The current telecoms business model is approaching its ‘end of life’. Today, we’re previewing here on our blog an updated Telco 2.0™ Manifesto which we hope will provide a cogent reference point for creating a vibrant new business model at the heart of the digital economy.

This second edition reflects the changes in our thinking over the last two years since we launched the Telco 2.0™ Initiative. It is based on output from four major Telco 2.0™ ‘executive brainstorm’ events, multiple consulting engagements around the world, and our formal research programmes. We’d like to thank the many people who have wittingly (or unwittingly) provided input to it.

The Manifesto is relevant to:

• Those developing strategy across the telecoms, media and technology (TMT) sector.
• Corporate managers in all vertical industry sectors looking to improve efficiency and effectiveness through Information and Communications Technology.

We believe it provides new insights into future business models for the ‘information economy’ at large. The Manifesto seeks to answer eight critical questions:

1. What are the fundamental properties of today’s telecoms business model?
2. Why do these create challenges for future growth?
3. Why are current efforts to find a new business model too limited in scope?
4. What are the real issues that need to be addressed?
5. What are the key principles behind the new business model?
6. What are the core products and services of a Telco 2.0™ business model?
7. How big is the size of the opportunity?
8. What does the journey to this new business model look like?

We very much encourage your feedback, either in via the comments tool below, or directly to contact@telco2.net.

Boom, bust and bundling

The ‘Telco 1.0’ business model has been stable from the inception of the telegraph right through to the mass adoption of the mobile telephone. This model has two pillars:

• vertical integration, where the network owner controls the services on the network, and repays the capital investment by billing for them. This control can be created either by (i) embedding the service in the network (as with voice or SMS), or (ii) through control over the edge devices — handsets, set top boxes, network storage devices, home hubs. Device control can be direct via technical means, or indirect, such as via subsidies of devices with preferred configurations.
• the revenue model is a one-sided market, where the telco buys equipment and content from suppliers (‘upstream’), integrates them, and bills the end user for services (‘downstream’). The upstream side is cost, and the downstream side is revenue.

This model survived both technological revolutions (e.g. fibre optics, digital switching, microwave radio, and spread spectrum wireless) as well as regulatory change (e.g. divestiture, privatisation, and unbundling). It has been very successful, particularly in emerging markets. All aspects of a service, from sales to support, are conveniently packaged in a single easy-to-buy proposition to the end user.

The arrival of Internet access as a mass market consumer product in the 1990s challenges these two pillars. Users can acquire content and services independently of the network operator — a horizontal market structure. Furthermore, the business model of many Internet content companies is a two-sided market (more here and here). They acquire a ‘downstream’ audience using either cheap or free content. Advertising is the primary revenue source, coming from the ‘upstream’ side of brand owners and merchants.

The demand for Internet access sparked an infrastructure boom, which ran in parallel to the mobile boom.

Following the subsequent dotcom bust, telcos have been focused on three activities:

• Managing the explosive growth of the mobile business (especially in emerging markets), as well as (mostly fixed) broadband in developed markets.
• Bundling the voice, video and data services together as the ‘triple play’, to reduce churn.
• Consolidation via M&A, to maintain prices.

All three have placed huge strain on the back office systems, and attention has largely been focused internally on operational issues, rather than strategic or structural ones.

Triple play trouble

The telco business model is under strain. The hyper growth phase in mobile and broadband is over in developed markets. The underlying tensions between the telco and Internet models are no longer masked. We are seeing increased price competition. The regulatory environment is becoming less favourable, with reduced termination fees, capped roaming rates and effective unbundling rules.

Most importantly, each element of the triple play bundle — voice, video and data — has problems with either growing revenues, or the cost of service delivery, or both.

Voice: Slower growth precedes decline

In developed markets, increased usage of voice is no longer sufficient to compensate for price deflation. Revenues are starting to peak and fall. High-margin mobile voice and SMS services are vulnerable to arbitrage (e.g. roaming SMS, international calling). This is particularly true when IP is used as a signalling system independent of the telco network and charging regime.

Complete ‘over the top’ replacements for telco voice and messaging services have achieved adoption in some markets (e.g. MXit vs. SMS in South Africa, Skype for small businesses replacing long-distance, international and conference call revenues). These services remain at the periphery at present, but are still growing fast.

Video: Hard to enter than expected

Both fixed and mobile video are failing to generate the level of profit anticipated. In both cases, telcos lack the content acquisition, packaging and promotion skills that more mature media players have long perfected. The Internet market is driving rapid innovation in content aggregation at a speed telcos cannot match. Telco forays into becoming a media business have generally been underwhelming. For mobile video, user interest isn’t matched by a willingness to pay. The only exception in media is ringtones, which is a market that is also maturing and facing decline. Music may also flourish for a short time, although that is a very troubled industry indeed due to piracy.

Data: Not a golden goose after all

Users fail to intuitively understand megabytes and megabits, and would prefer ‘postage and packing’ to be included with the device or content. There is minimal differentiation between ISP plans. Pricing, usage and value are disconnected, since price discrimination is difficult. Price competition is the norm. Online video is driving the need for fresh capital investment, as well as operational expense. Some of this can be justified by reduced operational costs (as fibre is cheaper to maintain than copper, and LTE/WiMAX have more capacity than 2G/3G) but there remains a significant funding gap. Mobile data usage is growing very rapidly, but typically over 90% of traffic is from laptops, which don’t generate commensurate revenue. Continued growth may result in congestion and spectrum exhaustion in urban hotspots.

New sources of value remain elusive

Network operators are aware of these issues and are experimenting with new business models. Media products, as noted above, have met only patchy success; yet operators are heavily investing in servicing the media and entertainment sector. Advertising-funded services exist, but the entire online advertising industry — including Google — is still under 2% of global telecoms revenues. Advertising alone cannot significantly impact the telco business model.

Advertising is too small to be the basis for a new business model

Meanwhile, in the economy at large, there are inefficient business processes in every industry, through every stage of production from creating a customer relationship and promoting the offer, via service delivery, through to billing and customer care. Typical examples might include delivering parcels, authenticating banking customers, or servicing welfare recipients. These often waste labour and energy, and tie up working capital. Could the telco be in a position to optimise these time and trust sensitive processes?

The trillion dollar re-think

Given these issues and opportunities, is necessary to answer two questions: What is the purpose of a telecommunications service provider? And what does the future business model look like? To answer these we need solutions to the following problems:

• How should the underlying infrastructure be funded, and what is the role of the telco in this?
• How do we protect and evolve the core voice and messaging products?
• How do we turn online video distribution into a profit driver, rather than a cause of cost inflation to the ISP?
• How do we create more value from our current assets, both physical (e.g. networks and IT systems) as well as those less tangible (e.g. brand, trust, customer data)?
• How do we find new classes of customer to service, and therefore revenue sources?

In answering these questions, we see a need for change in the industry to reflect a new world increasingly unlike that experienced before.

Telco 2.0: A new vision

To resolve these issues, telcos must learn from the structural changes that have taken place in other industries where vertical integration was weakened. There has to be a change of priorities:

• A shift to revenue growth via wholesale and business-to-business services, rather than consumer retail.
• A shift to evolving the core personal communications products — a conduit for businesses to interact with the customer — rather than media services to temporarily fend off user boredom.
• A shift to treating customer data as a valuable by-product, not a form of digital waste.
• A shift to servicing universal business processes performed across many industries, rather than competing with services specific to verticals (e.g. finance, entertainment, IT services) that inevitably compete with entrenched suppliers.

Defining the new business model

The future telecoms industry structure comprises the following functions (although not all may necessarily be found in any one telco):

1. Infrastructure services. Our view is that in the long term passive infrastructure becomes part of a completely different multi-utility business, and not part of the telecoms industry at all. Rather than build duplicative competing access networks, capital has to be freed up to invest in ‘network edge’ assets. Telcos should aggressively pursue network sharing and outsourcing initiatives, and co-opt municipal or open access models.
2. A retail arm, which deepens the intimacy of the customer relationship by offering packaged ‘digital lifestyle’ products and services. For example, a wireless picture frame for the grandparents is the perfect complement to a picture messaging phone. Innovation is centred on the core personal communications products, which must be integrated closely with the online services the customer prefers. The retail arm invests in the home and office network, and these assets form part of the network that the wholesale division can re-package. It also broadens the range of goods and services on offer, with each integrated into a single e-commerce, identity, billing, operations and support infrastructure. To do this is has to learn new skills by emulating the best of the retail sector, such as grocers.
3. A rich wholesale delivery platform. Compared to today this platform addresses a much broader range of online delivery problems, on behalf of a much broader range of commercial customers, using a broader range of delivery assets. It turns ‘over the top’ competitors into customers, rather than threats to revenue and sources of cost.
4. A business process platform that creates value-added services (VAS) that extract more value from the customer data assets of the telco. These services address a wide range of cost, efficiency and effectiveness problems in the economy at large, again for a broad range of commercial customers.

We have identified seven core value-added B2B value-added services:

• Identity, Authentication & Security;
• Advertising, Marketing Services & Biz Intelligence;
• E-Commerce Sales;
• Order Fulfilment - Offline;
• Order Fulfilment - Online (E-content);
• Billing & Payments;
• Customer Care

Other complementary businesses may legitimately exist - systems integration, managed IT services, hosting, money transfers - but are not core to the Telco 2.0 model.

Each component of the ‘triple play’ is impacted:

• Voice minutes are sold at wholesale and re-packaged and sold under a wide variety of branded services, where voice is just am integrated feature of that service, not the whole product.
• For video delivery, the telco video platform focuses on supporting consumer electronics companies, content providers and aggregators to creating the user experience. Revenue comes from taking pain and cost out of their businesses, and enabling value to flow along the whole chain. The telco should exit trying to run gatekeeper portals for video.
• Data products are diversified beyond the simple retail ISP, with a mixture of hybrid consumer/business products (e.g. home worker services), and fixed/mobile products (e.g. femtocells backhaul over landlines). The retail ISP works to offer a ‘connected lifestyle’, not a series of disjoined broadband products tied to particular places, devices or times of use.

Two key enablers are (i) sender party pays data, where the upstream party pays for delivery of voice, video or data; and (ii) communications enabled business processes (CEBP), which optimise interactions between consumers and merchants through the voice and messaging tools. CEBP demands that new (wholesale B2B) capabilities are added, such as the ability to directly deposit an interactive voice message into a voice mailbox.

Size of the opportunity

We have modelled the potential size of the opportunity, as shown below. Our model suggests that by 2017 (ten years out) this is around $250bn for new wholesale services and $125bn for the VAS.

Size of the opportunity

We have deliberately excluded a revenue opportunity from the retail side. In a two-sided market, a key feature is that the charges for using the platform have to be balanced between the two sides to get the right size of audience. So newspapers sell at a price that barely covers their print and distribution costs. This maximises revenue from advertisers, who are less price sensitive than readers. Just as with advertising, telcos will be forced to adjust their retail pricing to maintain mass audiences: retail is the tool you use to acquire a customer relationship that can be monetised through activities such as CEBP.

Making the journey to Telco 2.0™

The seven key steps to approaching this challenge are:

1. Divest yourself of infrastructure assets and activities not strategically aligned with the Telco 2.0™ model.
2. Create new financial and operational metrics to measure the progress of your organisation.
3. Update your processes and product pipeline gating criteria to reflect your new priorities.
4. Focus your retail business on (i) evolving the voice and messaging products, (ii) creating the necessary edge assets for video distribution, (iii) engaging a wider range of partners and products, (iv) benchmarking yourself against the leading non-telco retailers.
5. Considerably enhanced your wholesale product portfolio, as this is the new growth engine.
6. Add in the two-sided value-added services based on your strengths and local market conditions.
7. Work with existing partners, and collaborate across the industry, to create the transaction networks needed to support these value-added and 2-sided market services.

You are very welcome to join us at our fifth Telco 2.0 Industry Brainstorm in London on 4-5 Novemeber to discuss these ideas in more depth with your senior industry colleagues.

Posted at 04:28 PM | Link to this article | Add a comment

We’ve long believed that the real reason you build an open telco platform is to facilitate interactions between merchants and users, not to enable a supply chain of media or entertainment products. The telco industry uniquely has relationships with nearly every economically active person, a means to reach them, and customer data that nobody else has. We’ve asked Thomas Howe, an authority in the space of communications enabled business processes, to explain the real significance of BT’s entry into the telco platform space — the start of a global telecom platform war.

As I reported a few weeks ago, Ribbit has indeed been sold to BT. The selling price — $105 million — has caused some surprise. However, it makes complete sense to me.  Here’s the math that makes that work:

• BT has relationships with several thousand global companies in Britain and beyond: British Airways, the BBC, HSBC, Barclays, Royal Dutch Shell, BP, RBS…  you get the picture.  Each of these companies will one day demand (if not already) that their telecom provider offer APIs so that they can integrate their business process with the communications infrastructure.  Thus, the BT Web21C APIs are born.
• As a round number, assume that each large company has between twenty and forty large applications that require integration and management. We can count six areas that all have right off the bat : CRM, ERP, HR, logistics, inventory management, IT automation. No stretch to imagine that each area has several applications in it, or different divisions have different needs, etc.
• Again, as a round number, business efficiencies of 20% are commonly seen in CEBP applications, providing ample reason to integrate communications systems with enterprise applications.
• So, from simple multiplication, we have several thousand companies with 20 to 40 applications each, giving us about 30,000 CEBP applications for BT’s large customer base alone.
• From a world-wide market perspective, just multiply that number times the number of large carriers.

So, what are the chances that there are 30,000 CEBP engineers in the world? Would you say about… zero? I would.  What happens when you have a tool that any web developer can use, like Flex or Flash? You’ve got a fair sight more than the 100 or so CEBP engineers that exist now.   By aquiring Ribbit, BT acknowledges that there’s a severe go-to-market issue with CEBP deployments: there aren’t enough engineers to do them.

[Ed - You can see Thomas present at our next Telco 2.0 Industry Brainstorm in London on 4-5 November.]

Posted at 11:02 AM | Link to this article | Add a comment

The current EC review of Telecoms Law and the UK government consultation on Illicit P2P Downloading (announced last week) threaten the ISPs relationship with its customers. Legislation alone will not solve the Content Industries problems with the internet - ISPs have capabilities they can bring to the table to help ease the pain.

Throughout history, whenever an industry is in meltdown, bullets of blame are sprayed everywhere and the industry players turn towards governments and the legal system for protection. These days, the music industry is in meltdown and the bullets of blame are targeting the ISP industry. Failure to react could cost the ISP industry dearly. We examine some of the options below.

Note that music is not suffering from a demand-driven meltdown: consumer demand for music appears as strong as ever. The problem appears to be music is being increasingly delivered by the internet, and it is proving difficult to monetise this demand across the whole of the value chain.

All the evidence seems to point towards a significant number of consumers who are sharing music without the rights holder’s permission and without compensating them. Demand for legal online services pale into insignificance compared to the illicit demand. Even worse, consumer behaviour and expectations seems to have changed — free sharing of music is becoming the default mode. Not surprisingly, music companies are looking for the law for protection and other content industries fearing a similar fate are jumping onto the bandwagon.

The Legislative Pipeline

In Europe, the EC is proposing amendments to European telecommunications law which will allow the monitoring and blocking of services by ISPs. The amendments will also permit ISPs to sanction users by suspending or terminating Internet access. Our friends at TelecomTV are so concerned about this that they have started a “throttle the package” campaign.

In the UK, the Department of Business Enterprise and Regulatory Reform (BERR) has issued a ‘Consultation on Legislative Options to Address Illicit Peer-to-Peer (p2p) File-Sharing’. This consultation seems to be driven by the Gowers report, specifically:

“Recommendation 39: Observe the industry agreement of protocols for sharing data between ISPs and rights holders to remove and disbar users engaged in ‘piracy’. If this has not proved operationally successful by the end of 2007, Government should consider whether to legislate.”

Any new legislation will pose interesting questions about the potential loss of individual privacy, opening the door to censorship and digital disenfranchisement. However, the Telco 2.0 angle is less about civil liberties, as we are more interested in the impact on the value chain and business model.

Enforcement won’t be cheap

In France, the Oliveness Agreement recommends the majority of costs will be borne by a government agency employing 30 people, sending 3 million infringement notices per annum and costing £15m per annum.

In the US, the rights holders seem to bear the brunt of costs of the Digital Millennium Copyright Act (DMCA) — monitoring aggregator sites (eg YouTube) and issuing take-down notices. This can take a significant amount of resources. The DMCA seems ineffective for file sharers, and obviously is inapplicable to aggregators based outside the USA.

There is no doubt that the ISPs will have to install equipment on their networks to monitor traffic. Yet detecting and differentiating between legal and illegal traffic is a formidable challenge. Most UK ISPs have already installed Deep Packet Inspection (DPI) equipment on their networks, but a technological arms race seems inevitable and ongoing costs will be significant.

In all probability, over time enforcement will reduce the amount of the consumers file sharing on the internet. The internet is far from the only way to file share. A recent British Music Rights (BMR) survey showed that sharing and ripping of CDs is more prevalent today than file sharing on the internet.

Without wishing to delve deep into the cannibalisation debate, we suspect that legislation alone will probably not generate any new money to the music industry.

Changing Behaviour

The BMR survey shows just how much people love and value music, and highlights that a significant amount of that value is currently unmonetised:

“It forms when fans really connect to a piece of music or to an artist. They develop a bond and will be prepared to pay more for a specific item: the original CD, band paraphernalia, or concert tickets. The value to the music consumer in this case rests in the item itself or to the individual who produced it”

It seems clear that there is value in proving a legitimate purchase of music has taken place — a digital token proves support of an artist. Lessons from retailers with loyalty schemes allowing discounts on associated products are clearly appropriate for content aggregators.

Another key finding of the BMR survey is about that people enjoy experimenting with music:

“It is about trying-out, searching, exploring, investigating, giving something a go, rating, and recommending to others. The value to the music fan is in access to a large range of music for experimentation, and participation in a community of like minded music lovers, rather than in any one track.”

A new generation of services are becoming available to meet this need - last.fm, and Pandora are just two examples. I have been personally experimenting with a service called Spotify and can see great advantages compared to managing a digital music library on my hard disk.

Simplifying Rights & Access to Catalogues

In the EU, there is not a simple, streamlined system for clearing music rights. The EU is trying to change the status quo, which will allow licensing across Europe and also competition between collecting societies.

In the UK, the MCPS-PRS, which is the major UK music royalty collection society, has a standard Joint Online Licence which costs music aggregators around 8% of Gross Revenue, but has some minimum rates which could push up the bill. For details see here. These royalties are paid to music writers, composers and publishers.

It seems obvious that the more difficult it is to license music, the higher the probability that someone will infringe either accidentally or deliberately. Price is also a big factor, for example the robot-powered music recommendation and streaming service Pandora closed down in the UK complaining that royalty rates were too high.

Getting access to the record companies catalogues is an even bigger problem. Even a company the size of Nokia, and probably with a huge budget, seems to be finding it difficult to get access to all catalogues.

Some artists who own their own rights even refuse to put their material online. The Beatles are probably the most famous such case.

We firmly believe that the rights holders should be free to choose their own distribution channels and set their own prices. However, the current market problems points towards more flexibility being required.

ISP incentives

BSkyB’s announcement of a music partnership with Universal is also interesting, although there are more questions than answers about the service at this early stage.

The trend is set and it won’t be long before all of the major UK fixed ISPs are offering some sort of music service. We strongly believe that partnerships are the way forward here for ISPs, rather than building vertically integrated solutions. ISPs should focus generic capabilities which can be offered to any type of content:

• Making content delivery cheap and efficient — by building CDNs, caching content close to the edge and making P2P delivery more network-aware. There needs to be a menu of choices of content delivery, for example off-peak data — not just ‘premium’ options like assured QoS streaming.
• Helping content aggregators build a sustainable economic model (and reduce their need for underpriced ‘over the top’ distribution). It should be straightforward to charge to your monthly ISP bill; or offer an ad-funded model with the ISP using its customer knowledge to target ads; or offer separate per-megabyte charges for delivery to the user for specific partners or applications. Then offer the billing and collections service on behalf of the third party.
• Market services to the base. The ISP should know better than most which of its base likes which type of content!

Future Challenges

Douglas Merrill, ex-Googler now head of digital media at EMI, sums up the challenge of how to make money in a digital age perfectly:

“We don’t know the answer, and that’s kind of exciting, when you don’t know the answer, you try a bunch of things, and in careful ways you measure the result. We’ll figure out how to make money later.”

We don’t believe there is a silver bullet on the horizon either. We are certain that carrots are needed as well as sticks. And, we are certain that participation amongst parties in the value chain is the only way forward.

[Ed - Telco 2.0’s new ‘Content Distribution 2.0’ research practice will continue to track these developments and suggest solutions. Watch this space for launch later in the summer]

Posted at 05:28 PM | Link to this article | 1 comment

Qualcomm, best known for owning a lot of patents on cellular radio tech, has an interesting new product out — and it involves a large yellow backhoe loader. Not quite what you’d expect! But a regular theme in Telco 2.0 is that the real value for the telecoms industry isn’t in the consumer entertainment applications everyone loves, but in the enterprise. That means working with people and things, driving out labour, energy and working capital costs.

First we’ll go through what the product does, before diving into what it means for the business models of both Qualcomm and telcos wishing to apply the same lessons.

Diggers are a product, digging holes is a service

The world’s leading manufacturer of backhoes and the like is JCB (for whom we have a nostalgic fondness). They have started to add Qualcomm GPS/GSM modules to some of their vehicles. These communicate with a Web application back at headquarters, also Qualcomm’s work. If you buy one, and pay the extra service charge, you get to log in to the Web page and see the data the device is collecting. Obviously, it regularly reports the digger’s location, which is handy in the event it gets stolen, or if its operator decides to nip off for a crafty pint of beer.

But it’s not just location information — a common flaw in a lot of LBS projects — but rather location added to data of some other kind. This could be a map or network diagram visualisation of the data, or data retrieved or filtered by geographical criteria. So it should be easy to get reports from a remote station that could include any kind of data you want, which could include location, and to send things back. JCB and Qualcomm’s service does just this. It provides among other things details of whether or not the engine is running, and if not, when it last ran, how long it has been running, and how long the vehicle has until it needs servicing. The significance of whether or not the engine is running is of course that if the engine is running, the machine is probably working. As well as that, it also monitors engine instruments — oil pressure, temperature, RPM, exhaust lambda sensors — so that the service schedule itself can be adapted depending on how well the digger is getting on.

But the real user value comes from the system’s user-configurability. As well as defining areas on a map and requesting an alert every time a digger enters or leaves one, you can arrange for an alert to fire when a vehicle whose time-before-overhaul has reached less than a working day enters a geofence around the maintenance workshop, and therefore get the vehicle into the shop when it passes by. You could direct the alert to the driver’s mobile phone, instead, and do yourself out of a job.

So for JCB, they are taking waste out of an everyday business process of driving diggers around: downtime for maintenance, under-utilisation, and cost of repairs. They do this by reducing lag in business processes (e.g. getting the digger into service at the right time) using data by-products of the business they’re already engaged in. Rather than selling diggers — a business input — in a price-based competition with other manufacturers, they instead sell outcomes — more holes dug and filled per unit of labour and capital.

Qualcomm, no longer the default radio technology, switches business model

It’s also an example of something else. Beyond the world of standardisation, there is a further layer of standards which are in a sense much more important, namely the assumptions in everyone’s head. You can see one in JCB’s promotional material for Livelink — the geographical interface for the system is Google Maps. (Or something with a near-identical user interface — Yahoo! and Microsoft Virtual Earth also look a lot like Google Maps.) That is how we expect a map on computer screen to look and behave, and the format used to display geographical data on the map is the same (Google’s Keyhole Markup Language and GeoRSS). Similarly, the default operating system for a new IT project is some form of Linux, the default network protocol is Ethernet, and the default GUI is a Web page.

And, of course, the default mobile telecoms system is GSM/UMTS. We can’t be the only ones to have noticed that UMTS and GSM networks are still being built, sometimes replacing IS95 or CDMA2000 ones, existing UMTS systems are being rapidly retrofitted to HSPA standards, and where another network technology is used, it’s invariably WiMAX. Whatever LTE turns out to be — and it may well just be HSPA+ with a flatter network architecture — it’s going to be the default standard, and WiMAX will be the only real alternative. Nobody is deploying Qualcomm’s 4G design, UMB (1xEV-DO Rev.C as was). Even their traditional best customers, Sprint-Nextel and Verizon Wireless, are going their own ways, to WiMAX and LTE respectively.

Now there’s a problem; what do you do when you stop being the assumed standard? Qualcomm settled its row with Nokia. It tried and failed to derail IEEE802.16e standardisation in favour of 802.20. It will of course continue to collect its rent on UMTS silicon. But it seems clear that their real strategy for a future is to specialise in services, applications, and platforms — to become the most developer-focused vendor in the telecoms industry. JCB Livelink is just one of the products of this drive to exploit the power of combinations.

Telco products are missing the magic service ingredients

JCB, meanwhile, remains the digger everyone thinks of when they think “digger”, but they have only managed to stay there by continuous innovation. Having invented the first backhoe-loader was never going to be enough. Livelink represents their move towards integrating their machines into a product-service system. And it’s about time too; the property bust has cut JCB’s order book by 20 per cent.

We’re not sure if making them dance is part of their strategy, though, or whether it was just too much fun.

So what innovation is missing in the telco space? Well, today’s basic telco voice and messaging products are peaking in usage and revenue in mature markets. The answer is to turn them into conduits to facilitate interactions between users and merchants. Telcos have a number of advantage here. What they supply is communication — not just location. Furthermore, the telco already has a relationship with pretty much everybody who is economically active, via their landline or cell phone. Rather than aiming for the ‘digger’ business process or vertical, there are a set of generic business processes (see slide 16) that they should tackle.

Note that BT just bought Ribbit, the new voice & messaging firm whose developer friendliness we praised so much. BT is doing very well at coping with the end of its role as default telco; Qualcomm is on the same road.

This is an example of something we keep banging on about: the reason for exposing the network APIs required to handle the seven questions isn’t to make each one a discrete product like a telephone call. Instead, it’s to make it possible to recombine them into new applications. Rather than try to guess what the users want, it’s all about making it possible to build bits of the telco into new things and processes that telco management couldn’t even imagine.(“I know - an application for managing large yellow backhoes!” Try that at Vodafone HQ.)

So in this case, if the normal driver of the backhoe is in Spain on holiday (well, they’re not doing much construction there any more…) then the message can instead be relayed to his boss, or someone else. The API tells us if that person is roaming, for example. Rather than the employer having to issue everyone with a phone, the existing personal infrastructure of the users is adopted. Suitable privacy controls and opt-ins are put in place. The telco is in a position to arbitrage away the difference in cost between “one phone per application” and not spending anything on hardware.

And mobile has a special role here, because of its unique ability to extend the reach of IT systems into the physical world. So we certainly ought to be thinking about yellow diggers, offshore wind turbines, shipping containers, and perhaps even cows. (No, we don’t mean Cells on Wheels.)

Posted at 11:56 AM | Link to this article | Add a comment

In Today’s Issue: All the Vodafone that’s fit to print; just what’s in that tall glass of mobile data?; the Spanish builder menace; AT&T discovers principled objection to mergers, porcine aviator sighted; Sprint flogs towers; Sprint’s multi-gigabit radio backhaul, departure from the NGMN; is MediaFLO short of spectrum?; frantic open-source activity; Nokia pays for friends; Intel dumps Ubuntu from its mobilinux; Win95 on a Nokia N810; better voicemail for all; Bundesnetzagentur’s odd idea of regulation; BT begins to move on fibre

Vodafone found that once the stock market doesn’t like you, there’s very little you can do about it this week. You wouldn’t imagine that interim results including the phrases “first-quarter £9.1bn revenue” and “expecting full-year profits around £11bn” could scare the markets, but that’s what happened — vodashares were marked down by around 11 per cent. The monster carrier responded by offering to buy back a billion pounds’ worth of stock. Yet if the best repartee is a parliamentary majority, as Prime Minister Disraeli once suggested, the best trading statement is usually a bag of cash.

Perhaps the markets were reacting to the enigmatic surge in data revenues? These were up by some 29 per cent, and are marching steadily towards the billion pound mark — which you’d think is great news for Vodafone. However, like all carriers, Vodafone has managed to get its non-SMS data traffic moving by the simple expedient of slashing prices and broadening the offer to emphasise its role as a mobile ISP. (There’s a good reason why the star mobile data product across all the UK operators is a little Huawei E220 radio modem for your laptop.) Back in the dotcom boom, the argument for mobile data was a) that it would be additional to voice and messaging revenues and b) that it would be a high-margin branded product in its own right rather than just being bulk IP traffic.

However, what we’re actually seeing is quite the opposite - voice and messaging are the high-margin products, non-SMS data services are substitutes for them, and the top selling service is a pipe in the sky. How much of the extra data usage is made up of instant-messaging or social network usage that competes with Vodafone SMS and branded/portal IM? How much is Skype traffic from laptop users? Perhaps the City recognises these issues. Or perhaps they just thought “No-one ever got fired for selling Vodafone (not since 1999 anyway, and that’s before my time)”? Alternatively, they noticed this bit in Arun Sarin’s statement:

According to the group, economic and competitive effects particularly impacted Spain. Sarin added that the British mobile phone group had been hit by the decrease in economic migrants who had been working in Spain, often in the construction industry. He said the slowdown in Spain’s construction industry had also resulted in a reduction in the number of builders who used mobile broadband devices when working on sites.

Tradesmen and small businesses have traditionally been a huge market for the industry; this was one of the biggest surprises at the very beginning of Vodafone’s history, when they expected bankers and got a surprising number of plumbers. It’s also the same pattern we see in the emerging markets, where so much growth and creativity comes from small independent traders. So this probably isn’t good news.

Speaking of monster carriers… AT&T is objecting to the Sprint-Clearwire WiMAX deal, on grounds that it would lead to an undesirably high concentration of ownership in the market for…wait for it….leased surplus spectrum from the educational fixed television sector. The FCC assigned some speccy from the 2.5GHz band for the use of educational institutions who wanted their own little TV station, years ago. Not many use it, and the ones who don’t often lease the spectrum out. Obviously, the lessors have to be people who use the 2.5GHz band. And who does that but Sprint/Clearwire?

Perhaps it’s a real concern, but it certainly sounds a lot like chutzpah coming from the operator formerly known as SBC/BellSouth/Cingular/AT&T Wireless/AT&T (Ma Bell) and probably some other mergers we forgot. Relatedly, Sprint has also parted with the ownership of thousands of cell towers; rather than the kind of giant network-outsourcer deal we often talk about, however, it’s more of a financial exercise.

Meanwhile, here are some details about how Sprint/Clearwire plans to backhaul its WiMAX base stations: by provisioning them 1.6Gbits/s of point-to-point microwave Ethernet, apparently. It’s a reminder that radio may be black magic, but there are times when it can even rival fibre. If you already have towers, it saves so much trouble digging up the road. Sprint, meanwhile, has quit the NGMN, apparently on the grounds that nobody cares about Qualcomm’s UMB any more, and anyone who doesn’t want LTE will go for WiMAX.

An interesting piece at Daily Wireless which raises the question of whether MediaFLO has been left standing in the race for mobile TV spectrum, touches on the possibilities of ultra-localisation as a way of making mobile TV actually interesting. It also reminds us all how smart the old IPWireless team, now with NextWave, really are. (They’ve also just taken their original good idea about UMTS-TDD as a mobile TV medium and applied it to WiMAX.)

The febrile activity in the mobile OS and developer platform world continues, and it’s like a bathful of angry octopi down there. Linux folks at OSCON were threatening to move on from their 18% share of the embedded OS market to attack the 43% or so held by proprietary and non-Microsoft products. The president of the Symbian Foundation is promising to push for mass developer adoption.

He’d better. Nokia bewails that its developer community is mostly people they pay. This isn’t necessarily a bad thing, though; hackers need a business model, too, and so far there isn’t much in the way of a market for Symbian apps outside Nokia and the operators.

Linux people like nothing more than a good row about the content of an OS distribution: and Intel obliges, by removing Ubuntu components from its own Moblin mobile Linux implementation. Expect more tensions between closed and open innovation models to come. Journalists meanwhile like nothing more than a really improbable merger tale, and analysts obliged, suggesting that Android and Symbian would merge. They didn’t say how, and getting an octopus to embrace a squid doesn’t produce a beautiful dolphin — just a mess of tentacles. And Nokia’s linux shop gets MacOS and Windows 95 running on an N810. You have to ask why, don’t you… still, nice to be paid to do something in these economically challenged times.

That’s perhaps enough techieness for the time being. Here’s a service that replaces your carrier voicemail and routes messages into your IMAP e-mail, thus rendering voicemail somewhat less user-loathing. Naturally, there’s no business model for it yet, except for asking readers of The Register to make suggestions. And if that doesn’t work, we think they’ll start going to VC meetings with a kitten, a meat cleaver, and a banner reading BUY ME BEFORE I KILL AGAIN. (The Reg says that their lack of a business is “like any self-respecting Telco 2.0 company”. Cheeky little monkeys.)

A spectre is haunting Europe; the spectre (or possibly sceptre?) of Viviane Reding. The EU Commission slaps down the German Federal Networks Agency; it can’t force a new entrant to the market to pay an “unjustified” charge to the incumbent. This is one of those things where the only possible answer is “I should bloody well think so too”, as it seems crazy, but the German regulator did actually try to make new DSL operators pay a tax to Deutsche Telekom. Now that’s what I call regulatory capture.

And finally: it’s happened! BT wants to spend £1.5bn on fibre-to-the-cabinet. Watch this trench for more details…

Posted at 09:32 AM | Link to this article | Add a comment

Telco 2.0 is running a series of depth interviews with senior people in the Telco-Media-Tech sector. To start with, to support our summer research programme on new Content Distribution business models, we caught up with Tony Rallo, CTO of Televisa, the Mexico-based media giant which is also the world’s biggest creator and distributor of spanish-language content.

Tony has deep expertise in digital media (previously he worked for Apple in Europe). The global spanish-language market he serves (LATAM, Spain, US Hispanic) is huge and complex, with a GDP of $2.4 trillion, bigger than that of China. Televisa creates over 50,000 hours of video content per year (more than ABC, NBC, CBS combined) and has been at the forefront of exploiting it through the multiple media platforms they own (4 x TV channels, cable companies, soccer teams, live event venues, websites, merchandising operations) and through selling it to others worldwide.

Tony has a strong belief that Telcos potentially have much to offer the content industry…if only they’d think differently. Here’s what he had to say to us about the current state and future direction of content distribution - his personal views, not his company’s - over a beer as he passed through London:

INTERVIEW:

Q1: Is the movement of video content into the online world an opportunity or a threat for media companies?

A1: It’s a big opportunity for all players in the value chain but you have to be aware of some important usage factors when creating an effective strategy. Firstly, the terminals. The PC, the TV and the mobile support different types of experience that are affected by time of day and type of content. This is more subtle than the normal debate around ‘lean-back’, ‘lean forward’, ‘participation’ and ‘snacking’. They all have different impacts on revenue and cost models.

For example, advertising models need to be adjusted depending on if the content is live or time-shifted. Sports content is consumed (and monetised) in different ways to entertainment and sub-categories like soap operas (‘telenovelas’). Mobi-sodes and other made-for-mobile content is going to be very important for the majority of mobile phones, but when you get to 3.5” screens (iTouch/iPhone) and bigger (Mobile Internet Devices) then normal video content can work fine.

Q2: What are the best business models for monetising video content online?

Advertising is still king for non-movie Video on Demand. Paying for individual content is not going to work on a mass scale partly because users just won’t be able to manage all their media files effectively and will get frustrated. Clearly there will also be a “Download to own” market within walled gardens like iTunes or XBox Market Place, but compared to the advertising and sponsorship models, I believe it will be small.

Renting will be a better model, especially for movies. Syndication and merchandising is obviously important - Televisa generates huge revenues from live events and merchandising around telenovelas like Rebelde [link]. Bundling with other communications products may also be an effective approach. For example our cable network in Mexico City - Cablevision - allows us to add voice to our packages as well as giving us another reverse channel for our online content. [Ed - It’s a similar model to how Comcast competes with Verizon in the US.] We’ve sold 27,000 voice lines on our triple play bundling since December 2007. We’ve also recently made investments in two other cable operators, Cable Mas and TVI, which we think is important given the nature of the Mexican telecom market.

In terms of our bundling with mass entertainment brands like Rebelde we take a 360 degree approach that goes beyond merchandising and Live events to include special Rebelde content for paid TV, Premium SMS (Ringtones, etc), a Rebelde custom made Magazine, eMarketing through databases to registered fans, specific online activites and exclusive (‘behind the scenes’) content online, an official website, and a Home Video Division which sells DVDs with all kinds of extras on too!

Q3: What’s the key role of IP (internet protocol)?

IP really helps address the issues of matching a multitude of different user experiences with a growing number of devices and content types. New technology, helps us to see what people are watching. This helps us to target advertising. For example we are currently evaluating Black Arrow for our online delivery platform. In cable we track 10,000 set top boxes per day in Mexico City via a custom made tracking application.

Q4: Broadcasting across frontiers - how well does content originated in Mexico play in other Spanish-speaking territories?

Telenovelas and similar drama-based entertainment seem to have universal appeal that transcends geographical and cultural borders. While Televisa is a Mexican-based company, we believe we are a global player. We have been selling content for more than 40 years. Today we sell in over 90 countries around the world, either via cable signals to MSOs or as ‘canned’ content to broadcasters. Most of the content is dubbed into 15 languages: from Mandarin to Turkish to Italian, Portuguese and French. But, as part of our expansion into new business areas, we are now locally co-producing successful formats like ‘Ugly Betty’ in countries such as China and France, producing them with local talent in the native language.

Q5: What are your views on piracy and security issues around online video?

Firstly, the industry must accept that hackers will never be beaten. Secondly, we need to think creatively about ‘traffic shaping’. Rather than the current approach of stopping people doing what they want, we need to think about differentiating services and access prioritisation based on consumer needs.

For example, one approach might be to improve throughput of important business traffic like email during office hours and then let other activities like P2P file transfers to happen unfettered at night time. Ultimately, every service provider will have to develop an appropriate approach based on their local telecom market situation and regulatory environment. Comcast has been in the press a lot recently for their battle with BitTorrent . Maybe if a Telco should develop a service proposition that charges differently depending on what priorities of services the user wants? This has not been resolved at all and it goes back all the way to the Net Neutrality discussion everyone is having. [Ed. - we couldn’t agree more. The two-sided telecoms business model addresses this head on. See here.]

DRM (Digital Rights Management) is another issue we haven’t seen well resolved so far. In delivery platforms such as “Pay TV” (i.e Sky, Cable) the digital rights are managed de facto since the content is encrypted throughout the distribution chain. But many content owners are “covering the sun with one finger” since today My HD Digital Signal can be transcoded to Analog and back to a digital file in a format like Windows Media or Quicktime with very HIGH quality and then uploaded to any website such as youtube. I mean any normal PC with good horsepower and Media Center Windows Edition can record a lot of content from any Analog” Signal….

Therefore I expect DRM on the business to Consumer side to be a long, complex debate. Steve Jobs recently proposed making iTunes DRM-free, but the industry hasn’t fully processed the importance of what he was suggesting. My view is that if we get our pricing right users will always be willing to pay for high quality protected content just as they do for high quality software.

YouTube is great for user generated content [see Chinese Backstreet Boys example below!], but Telco 2.0 readers should keep a close eye on what is happening with Hulu in the US. There you have high quality content delivered in a high quality fashion. There are predictions that within two years Hulu will have larger revenues than YouTube. It is very hard for YouTube to justify advertising in content which they haven’t developed and don’t own the proper rights. [Ed. - cf. Our analysis of YouTube vs iPlayer in the UK here].

Q6: How do you see telcos role in content creation?

Telcos have proven throughout the world, time and again, that they are not good at creating content. Telefonica made an interesting move in buying Endemol, but that seems to have been a temporary blip.

For one thing, they don’t really appreciate how complicated a critical issue like digital rights management is. All the contributing elements of a piece of commercial video (actors, musicians) have different types of rights attached to them, which is extremely difficult to manage.

Secondly, technology choices: a recent survey showed that the best penetration rates for IPTV were typically only 10% of the DSL install base. Why would users switch from cable if the cable services are up to par or better? My view is that content distribution via IP is an expensive option compared to broadcasting via antenas or satellite, even though the cost of broadband is dramatically reducing in a number of key markets. We are trying to do our share in Mexico since broadband penetration is directly correlated to economic prosperity, especially in the small and medium sized business market which is a very important part of the social fabric of the country’s economy.

For consumer entertainment, though, DTH (Direct-To-Home) satellite is a much better choice for a telco trying to create a national footprint, especially in a country with large geographic size.

Approaches to Mobile TV need some re-thinking too. The network technology is just not ready yet. Mobile TV certainly has a future as a broadcasting platform, but only for certain types of content. DVB-H, MediaFlo and DMB are very good complementary solutions for content owners and wireless operators to prevent streaming video saturating operators’ GSM and 3G networks and allowing 14 (or more) good quality video channels to be broadcast to a handheld device. [Ed. See more analysis of video on mobile here and of MediaFlo here].

Q7: So, telcos should focus on content distribution?

Yes, they should become a new type of MSO, but using a different platform and architecture. [Ed - We’ll be exploring what this might look like in a report coming out in September].

Q8: And what about the huge costs of over-the-top content distribution that ISPs are currently incurring (cf. iPlayer example in the UK)?

In the past users consumed roughly 30% of their daily bandwidth allowance, but were charged for 100%. Now, with P2P file sharing, and increasingly with services like the iPlayer in the UK, Hulu in the US, and high-quality YouTube they are starting to consume 100% (and more!). So, ISPs need to wake up and smell the coffee - they should charge their consumers more cleverly for different levels of content and service quality, as I mentioned before.

In Mexico, for example, pricing has been a big problem, but that is more because of local monopoly issues. Having broadband at USD$30 a megabyte won’t be sustainable in the long run!

Q9: So, what propositions could telcos develop to support your online video business, and make a decent profit in return?

• Usage data to help targeted advertising? Yes, they could do a lot more here. If you consider how much we pay for unscientific usage data today, we’d certainly be willing pay for anything more accurate. However, as it stands today, we have received no propositions from telcos in this area.

• Billing and payments, to collect content charges indirectly? Yes, but mobile operators are being far too greedy today. They are asking for 50% of the transaction, when Amex want 6% and Visa 4%! As a result we’re looking at alternative (pre-paid) approaches to avoid telco charges.

• Content delivery services that reduce distribution costs and improve QoS? Yes, theoretically. But companies such as Akamai and LimeLight already have a very holistic offering. Their footprint and intellectual property in this area is very strong. Telcos are not good at maintaining server racks in the way Akamai or Limelight are. Perhaps they should buy a CDN (Content Delivery Network) company!

Q10: What’s your big message to the telco industry?

Telcos need to create a new type of brand proposition to the content industry - a new B2B2C ‘Lovemark’ . It needs to be based on a win-win, two-way street which helps the consumer receive a high Quality of Service, Quality of Content and Quality of Experience.

Telcos should be talking to content providers a lot more than they been to date. Otherwise situations like the iPlayer in the UK will continue. We need to avoid situations where the content provider launches a new platform/ service and the Telco Infrastructure becomes stressed. Paradoxically both sides need to communicate a lot better.

Ultimately, telcos need to help content owners move from ‘Network’ Television to ‘Networked Television’.

Telco 2.0 take-aways:

Telco’s clearly have a role in distributing video content. More and more content players we speak to see telcos as an additional distribution channel to audience viewing, fulfilling the content owners’ need to distribute to as many eyeballs as possible. Satellite, Cable, Fixed-line and Mobile all have a place in their distribution plans.

Security of content, quality of viewing experience and usage metrics are clearly features that content owners value and appreciate that Telcos have potential supporting capabilities in these areas. However, Tony’s view that Telco’s are, relative to the CDN players, not strong in managing racks of servers and software should be a real worry - we believe that this will be a core competence for content distribution in the future.

We are not surprised that Tony highlights telcos’ lack of success in creating content. We believe that vertically integrated approaches whereby Telcos buy content rights is the wrong strategy and one doomed to failure (a view we get supported time and again in our survey results).

Our analysis suggests that the two-sided business model offers the best prospects going forward for both content owners and telcos. And there are some good early models to learn from (cf. Telenor’s Content Provider Access programme).

Most importantly, the interview with Tony highlights the most interesting conundrum facing online video distributors: broadcasting is a cheaper way of reaching mass markets and attracts higher advertising rates, so how can Online Video become profitable - is it through interactivity, personalisation or just as a niche play?

[Ed - we’ll be debating this issue at the November Telco 2.0 event]

Posted at 12:55 PM | Link to this article | Add a comment

Online Video consumption is booming. The good news is that clearer demand patterns are beginning to emerge which should help in capacity planning and improving the user experience; the bad news is that an overall economic model which works for all players in the value chain is about as clear as mud.

We previously analysed the leffect of the launch of the BBC iPlayer on the ISP business model, but the truth is that, even in the UK, YouTube traffic still far outweighs the BBC iPlayer in the all important peak hour slot - even though the bitrate is far lower.

Looking at current usage data at a UK ISP we can see that the number of concurrent people using YouTube is roughly seven times that of the iPlayer. However, our analysis suggests that this situation is set to change quite dramatically as traditional broadcasters increase their presence online, with significant impact for all players. Here’s why:

Streaming Traffic Patterns

Our friends at Plusnet, a small UK ISP, have provided Telco 2.0 with their latest data on traffic patterns. The important measurement for ISPs is peak hour load as this determines variable-cost capacity requirements.

iPlayer accounts for around 7% of total bandwidth at peak hour. The peaks are quite variable and follows the hit shows: the availability of Dr Who episodes or the latest in a long string of British losers at Wimbledon increase traffics.

Included within the iPlayer 7% is the Flash-based streaming traffic. The Kontiki-P2P based free-rental-download iPlayer traffic is included within general streaming volumes. This accounts for 5% of total peak-hour traffic and includes such applications as Real Audio, iChat, Google Video, Joost, Squeezebox, Slingbox, Google Earth, Multicast, DAAP, Kontiki (4OD, SkyPlayer, iPlayer downloads), Quicktime, MS Streaming, Shoutcast, Coral Video, H.323 and IGMP.

The BBC are planning to introduce a “bookmarking” feature to the iPlayer which will allow pre-ordering of content and hopefully time-of-day based delivery options. This is a win-win-win enhancement and we can’t see any serious objections to the implementation: for the consumers it is great because they can view higher-quality video and allow the download when traffic is not counted towards their allowance; for ISPs it is great because it encourages non-peak hour downloads; and for the BBC it is great as it will potentially reduce their CDN costs.

YouTube traffic accounts for 17% of peak-hour usage - this is despite YouTube streaming at around 200kbps compared to the iPlayer 500kbps. There are about seven times the amount of concurrent users using YouTube compared to the iPlayer at peak hour. Concurrent is important here: YouTubers watch short-length clips whereas iPlayers watch longer shows of broadcast length.

P2P is declining in importance

The real interesting part of the PlusNet data is that peak-hour streaming at around 30% far outweighs p2p and usenet traffic at around 10%. Admittedly the peakhour p2p/usenet traffic at Plusnet is probably far lower than at other ISPs, but it goes to show how ISPs can control their destiny and manage consumption through the use of open and transparent traffic shaping policies. Overall, p2p consumption is 26% of Plusnet traffic across a 24-hour window - the policies are obviously working and people are p2p and usenet downloading when the network is not busy.

Quality and therefore bandwidth bound to increase

Both YouTube and the iPlayer are relatively low-bandwidth solutions compared to broadcast quality shows either in SD (standard definition) or HD (high-definition), however applications are emerging which are real headache material for the ISPs.

The most interesting emerging application is the Move Networks media player. This player is already in use by Fox, ABC, ESPN, Discovery and Televisa — amongst others. In the UK, it is currently only used by ChannelBee, which is a new online channel launched by Tim Lovejoy of Soccer AM fame.

The interesting part of the Move Networks technology is dynamic adjustment of the bit-rate according to the quality of the connection. Also, it does not seem to suffer from the buffering “feature” that unfortunately seems to be part of the YouTube experience. Move Networks achieve this by installing a client in the form of a browser plug-in which switches the video stream according to the connection much in the same way as the TCP protocol works. We have regularly streamed content at 1.5Mbps which is good enough to view on a big widescreen TV and is indistinguishable to the naked eye from broadcast TV.

Unlike Akamai there is no secret sauce in the Move Networks technology and we expect other Media Players to start to use similar features — after all every content owner wants the best possible experience for viewers.

Clearing the rights

The amount of iPlayer content is also increasing: Wimbledon coverage was available for the first time and upcoming is the Beijing Olympics and the British Golf Open. We also expect that the BBC will eventually get permission to make available content outside of the iPlayer 7-day window. The clearing of rights for the BBC’s vast archive will take many years, but slowly but surely more and more content will be available. This is true for all major broadcasters in the UK and the rest of the world.

YouTube to shrink in importance

It will be extremely interesting to see how YouTube responds to the challenge of the traditional broadcasters — personally we can’t see a future where YouTube market share is anywhere near its current level. We believe watching User Generated Content, free of copyright, will always be a niche market.

Online Video Distribution and the associated economics is a key area of study for the Telco 2.0 team. We are planning on producing a full report in time for the next Executive Brainstorm in November.

Posted at 11:04 AM | Link to this article | 3 comments

The Telco 2.0 research team is undertaking some detailed business modelling around ‘Rich Media Distribution’ over the summer. We’ll also be debating this with industry leaders on 4-5 November at our next event in London. More on both of these anon. In the meantime, here’s some analysis of Verizon’s P4P next generation file swapping initiative:

We’re not sure how it happened, but Verizon appears to be turning into one of the most interesting telcos around. For a start, there’s the fibre - but then again, even AT&T has an FTTH roll-out of sorts going on. Then there’s ODI, their developer platform initiative. The whizzy portal-like Dashboard application Verizon Wireless is putting on its LG Chocolates has a publicly available API so people can do evil things to it. But perhaps the most significant change at Verizon is P4P, an attempt to reconcile the huge RBOC with the world of peer-to-peer applications, using a technology developed at Yale University as Haiyong Xie’s PhD research project.

We’ll start by noting that a lot of people read “P2P” and think copyright. Of course, the means by which you distribute something don’t determine its content, and certainly not its intellectual property status, so this is a red herring. Anyway, we’ll recognise this and move on - we’re interested in the telecoms aspects, not the record industry.

Why don’t telcos/ISPs like P2P?

Theoretically it should be one of the most efficient ways of delivering heavyweight content like video, music and big datasets; as more people want a specific file, so more sources of it are available. The scaling process is that of a mesh network. But of course, it doesn’t work like that; the Internet isn’t actually a random mesh network, but it does look like one to its participants. Instead, the underlying topology is very much scale-free, with more mesh-like areas interconnected by unusually critical and heavily-used links.

OpenP4P chart showing traffic by type

Thinking of it in economic, rather than technical, terms, this comes out even more strongly; the cost of delivering bits varies sharply as they make their way across the Net, depending on the markets for various kinds of lower-layer connectivity, the distinction between peering and transit, regulatory issues, time, and geography. The problem with P2P clients is that they tend to hammer away exactly as if they were part of a dense mesh network, where it doesn’t really matter where traffic comes from or goes to - but in fact, their behaviour can cause serious economic problems for ISPs if it means a high-cost sector of the network is heavily used.

This could be literally anywhere - for an Australian or New Zealand operator, it could be a congested transpacific cable, for an emerging-market one it could be an expensive international satellite link, for a British operator it could be the BT-owned local loop under IPStream or their BT Wholesale backhaul links, for an operator in a small but highly connected country like the Netherlands it could be metro connectivity, and for an FTTH operator it might be their peering relationships at their friendly local IX. But what’s certain is that there’s always somewhere, but it’s never the same place.

It’s Not That Simple

Some P2P clients now attempt to prefer local peers; but this is where the second clause comes in. What is excellent optimisation for one network will be poison for another; trying to maximise local traffic is exactly what the British or Dutch examples don’t want. The British ISP will have to fork out much more to Openreach and/or BT Wholesale; the Dutch one would much rather push traffic out to the abundant and cheap international connectivity of AMS-IX.

The problem is really that the business models of both parties to the game don’t work. Both ISPs and P2P users are constrained by their assumptions to behave as if they were adversaries; one desperately trying to stop the flood of traffic or sting it for more money, one desperately trying to evade them. What they really need to do is to co…well, whatever the verb from “co-opetition” is. If there was a way for ISPs to announce details of the network’s cost structure, so the P2P client can programmatically adapt its behaviour, this problem could be overcome. Rather than imposing crude preferences on the users through QOS and deep packet inspection, the ISP would play a tune for the clients to dance to.

OpenP4P Results

This, in a nutshell, is the aim of OpenP4P. Here are the results of Verizon,Telefonica, Pando Networks, and Yale’s field trial of the system. They are impressive, on the surface at least; but we’d note that so far, they’ve only tested it in the context of Verizon and Telefonica’s network topology. Obviously enough.

The data showed a dramatic cut in the traffic hitting VZ’s external peering links and also a big cut in traffic on their long lines between metro areas; unsurprisingly, given that the project’s aim was to localise traffic, the utilisation of local loops and metro backhaul was dramatically increased (this went from 6% of the total P2P to 57%). We don’t know how well it would work if the optimisation target was different - for example, to maximise traffic on LLU lines and lay off the backhaul, or to minimise internal traffic and maximise external.

OpenP4P results on Verizon: a metric of hop count over time for P2P and P4P traffic

However, Telefonica’s half of the trial does suggest that it works; they saw a 57% cut in the number of hops a P2P packet traversed, compared to a fivefold reduction for Verizon, but saw a much greater increase in the amount of traffic served within their local networks (it increased by a factor of 36, compared to a factor of 10 at VZ).

More Unanswered Questions

There are also some issues of security and trust that still need to be cleared up; the “trackers” that provide the network data to clients are in a very responsible position, which hackers would give their eye teeth for. A malicious tracker would be able to steer all the P2P traffic on the network down the most critical link, for example.

And how is this going to make money? By definition, if we’re publishing this information to the Internet at large, we can’t really restrict who reads it. More fundamentally, we don’twant to do that - because this doesn’t serve our interests at all. Refusing some group of applications the information would just add them to the heap of undifferentiated P2P traffic that’s clogging the lines.

Conclusions: Fundamentally Two-Sided

But there is an implicit two-sided market here. Users’ cooperation is rewarded with improved throughput and latency; content providers’ cooperation is rewarded by better quality delivery; the telco is rewarded with lower costs. Trade, in a sense, has been facilitated by the creation of a new network API. P4P is precisely what telcos and ISPs ought to be doing, faced with this coordination problem. However, we would recommend considerable caution in deploying technologies like this until the engineering and operations aspects of security have been clarified. The best way to clarify them would, of course, be to participate in the Working Group.

Posted at 10:17 AM | Link to this article | 1 comment

In Today’s Issue: Some phone or other launched; “ZZZPhone” debunked; Verizon ODI dip stick; Launchcast “Dashboard” open to hackers, in a good way; Verizon - dangerously interesting?; Sprint pushes push-to-talk; iPhone Truphone; NTT DoCoMo on the unwise monster acquisition trail again; unwitting private equity fund sups with Richard Li, helps 3UK double its customer base; pass the separator, Mme Reding; Comcast in trouble with the FCC; open search at Yahoo!; the coming mobile data boom?

Apparently the 3G version of some device or other launched today….but beyond such trivia, there were far more interesting things going on in the industry. For a start, wouldn’t you like to design your own phone? It’s a cool idea, but you’re probably best starting with an OpenMoko; it turns out that the devices are actually a job lot of old ZTE stock and the orders tend not to be fulfilled.

Here’s something more, ah, fulfilling: the first Verizon ODI device is out! And it’s something genuinely interesting - a module that fits into a tank of liquid and reports the level of the contents by text message. That’s actually useful, and could actually make money for operators and users, which is why nobody’s going to promote it very much.

Meanwhile, Verizon Wireless shipped the first gadgets with its “Dashboard” portal on board, aka Adobe Launchcast. More interestingly, details of it are being published so developers can make things to fit in with it; is Verizon gradually turning itself into one of the most interesting telcos around? FTTH, P4P, ODI, and this…which’ll come in handy, as they surrender to the falling price of SMS.

Quietly, Sprint gets some work in on its core voice & messaging products, rolling out its push-to-talk service to 47 new markets around the US. On the other hand, though; Truphone launches an implementation of its SIP client for the iPhone, but you can’t use it over-the-top on the 3G data network, because Apple doesn’t want its users burning the bundled data connectivity competing with the operators who both buy and subsidise the Jesus Phone.

Mike Elgan of Computerworld, meanwhile, asks the right question. Mobile phones have improved beyond measure in the last ten years - but what about calls? Hear, hear….literally.

The first rule of telecoms investment: don’t buy a Japanese network operator. The second: don’t buy a Japanese network operator’s good idea for use elsewhere. The third: if you are Japanese, don’t buy a foreign network operator. It is with a heavy heart that we read that NTT DoCoMo wants to buy stakes in foreign telcos again; oh dear.

Another piece of good advice is not to become a minority shareholder in anything Hutchison-related; there have been so many asset trades inside the empire that result in one-off gains for them and dilution for the others. Here go some private equity funds, looking at a 45% share of HKT. After all, 3UK will be wanting some capital if it’s going to double its business by 2012.

In the fixed world, meanwhile, they are about to feel the force of Viviane Reding for a change; so far the mobile operators have been the prime target, but now the European Commission is looking to push functional or structural separation across Europe. It might hurt at first, but it’s for your own good…

In other regulatory news, the FCC isn’t happy about Comcast and their Chinese Firewall-style use of spoof TCP RST messages to spork BitTorrent users.

They’re trying to buy Yahoo! again - that’s Microsoft and Carl Icahn, who’s apparently temporarily had enough of kicking Motorola around the pub car park like a sack of waste. Perhaps this is why? Yahoo! is introducing a platform to let third parties build their own specialised search service using Yahoo! APIs….which sounds cool.

And Informa crystal-ball merchants reckon we’re going to see mobile data volume race past voice in 2011.

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In a previous article we provided an introduction to what we believe is the template for future growth in telecoms: two-sided markets. Having got the basic facts laid out, now we can take a closer look at some of the consequences of moving from one-sided to two-sided markets.

Two-sided markets in a nutshell

A brief reminder of what we’re talking about. In a one-sided market, merchants buy in equipment and services, taking on inventory risk. They combine them in some value-adding way, and sell the result on to end users (or other intermediaries in a value chain). The suppliers and customer do not interact directly. Most of telecoms works within a one-sided model today.

In a two-sided market, the middleman facilitates two groups on either side to interact with each other via some platform. This lowers transaction costs and builds scale. Critically, the price structure of using the platform is set to encourage participation from the most price-sensitive side, maximising platform revenues overall, rather than separately for the two groups. For example a newspaper typically charges a cover price well below that which would maximise reader revenue alone, because it needs a big audience to attract advertisers.

A good example of a company that moved from a one-sided to two-sided model is online bookie Betfair. Originally they only offered their own set of bets and odds online. They then allowed other bookies to offer bets in competition with one another, at which point Betfair’s business took off very rapidly. (Another in-depth example on job sites is here.)

In telcoland, i-mode is an example of a two-sided market, joining application developers to users. Our hypothesis is that operators need to focus on developing capabilities and services that facilitate a much wider range of business processes than content retailing. In each case, ‘upstream’ parties wish to interact with the telecommunicating public in some way, and the telco takes friction out of this process. The data by-products of the current triple/quad play products are key enablers, along with assets in the ‘edge’ devices (handsets, home hubs, set top boxes, smart meters, etc).

Elephants are born big

The first observation we have about two-sided markets is that they always need scale. That means you need to kick-start the market in some way to make it attractive to your initial customers and users. Typically some kind of trend-setters or marquee users are used to pump prime the platform. For example, an upmarket shopping centre looking to attract both retailers and shoppers will want a John Lewis or Nordstrom as anchor tenant. Every music platform will wants the Universal Music Group catalogue. In telcos we see this effect with peering and interconnect sites, with large anchor tenants attracting the smaller players.

This leads us to conclude that telcos are better advised to try building new two-sided revenue streams off their existing core voice, messaging and broadband businesses. This contrasts with the current approach of building whole new propositions, particularly around entertainment media, from a base of zero. Ultimately a collection of transaction platforms — for advertising, payments, and customer service — will be converging from multiple industries, such as online search, e-commerce sites or banking. Better to compete off a strong base when engaging such powerful rivals.

Gasoline, girls and guys

It would be nice to think that users will appreciate your wonderful new entertainment products and gladly surrender some more money for value-added services. Sadly, they seem to have a budget in mind that they want to stick to, and you end up dissipating a lot of your profit in marketing expenses.

A more compelling proposition is through creating efficiency and cost savings in a broader range of industries. In particular, saving labour costs or energy are obvious targets. It is possible to create one-sided solutions for specific verticals, e.g. a fleet tracking solution using cellular location. However, we feel that a two-sided market offers a more defensible opportunity, which means business process services (e.g. advert targeting) that involve interacting with the mass retail customer base in some way.

This is not to disregard the traditional focus of telco platform efforts, which is to optimise the supply chain of purely digital applications and content to users. This is necessary, but ignores the wider opportunity, and the consequent chance of spreading the risk and cost of building the platform across a much larger range of revenue sources. It’s the “analogue” world of people, trucks and raw resources where most of the economy still lives.

What do you know about the customer?

The ‘upstream’ party that wants to interact with the telco customer will have some data on that customer and their own relationship. However, this is likely to be significantly different from what the telco knows about the customer. The data assets of the telco, and the permission to use it derived from the customer relationship, are every bit as critical to optimising business processes as the ability to transmit data over distances via networks.

Where this data is most valuable is the ‘real time’ intelligence the telco can provide. Every time UPS delivers a yellow sticky ‘sorry you were out’ notice, instead of a parcel, resources are burnt to no productive end. The telco’s role is to use customer information/data — such as whether your mobile is associated with your home femtocell, if you’re in the middle of a call, or are roaming abroad — to help time interactions and facilitate transactions.

This is a common feature across two-sided markets: the more the middleman can help personalise the interaction, the more the platform can charge for its services. Operators need to reconsider how they manage such data assets, gather user consent, and extract value from them.

No bronze medals

Another property of two-sided markets is that they tend to follow ‘winner-takes-all’ economics, with a small number of dominant platforms: Windows and Mac OS; Visa, Mastercard and Amex; or Google and Yahoo!. In general, individual telcos will struggle to achieve scale in two-sided markets. The implication is that they will need to co-operate to either create clearing houses or hubs themselves, or work through existing aggregators or transaction networks (e.g. mBlox).

The goal for the platform must therefore be either to aim for general monopoly (in much the way the PSTN/PLMN voice network is the platform for all personal communications), or differentiate to dominate a niche.

The danger is that the telco is enveloped by other transaction and commerce platforms. A naive approach to exposing location, presence or other data could not only leave value on the table, but even worse have the telcos subservient to a small number of powerful external intermediaries.

A regulatory misfit

In competitive industries, and over the long run, prices reflect underlying costs. Competition will weed out inefficient players, making costs and prices converge.

Two-sided markets don’t work this