Internet backbone, online video creates huge uncertainty in the demand forecasts of ISPs. Should ISPs price-in the increased risk of rising costs? Get it wrong and you’re out of the market.

There is also a wide divergence here between different markets. In the USA, the cable companies have an existing and highly efficient video distribution network, and plenty of metro fibre to feed it. Likewise, AT&T and Verizon are not lacking in backhaul options in their territories. Contrast this with the UK and much of Europe, where backhaul is a very considerable expense — those options are much more valuable, but aren’t being priced that way. (Of course, if you’re a non-incumbent carrier in the USA, life may be very uncomfortable indeed…) This story also plays out differently between urban areas (more backhaul competition) and rural ones (often where there is a monopoly).

A multi-modal delivery problem, not just a ‘pipe’ problem

We’re also in very early days of online video delivery. The “last metre” problem of getting stuff to the TV in the home from the broadband outlet is only just being addressed: services like Sky Anytime, Iliad’s Freebox and Apple TV have only just reached the necessary performance, cost and usability level needed. And this hints at the deeper reasons why video breaks the traditional ISP model. A whole new slew of assets and competences are required by the ISP.

You need to be able to blend multiple modes of delivery — physical media, side loading, broadcast, broadband, edge caching, and content delivery networks. [More on this and some case studies in our Future Broadband Business Models report.] These require assets both in the network core as well as the network edge. The new skill is to be able to spread the delivery load and cost over the different delivery and distribution systems. For example, Amazon’s Kindle e-book reader retrieves text books over the air, but audio books are side loaded from a PC to keep costs down. Apple’s skill with the iPhone and iTunes will have people watching plenty of mobile video, but will also help to skew it towards side loaded content, not streamed content over the wide-area network.

So if you focus on the demand side for online content, you miss the real story. It’s the cost side where the pure-play ISP business model meets its nemesis, because the key skill is to get the content partnered with the right delivery system — and to have a broad enough suite of delivery systems to meet the unique needs of each user base and market. On mobile, this skill is likely to be a life-or-death issue as the costs of spectrum and backhaul are very real indeed.

A ‘postage & packaging’ problem, not an access problem

Another reason the ISP model is killed with video is that in markets with usage caps and overage charges (i.e. most of them), users suffer from metered megabyte anxiety. They don’t know how much they are using. Therefore they would prefer to buy content with the “postage and packaging” thrown in, much like Amazon does for physical goods. Increasingly ISPs are going to have deals with content providers to do just that — it’s already pretty standard on mobile networks with on-portal content. (This is another reason why the original i-mode business model predicated on packet data charges won’t fly any more.) Again, without a single extra packet on the network, the retail ISP business model has been undermined. The new skill required is to be able to wholesale access to upstream aggregators and media companies.

A regional, not a global issue

Finally, in most industries the demand curve shifting right (i.e. increased demand at any price level) is good news, meaning rising prices and producer surplus. Telcos have a kink in their costs and supply curve. Copper cables and wires have finite capacity, particularly in the uplink direction. Users themselves are generating no shortage of video. If the industry is to finance its own fixed infrastructure, that upgrade to fibre either happens or it doesn’t. You have a sequence of cheap upgrades (e.g. ADSL to ADSL2 to VDSL) followed by a whoppingly expensive one. In places like Hong Kong or Korea that have fibre already this has a very different cost structure to the UK, for example. The Victorian apartment I’m sat in now doesn’t have any ducting whatsoever to drop fibres through. Overhead poles are rare, unlike many US or Canadian neighbourhoods, and the streets cover centuries of tree roots and lead pipes.

On mobile, you need to create an ‘edge’ network to offload traffic onto the fixed network in the home — an expensive proposition too.

In a sense, the ISP model is already dead. Fibre is only being deployed in two ways: through shared, municipal or community schemes (e.g. Sweden), or as part of a triple play bundle (e.g. USA). Nobody’s building fibre just to sell ISP services, because being a pure residential ISP isn’t a business, because it can’t deliver video efficiently.

A supply side problem, not a demand side one

The take-aways are therefore that:

  • The thing to worry about is not whether users will be putting demand into the system for content, but how you can take delivery costs out of delivering media.
  • There is no and one-size-fits-all solution to the ISP conundrum of selling options and praying they aren’t called. Video is one of the key pressures on the ISP model, although not the only one — such as piracy, legal intercept and data retention. The answers are very different by region and network type.
  • The network edge is the where the answers lie, because that’s where the delivery systems converge. It’s as much about how you get content between devices (e.g. PC to set top box and mobile) as delivered to devices.
  • Packaging and segmentation are core retail skills and need far more thought than bandwidth caps and blocking ports. IPSs need to build relationships with content providers to move towards a hybrid media services model.
  • Option pricing is a marketing skill that ISPs have not yet mastered. (Paying for the 95% percentile of peak usage, a typical enterprise approach, comes closer.) A lot of these 3G dongles might come to have a nasty pricetag in backhaul and network upgrades, especially in hard to determine hotspots. Or you could try having a nasty PR effect if you try to enforce the ‘no streaming video’ clause in the contract across the whole network.

    [Ed - We’ll be discussing these issues at our next event in November - more details here.]
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Reducing Friction in the Digital Economy - 5th Telco 2.0 Event, 4-5 November

We’re delighted to announce the focus and draft agenda for the next Telco 2.0 event via its website here. We’ll be intergrating our research programme in tightly with this and looking to bring more ‘upstream’ players along (mediacos, banks, retailers, government, ASPs) to engender a strong debate. All comments, ideas, questions very welcome - either in comments section below or privately by email.

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June 9, 2008

Ring! Ring! Hot News, 9th June 2008

In Today’s Issue: FTel/Teliasonera nightmare off; Singtel/Indosat off; visual voicemail for all; iPhones to be 50% subsidised; David Isenberg, underworld spy; DTAG, spy; VZW buys Alltel; secret Phorm docs; Android-Access row, but mobile Linux marches on; 3GPP femto standard less unready than before; 3UK crash; Qtel spends a billion in Iraq

FTel backs away from a fresh round of value-slaughtering M&A - that’s sense, Withnail. Apparently there have been so many leaks that the French stock market regulator won’t let them go ahead - as if that would be a problem for a French state company wanting to make a huge deal. Sounds like a good pretext to back down with dignity - especially as the deal involved paying €24 a share in shares, with France Telecom shares at €18.

In other news related to sensible restraint, SingTel and Temasek step away from their stake in Indosat - fortunately there’s still Qtel in the market for huge and legally entangled telecoms M&A. Perhaps we could all go away and work on improving our key voice & messaging products? Or, alternatively, we could give the customers money to buy our stuff with. That always works…and there’s no chance anyone else will, right? YouMail, meanwhile, introduces a better voicemail service for a wide range of gadgets.

Guess which one they chose? The new iPhone, it turns out, will go on the market with the help of a $200 slug of AT&T’s cash for every gadget. Surely, surely, Apple can’t have managed to get the telcos to pay a revenue share and subsidise the selling price? But then, it’s not as if the telecoms industry hasn’t had its fair share of crooks.

David Isenberg remembers some of them in a post about the early days of Telecosm and the ruffians who could be found there, from Gary “Global Crossing” Winnick to Henry “Broadcom Secret Bunker” Nicholas via Michael Milken. This week saw even more relevations about the spying scandal at DTAG, as Der Spiegel poured forth more and more detail on how the company systematically made use of an informal network of corporate security men to put journalists and members of its own board under surveillance. As well as traffic-analysing their calls, they also mapped their movements from the CDR stream and correlated this with bank information, oh, and introduced a mole into a magazine’s editorial staff.

Which is interesting - T-Mobile USA was, next to Qwest, the only telco to resist illegal surveillance in the US. We always thought this was because they were concerned about legal action in Germany, especially as roaming customers from their German, UK, Dutch and other European networks could have been spied upon as well. But that hardly fits with the image of a firm that was busy monitoring half the German press.

No other company, after all, had internal transatlantic roaming - AT&T isn’t present in Europe, and Verizon Wireless/Vodafone straddles the standards divide. They, meanwhile, have bought Alltel for $26.5bn, which makes them the biggest US operator by a nose. Chris Gent would have been proud. Especially as, like all his big deals, someone else is paying for it. The someone being Verizon and Vodafone shareholders - basically, the acquisition is being funded out of VZW’s cashflow, which means there won’t be any dividend for even longer. Perhaps Chris Gent would have been delighted.

Secret BT documents are leaked over the original Phorm trials - apparently they’ll only need up to 300 servers for the damn thing, so that’s OK. Meanwhile, OFCOM wants some rules about how you advertise broadband. Your breadth may vary.

Open-source expert from Access demands to know what’s up with Google Android - is it really all that open? Perhaps it’s the wrong question. Access’s Linux gadgets really impressed Telco 2.0 at this year’s 3GSM, and it looks like there’ll be space for a few competitors, as Windows Mobile is expected to fall behind Linux by 2013.

The 3GPP has decided on an architecture for femtocells - but it’s not “I bring you tidings of great joy - we have a standard” time yet. They have an architecture, but that isn’t the same thing as a standard, even if it appears to be the same as the existing GAN. Still, it’s progress. Speaking of architecture, 3UK is looking for a clue, after the server operating its pre-pay reload fell down. The server.

And Qtel is planning to invest $1bn in more towers in Iraq. We can’t imagine what might possibly go wrong.

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June 5, 2008

Oi Paggo: A Disruptive Brasileiro Credit Play

Oi is a Brasilian GSM operator with over 1m customers using their Paggo service, which is a direct competitor to credit card networks such as Visa & Mastercard. It is the perfect example of an operator moving into an adjacent field, building a complete vertically integrated solution, leveraging the advantages of mobile and targeting a specialist niche in their home consumer market.

How It Works

Paggo is a relatively simple SMS based payment service supported by a OTA downloadable SIM application.

resize-paggo-how-it-works.PNG

The advantages for merchants are:
- it doesn’t require a specialised credit card terminal. The retailer doesn’t buy a specialised POS terminal just an Oi SIM and mobile service;
- It also has a Web-based interface for not only transactions, but general account management;
- it has the lowest commission rate on the market and undercuts traditional cards such as VISA/MasterCard/American Express. The merchant rates are approximately 2-2.5%%; and
- It is totally mobile and therefore can be used by merchants who don’t have a retail presence, such as taxis and street vendors.

The advantages for the client are:
- It is really simple to use - just reply to a text message with your password;
- It is relatively safe even if you lose your handset;
- It doesn’t require you to be physically at a point of sale;
- It doesn’t charge for text messages and the billing is separate from the mobile card billing. It is available for both pre and post paid clients; and
- the charges appear comparable to a typical credit card company and structured in a similar way with monthly fees, interest and late payment fines.

The advantages for Oi are:
- it generates a new revenue stream from low use clients;
- it also allows Oi to sell mobile services into heavier users in the SME market who are the actual merchants;
- it is an exclusive to Oi and therefore clearly differentiates Oi in the marketplace and has enables Oi to gain market share in the launched cities; and
- because of the differentiation it allows Oi to operate on a non-subsidy basis in the pre-paid market.

Target Demographics

The card is targeted at the poor & unbanked who have struggled in the past to get credit - and in Brasil this is a huge market. The credit market is booming now Brasil enjoys low inflation and rapid GDP growth.

Brasil is the fifth most populous country in the world, with 187m people and per capita income of US$12,000. However, the income distribution is heavily skewed with 42% of total income held by 10% of households. It is this long tail of income distribution which creates the huge potential market.

Mobile phones are incredibly popular across the population and Brasil has mobile penetration of 62% with 121m users. The market leaders are international players such as:
- Vivo (Telefónica/Portugal Telecom joint venture) - 31% share;
- TIM - 26% share; and
- Claro (América Móvil) - 25%

Oi Market Position

“Oi” translates into “Hi” from Portuguese and is a very powerful customer friendly brand name for a communication company. It is this branding which differentiated Oi from its launch as a 3rd player. Oi was the first pure GSM operator at launch in 2002 and the parent company owned the fixed line operations in the region. The Oi region covers a vast area from Rio De Janeiro to the Amazon and has a population of 102m and includes the poorest Brasilian states.

It is the customer friendliness which has allowed Oi to rapidly gain market share in its region and now has a comfortable market share of approximately 27% in its original area with 16m customers. Oi is currently in the process of rolling out across the whole of Brasil through a mixture of spectrum and company acquisition. The regional cellular market share equates to 13% across the whole of Brasil.

The strength of the Oi brand has led the parent compant (Telemar) to rebrand its fixed and broadband arms with the Oi magic. Out of total group revenues in 2007 of R$25bn (US$15.3bn), the mobile arm contributed R$4.4bn (US$2.7bn). The mobile arm has a healthy EBITDA margin of 28%, but a low overall ARPU of R$22 (US$13/month).

Success of Paggo Payment Service

Paggo is only launched in three states: Rio de Janeiro, Bahia and Minas Gerais and the take-up and user acceptance is a phenomenon. It clearly offers great potential and should allow Oi to gain share, especially in currently under-penetrated markets.

It is heavily promoted on television with adverts featuring the star Brasilian footballer, Ronaldinho showing the advantages for the merchant of not requiring signatures.

resize-paggo-key-metrics.PNG

Paggo was a privately held start-up which was launched on Oi network; it was recently bought for R$75m (US$46m) in December 2007. Most of the launch investment was a substantial IT and support infrastructure behind the service.

Oi has plans to license Paggo to operators outside of Brasil.

Lessons Learnt

The success of this and similar payment services (e.g. Vodacom) shows that telcos need not restrict themselves to hauling bits around. What works are services that align with the things that ‘over the top’ media can’t do well: trust, handling money, building up a large user base, on-the-ground distribution, and customer support. Where they fail is when creating media content and online services that don’t exploit these capabilities.

Unlike Web apps, the service to the user appears almost laughably simple - the complexity is all in the back end and software integration, e.g. with merchant accounting, fraud management, tax collection, etc. Telcos are in the business of ‘postage and packaging’, and this is very much a packaging effort. Note the ‘upstream party pays’ model for the SMS sent both to and from the mobile handset, meaning the ‘postage’ charges are all included.

Notably this service grows the new market by serving the under-served low-end customer, not vying for the business of existing high-margin wealthy ones. This could be a critical lesson for telcos looking to expand other parts of their business. For example, you could launch a multi-modal VoIP service, which would also allow content sharing during calls, and target it at children, who would have a higher tolerance for lower voice quality, but also would place a premium on the new features.

Paggo has been built as an independent product, and then in-sourced. There are other such precedents, such as SK Telecom with Cyworld. These are one-sided business models, where you buy in a product and sell it to the user. By prising open the platform a little more, you can move towards a more two-sided model, which joins a larger number of entrepreneurs and innovators with the telco customer base. For example, Paggo customer service can’t query if a message has been delivered, or if there’s a network problem, without the telco’s assistance.

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June 4, 2008

Use Case: Optimising Rolls-Royce’s ‘Product-Service’ business

This is a ‘Use Case’ taken from our 2-Sided Business Models report, which is out now (10% discount to readers of this blog). We have chosen Rolls-Royce as an example of both the type of target business model (mixing services with products) and a specific B2B VAS (Value Added Service) opportunity - field service - for telcos to sell into.

A major trend of the times is the blurring of the distinction between service industries and manufacturing, creating product-service systems — in our own technology field, we can already see plenty of examples. Is IBM a manufacturer or a service provider? Ever since its early 90s crisis, it’s put a lot of effort into its services businesses (consulting, systems integration, hosted/managed service operations), but not only does it still make computers, it carries out fundamental R&D on topics like semiconductors, lasers, batteries and magnetic materials — even more hardware than the chip makers.

Similarly, everyone would agree that Ericsson manufactures telecoms equipment, but one-third of its profits come from Ericsson Professional Services. On the other hand, Google would seem to be a quintessential services company, but it actually makes its own servers. Further, some functions that are typical of tech manufacturers - R&D, design and engineering - are found in companies that outsource all their manufacturing, but whose output is still recognisably a physical product, like ARM Holdings.

But this trend is even more pronounced outside the IT/telecoms world. Many, many companies turned to integrating their products with services as a way of fighting commoditisation over the last 30 years - and it’s often cited as a way of making industry more sustainable (pdf). We’ve picked one example which offers insights into where telcos might take their business.

Our example, Rolls-Royce plc, is the British turbine engine maker. Since its bankruptcy and nationalisation in 1971, the company has gone from holding 8% of the world market for civil turbofans at privatisation in 1987 to being the second-biggest producer with market share of 40%. A big part of this success has come from integrating services into its products. In fact, services now account for 55% of RR’s revenues. An eye-catching example is that today, aero-engines for which Rolls has a long-term maintenance contract all send back live telemetry data by satellite to the Rolls service centre in Derby. So not only can their engineers use this information to understand how the engines behave, they can also control each engine’s service schedule in real time.

The other half of this is a complex infrastructure of service centres, workshops and teams of technicians distributed around the world, so as far as possible engines can be serviced as a flow process rather than job-by-job. Engines can even be provided as a service, like software-as-a-service — they are replaced from a pool when they are brought in for major inspection and overhaul.

The commercial upshot is that Rolls has been able to offer very keen upfront prices in order to win new business, while making up the difference on maintenance - about 70 per cent of the Rolls-Royce engines in service around the world are covered by a Rolls TotalCare maintenance contract. Long-term service contracts also help them embed the relationship with Rolls-Royce into the organisations they deal with, which helps win repeat orders. And the hoard of data from servicing the engines throughout their design life is an asset to Rolls engineers working on new products.

But field service is famously a business process that goes wrong. Even if you’re not going all the way to becoming a product-service system, almost any business has service staff in the field. It’s crucial to delivering a good product, and the closeness to customers means that anything going wrong is painful. And there are so many things that can go wrong.

In the report, we characterised some of them - here are some examples taken from the report.

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These are all problems of information, and it follows that an informational fix is the easiest solution. But most of the time, the answer is either to overbook and accept that customers will be disappointed, or else to throw money at the problem and accept waste. It would be great if you could implement lean production here, especially as more and more of your customers may be doing so themselves, which will increase their expectations of their suppliers.

Looking at these factors together — product-service systems, lean production, and don’t forget rising fuel costs — we can see that the ability to schedule production and service interactions dynamically, responding to signals from upstream and downstream, is becoming increasingly important. Location, identity, presence-and-availability, and secure messaging are key functions in any IT system designed to fulfil this, as is high availability and reliability. All of these are challenging and expensive to implement with standard IT tools — but they are core capabilities for telcos.

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Interestingly, bandwidth is only marginally relevant. Most of this activity involves messaging, voice, or signalling/context data interactions. It’s a question of communication-enabled business processes - CEBPs - which are precisely what friends of Telco 2.0 like Thomas Howe and VoiceSage do. Telco 2.0’s content-distribution side is all about providing logistics services for data - CEBPs are all about providing data services for logistics. The content distribution side is about providing logistics services for data, to move it from source to destination. Meanwhile, CEBPs that underpin many of those VAS are provide data services for the world of physical logistics, using telco assets to help burn less fuel and labour.

It is therefore one of the major opportunity zones for Telco 2.0, where the divergence between the socioeconomic value of data and its quantity, and hence cost, is greatest. Integrating product-service systems for the vast numbers of SMBs in the world, who are least likely to develop them in their own IT departments, could be the next SMS.

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June 3, 2008

Telco 2.0 Case Study: Telenor CPA

Lars Godell, Telenor’s VP of Group Strategy, is one of the earliest Telco 2.0 thinkers — his work on this goes right back to his Forrester Research paper on The Rebirth of European Telecoms in 2001. So it should come as no great surprise that he was speaking at the last Telco 2.0 Industry Brainstorm a couple of months ago. And as Telenor is, among other things, the world’s seventh-biggest mobile operator, with 140 million subscribers in 11 territories, there is every reason to listen.

In his presentation, Godell explained how Telenor is trying to develop a two-sided business model, to make wholesale the centre of its business, and in general to move towards “Telenor 2.0”. The key to all this, he argues, was their decision back in the rah-rah days not to spend heavily on “content”, however good the parties were. Instead, Telenor decided to concentrate on selling, billing, and delivering content on behalf of its creators. Regular readers will obviously recognise this as touching on several key Telco 2.0 themes: selling to upstream (producer) customers as well as downstream (consumer) subscribers, logistics services for valuable data, the importance of wholesaling, and the value of telco OSS-BSS capabilities to third party developers.

So, Telenor established its Content Provider Access (CPA) system, which performs these digital supply chain functions. This provides a reserved range of numbers for premium SMS termination, in order to collect payments from the public, and APIs to deliver the content via Telenor systems once paid for. All parties agree to publish technical information about their services and business models. Revenue is shared with the rest of the value chain at between 55% and 35%. The upshot is that Telenor derives $100 million a year in revenue from CPA in Norway alone.

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But Telenor’s plans don’t stop there; according to Godell, there are three stages in the move to Telenor 2.0. The first is to define the strategy, the second to launch it in at least one of the group’s regional operating companies, and the third to start a profitable third-party market. CPA looks a lot like stage 2 at least, but Telenor is increasingly interested in more complicated transactional VAS.

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Because of this, they are keen to work with the IPSphere Forum to develop a framework for sharing revenue around the operator, multiple upstream customers, other operators, and downstream subscribers. Godell says there is no single NGN strategy across the 11 operating companies in Telenor — the real problems aren’t in the network engineering side of the telco, but in the back office IT operation. His solution to this is “layered telecoms”, with progressively richer third-party integration as you climb the layers away from pure connectivity. But getting there will require a lot of effort to break down the existing silos and the administrative empires attached to them.

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As well as a systems architecture for this, you also need the ability for your own developers, to say nothing of third-party developers, to play around and make a mess — which is almost a contradiction with the idea of a unified systems architecture. So Telenor is launching a pair of developer ecosystems, Playground and iLabs. Playground is a tech-light showcase, intended to help upstream customers and developers commercialise their work, whereas iLabs is designed to let the developers themselves experiment with Telenor network capabilities and data assets.

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Content distribution is one thing; but there are quite serious limits on the possible gains from it. There are only so many ringtones. But the biggest source of potential margin, and hence bottom line, will be the emerging field of ‘communications-enabled business processes’, simply because of the gap between the social value of the information involved and the minimal, SMS/HLR-like marginal cost of the traffic.

Telenor’s success in this field depends on how quickly, and how well, they can resolve the IT problem, and on how well they do in attracting developers to iLabs in particular. Further, it’s going to be crucial to sell the change internally - according to Godell, culture barriers are a major problem.

Not only is there the nethead/bellhead antagonism between IT and Engineering, but there’s a very specific problem for Telco 2.0 in that “wholesale is not a positive word” - traditionally, it’s been a Siberian assignment in a noncore, low margin division, whilst all the power and money have gone to the retail marketers. Two-sidedness implies that it’s equally important to sell on both sides of the company, so retail has to make room for wholesale - which is not going to be easy.

Further, Telco 2.0 has to concentrate on external innovation, which is another big challenge to sell internally - after years of trying to create a service-development capability inside the telco, it’s difficult to say that it’s not so important any more, and even more difficult for traditionally straitlaced telco people to hand over control to a bunch of grimy hackers.

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Broadband Stakeholders Group Event, London, 9th June 2008

The UK’s Broadband Stakeholder Group is having an event in London next Monday, and it looks like it could get quite Telco 2.0. They’re going to launch two new research reports, one on the ‘social and economic value of next-generation broadband’, and one on ‘models for efficient public sector investment’. There’s an impressive lineup of speakers including:
* Ashley Highfield, Director, New Media and Technology, BBC
* Kees Rovers, President and CEO, Close the Gap, Neunen
* Kip Meek, Chairman of the Broadband Stakeholder Group
* Francesco Caio, Head of UK Govt’s independent review on next gen b’band
* Steve Robertson, CEO, Openreach
* Anna Bradley, Chair, Ofcom Consumer Panel
* Richard Allan, Government Affairs Director, Europe, Cisco
* Damian Tambini, London School of Economics
* Rachel Clark, Director, Broadcasting and Content, BERR
The agenda is here (pdf); look out for some other friends of Telco 2.0 there, such as Benoit Felten and Andrew Bud, and you might even run into some of the Telco 2.0 team themselves.

If you (or a UK-based colleague) is interested, it’s at the Millennium Gloucester Hotel, between 0900 and 1715 on Monday the 9th of June. You can book through:
Claire Landau, T 020 7331 2036, E claire.landau@intellectuk.org
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June 2, 2008

Vodafone: Too much da, not enough vo and fone?

As there’s a change in leadership occurring at Vodafone, it’s a good time to reflect on the direction of the large convoy of opcos and investments being led by the good ship Newbury. Arun Sarin has stepped out of his asbestos business suit, albeit scorched by the flames of investors and board members, safe in the knowledge that his mission to vanquish more timid enemies is won. Although they don’t say it aloud, The Economist notes that the core of this success was clinging on to markets where vertical integration is turning a profit (USA, emerging markets), and exiting those where is isn’t doing so well (Japan), whilst cost-cutting elsewhere the inevitable detritus of a decade of hyper-growth.

However, as the more acerbic tongues at The Register point out, rather choppy waters lie ahead. The business is rapidly maturing, cost cutting reaches its limits, and new revenue streams (entertainment content, advertising, data) are either slow to ramp up or come with significant supplier costs that dilute margins.

According to their corporate history website, the name Vodafone is derived from ‘voice and data phone’. True or not, the conundrum of whether ‘voice is just data’ persists to this day. So as Vittorio Colao becomes fleet admiral, our burning question is: what to do about the stagnating core product? Along with its peers, Vodafone has conspicuously failed to significantly enhance its voice telephony offer, beyond offering better coverage. We don’t think that’s going to be a long-term winning position as access becomes hyper-abundant, and people’s time does not. Rather than ask how data services can replace lost voice revenue, ask how data can be used to rejuvenate that voice business. And as the biggest player in the international scene, Vodafone is very well placed to do something about it.

Telephony is built on false assumptions

The chart below (from our recently published Consumer Voice & Messaging 2.0 Report) compares the cost of telephony and labour. We show the per minute cost in the USA of using a telephone (fixed or mobile), along with hiring someone (high school or college graduate). What it tells us is that the ‘scarcity’ used to be in the telephone network, and now it is in our time and attention.

Only a decade ago, it was worth paying a graduate for an hour if it would have saved you from making an hour’s worth of mobile phone call.

Today, we barely factor in the cost of calling into our lives. Yet we are buried in voice messages, missed calls, emails and texts. Delivering ever more data to the user is not the same as creating ever more value. The value comes from brokering the right relationships, helping interactions occur at the right time and medium, eliminating unwanted intrusions, automating flows of information, and making users productive.

Not a new problem

Mobile telephony is built off the same product template as fixed telephony, with the same assumptions and problems baked in from the 19th century. From the very beginning, problems have been evident. When Bell called Watson in that first call, the result wasn’t “oh, ****, he’s gone out for an afternoon in the pub”. No, Bell had pre-arranged for Watson’s to be there ready at the other end. It was a bit of a fraud, to hide the absence of presence, availability or scheduling features.

We see these problems still today. You call me, but I just fail to answer in time, so you go to my voicemail. I see a missed call, and call you, not knowing your talking to my voicemail. As you’re already in a call, speaking to my voicemail, I get your voicemail. Why on earth doesn’t the phone network just connect us together?

This particular instance is an example of a failed rendezvous, and we examined the context and unfilled user needs in more depth in this previous post. Many of today’s short phone calls are manual transfers of presence, location and availability data that should ideally be eliminated. Why can’t I request a call from you, rather than only interrupt you? Why can’t I tell you’re calling me back about the message I left a week ago? Sadly, operators are too well rewarded for terminating calls of zero or negative value.

Voice: one product, many business models

As with all telcos, there are three inter-linked business models that Vodafone needs to support. These require very different features.

The first is its retail offer. This takes hardware from the network equipment providers, plus software from various innovators, and packages it up as the core bundle offer or as an add-on value-added service. This supply chain is slow, costly and inflexible today, and their Betavine effort is only a small step towards what’s really needed.

There’s still plenty of mileage though in selling conveniently packaged communications. We’re not yet at the point where “if it’s software, it must be given away for free”. The users see the benefit to themselves, and are willing to pay for it. A good example at the moment is SpinVox, who offer a voicemail to text transcription service. Note how their own marketing copy says: “SpinVox has saved me at least two hours a week [our emphasis] of listening to often irrelevant voicemail.” (And contrast this with the primary purpose of most mobile media content products, which is to fill dead time.) We’ll dive into the challenges and opportunities for retail products a little more below.

Next up are the wholesale products of the operator. We feel there is a massive hole here in most operators’ strategic approach, with a few honourable exceptions. Voice is already becoming just one facet of many applications and products, and operators aren’t making it easy to embed it in. Wholesale products need to be broader in scope (e.g. to include voicemail, push to talk, and 3rd party network integration), as well as deeper in integration (e.g. simple 3rd party trouble ticketing, provisioning of offers sold through non-operator channels).

Finally, there are the two-sided markets, which we’ve written about here. The telephone remains a wonderful way of consumers and enterprises interacting — think of it as ‘v-commerce’ — but there is a huge amount of friction and inefficiency involved. Whilst so much effort is being expended on entering mobile advertising, hardly any is being lavished on building new revenues on top of freephone numbers, call centres and interactive messaging.

Voice as a platform, not a product

We promised to come back to that retail proposition. Ten years ago, mobile phone penetration was in the low single digits. Today, more than half of humanity has one. A decade hence, the experience will also be transformed again. For example, your address book or contact list will be dynamic: ordered by who you ought to be talking to, giving real-time presence and availability data, and probably infused with messages from companies with whom you have ongoing commercial relationships. Mobile will be the ‘to go’ portion of the PC experience, not some separate world.

However, there is unlikely to be a one-size-fits-all evolution of the public telephone service. Instead, we move from an era of mass production to one of mass customisation. There are too many innovative applications, too many niches and customer needs, for any one company to address them all. Instead, operators need to take a leaf out of the Telco 2.0 book and focus on two things: providing distribution for these services (and integration with the core offer), as well as enabling a bunch of high-margin value-added services that the upstream partners pay for, not the downstream end users. If someone is a Facebook fanatic, help that partner get their experience into the user’s hands.

This requires synchronising a lot of moving parts of the puzzle: handsets, network, operational support, etc. The need for putting together a complete experience, rather than just piece parts, is becoming received wisdom, with the Apple iPod, iTunes PC client and music store trio being the canonical example. It’s hard to do, and it’s still early days. Apple have barely moved the needle with the iPhone — the only concession to the voice service is visual voicemail. (And they’ve made a mess of the SMS client.) It does nothing to address the underlying issues of why people are sending those messages, and how to either eliminate them, or make them more effective. Nokia’s Ovi is resolutely focused on the content side of the business, not communications.

As the biggest player, Vodafone has more leverage over handset suppliers and software platform vendors. Pick up the phone to Qualcomm. Whatever magic they’ve done for 3, ask for a bit to be sprinkled over the Vodafone handset range. We’d also expect an operator like Vodafone to produce handset and service offerings much more tightly coupled with the online services that users increasingly route their conversations through. On the corporate side, IBM, Microsoft and Avaya are obvious targets for closer integration.

One good sign is Vodafone’s acquisition of Danish social media start-up Zyb. This is completely the right direction, and we’d like to see the gas pedal pressed hard to roll this kind of “address book 2.0” capability burned into as many handsets as possible.

This is also the time to make the most out of close relations with Verizon Wireless. Platforms need scale, new voice service features need scale, so why not become the de facto leader? Don’t wait for the standards bodies, make it a fait accompli.

Immediate action required: group communication

Whilst these long-term changes unfold, there a re short-term problems with the voice and messaging products, most notably in the pricing of services that compete against Internet offerings. Vodafone UK have cleverly priced ‘informational’ chatter differently from ‘social’ chatter with the ‘stop the clock’ promotion. After 3 minutes, you don’t rack up any more charges. This aligns value with pricing, and we like it.

The problem is that the online tools encourage users to communicate in groups, and to form conversations and communities. Voice and SMS pricing don’t align well with this. Why should a three-way call cost more? The users don’t see it that way. Why does sending an SMS to five people cost five times a much? Why does replying to a message cost the same an initiating the conversation? Why can’t I send Twitter status updates (with no termination charges) for free, to encourage more texts and calls?

There are many ways in which the traditional pricing assumptions of telephony and messaging don’t fit into our current communications landscape. Because Vodafone has shied away from being the price leader, it has more slack to play with here. You can afford to lose some money on termination fees to other operators if those charges have become illogical in the users’ minds. Or take a leaf from GupShup and use adverts to make group communications have no extra charges.

Be proud to be the phone company

Sometimes it feels like being a phone company is like an embarrassing medical condition nobody wants to admit to having. Voice communication will remain central to the human condition for as long as we’re around. Satisfying the need for people to collaborate, chatter, and communicate should be central to every operator strategy. Sadly, it too often ends up being delegated to the network equipment providers or handsets vendors, who tend to lack the skills or incentives to build complete services. If we had a shiny new R&D group, we’d be making the personal, social, human communications experience the top priority.

There are some carriers already making tentative moves towards a better telephony future. We like products like the H3G SkypePhone, but feel that there ought to be a lot more such examples. Embarq is making some useful moves with its eGo landline phone service. Verizon has made a good effort with iobi, but is utterly closed to outside innovation. Telekom Austria has some interesting softphone experiments on the go. Qwest has Q.Home on the launchpad. BT remains a bit of a dark horse here too.

Our own research found nearly 70 start-ups working on new voice and messaging services. (These are all documented in the report.) We’re sure there are more. None are really integrated with the telco platform. The opportunity to exceed the users’ expectations is there, and the business model — retail, wholesale and 2-sided platform — will bring in the cash to anyone who cares to execute on it.

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Ring! Ring! Hot News, 2nd June 2008

In Today’s Issue: More spy scandal at DTAG - Ricke implicated; your insecure mobile; iPhones that look like Windows!; killer photos hack RAZRs; “Safari” browsing, not browsing with Safari; FeliCa hacked; shareholder revolt at ALU; Isenberg on teleconferencing; Google’s app store; BREWidgets; Intel - they’re back; UK WiMAX delays; it’s Christmas for Openreach; Phorm demonstrations; Virgin Media adds more limits to unlimited broadband; KPN launches mobile TV - sort of; mobile phone shipments sink in Europe

Oh dear, oh dear; the Deutsche Telekom spy scandal takes another turn for the worse, as it turns out the spy was receiving money from the firm as recently as early last month, although the company had claimed it had all ended in early 2007. DTAG management, of course, claims that they were paying for something different and entirely aboveboard…they just don’t seem clear what. Interestingly, the spying included the mapping of targets’ movements using the mobile CDR stream — now that’s what we call a location-based service.

The Frankfurter Allgemeine Zeitung, meanwhile, claims that the spying project’s bills were sent to the same cost centre as the then CEO Kai-Uwe Ricke’s office.

Mobile spookery isn’t confined to the network operators, of course. Here’s an interesting article about extracting evidence from devices. Did you know the iPhone caches screenshots of the last view you had of all applications you use, so the sexy UI effects work? Or that mobile Google caches all your search requests in a plain text file on your phone? In fact, the iPhone looks to be a bit of a security vortex, what with all the private information it caches in the clear. Hey, you can even make it look like Windows! In other security news, last week saw the declaration of an exploit on Motorola RAZRs that let you break in by sending a specially crafted JPG image to it as an MMS message, rather like Langford’s Basilisk. You see, machine-to-machine really is the opportunity for MMS after all.

Meanwhile, it turns out that Samsung’s latest phone, advertised as offering “Safari browsing”, actually does browsing that’s like a safari, or something; whatever they meant, it wasn’t the Apple-made Web browser, to the disappointment of millions. Or not as the case may be — as this week also saw the discovery of a major security breach in the browser.

And whilst we’re on the topic, the RFID security fiasco goes on. Researchers at Fraunhofer demonstrated yet another attack, this time on FeliCa/NFC as well as on the already-classbroken MiFare chips. They proved that it was possible to intercept the communication between an NFC phone and one of those “smart posters” NFC fans love so much, and tweak it so the user got something completely different. It’s a great reason to use the trusted, encrypted and location-aware infrastructure we’ve already got — that’s right, your friendly local mobile network operator.

In other corporate distress news this week, Alcatel-Lucent’s twin bosses Serge Tchuruk and Patricia Russo are being criticised for accepting a generous golden parachute. Specifically, the company’s AGM voted to link Russo’s pay to performance targets. They also required a smaller majority to sack Tchuruk, with his side of the epic Franco-American culture gap looking the more vulnerable here.

David “Stupid Network” Isenberg, meanwhile, spots the airlines advertising directly against teleconferencing, a sure sign of a maturing technology at increasingly affordable prices. He reckons it’ll need more than just “gourmet food, sleeper seats, and vintage wines” to overcome security madness and high kerosene prices. We are not so sure. Isn’t it the case that flying is the one time you have to get things done without any interruptions?

Google’s annual geekfest, Google I/O was the scene of more semi-thrilling announcements about Android. This time, it looks like Google plans to set up something analogous to the iPhone App Store, as a way for small developers to commercialise Android software and for Google to keep an eye on it. The interesting thing here may be to what extent it’s open to non-Android work. Google, of course, is in the business of searching and publishing open-source software through code.google.com, but so far you can’t get paid directly for your efforts. It’s another plank in the platform.

Qualcomm, meanwhile, made another move in the emerging mobile platform race. They’ve had their own application developer ecosystem (BREW) for a while, but it’s been lacking a low-overhead way to build small applications comparable to Java FX, Flash Lite, MS Silverlight, S60/Python, or the Nokia Web Runtime. Now, BREW is getting features to create widgets under a project called “Plaza”. Qualcomm is making some smart moves as its CDMA franchise matures.

At the same time, Intel announced its re-entry to the mobile market. The argument is apparently that if you can do a good webpuck/pda/whatever, it can’t be that hard to add voice capability, so all the devices using the new Atom chips could be phones. In some ways this is a Telco 2.0 prediction coming true — voice gets added to all kinds of devices and all kinds of software. But one thing that our work on the Voice & Messaging report and on voice- and audio-related consulting projects has shown is that voice is both crucial, and difficult to do well. Intel will need to find ways of supporting all kinds of strange new voice applications, and also to provide high audio quality - something which is very dependent on hardware, just not any kind Intel makes. Another IT company that entered the mobile hardware business, RIM, has gained an unwanted reputation for poor voice calls.

The UK’s 2.6GHz spectrum auction is being held up, which is bad news for the WiMAX community. It’s the only major EU market where the high-quality 2.5-2.6 band is up for grabs, and the HSPA Evolution and LTE world is gradually beginning to catch up WiMAX’s lead. You want proof? 3 Ireland is upgrading its backhaul to support 14.4Mbits/s HSPA Class 10.

And it’s done; OFCOM is going to make all BT’s Christmases come at once, by letting them hike the prices Openreach charges independent ISPs, who will just have to either pass the bill on to subscribers or go under. Watch those “free” broadband offers go! Meanwhile, opponents of the now-notorious Phorm web-spooking system are planning to kill the head so the body will die, by staging a mass demonstration at the BT AGM on the 16th of July and then filing charges with the police against BT executives.

Speaking of “free” broadband, what about “unlimited” broadband? Or, for that matter, “broadband”? After all the advertising about their “fibre” network, Virgin Media has announced a new set of usage caps.

The good news is that they are being open about it — at the link, there’s a useful table giving all the restrictions, the times of day, the trigger levels, and their relationship to Virgin’s pricing. Expect to see more of the same from other ISPs.

KPN, meanwhile, launches DVB-H mobile TV. However, they don’t seem very committed. The devices are not being subsidised and will cost €499 a go, even before the service charge. We somehow doubt anyone wants to watch “snack TV” enough to pay four hundred quid up front. But then again, despite all the subsidies, mobile phone shipments have started falling in Europe…

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

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