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October 29, 2008

The Long Tail - turned on its head, says research

Exclusive: Will Page, the MCPS PRS Alliance Chief Economist, will be presenting at the Telco 2.0 event next week for the first time new research that all is not what it seems with the original Long Tail theory - and questions whether the future of business really is selling ‘less of more’.

The theory as developed by Chris Anderson back in 2004, and which has since become a widely accepted buzzword, doesn’t stand up to robust statistical analysis he says.

On stage next week, to support his argument, he will share analysis of digital music sales data gathered over 12 months from a catalogue of 13m songs. This is part of pioneering work with Harvard Business School and Andrew Bud of MBlox. At the event we will explore this analysis with the 250 senior execs gathered and try to decide what it means for investment strategy in markets disrupted by the long tail effect. Ultimately, should you bet large, small or not bet at all?

In the meantime, as an introduction, this Harvard Business Review article is strongly recommended.

Watch this space for more on this topic…

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October 28, 2008

Credit Crunch: Silver Lining for Telcos? (Part 4)

Over the last six weeks on this blog we’ve been examining why telcos, in the current climate of uncertainty, are perceived as ‘defensive’ by investors - namely low financial leverage and robust cash flow generation (see here). This trend appears to be continuing, but telcos shouldn’t grow complacent about their popularity - this will wane as the market eventually normalizes.

At that point, investors will return to their relentless reassessment of the long-term potential for sustainable shareholder value creation, and the historical record is not encouraging. Our discussions with investors this week strongly suggest that they share many views with the Telco 2.0 initiative - a need to identify and sweat core assets, develop creative approaches for areas of weakness, define a clearer vision, embrace partners, and focus on the wholesale platform.

In the article below we provide evidence suggesting that the interests of telcos and investors may actually be closely aligned in embracing a two-sided business model approach to redefining the future of the telecom sector. (We’ll be presenting a summary of this and the previous analysis at the Telco 2.0 event next week as stimulus for the debate on how to work with the investment community):

The almost unprecedented financial carnage of recent months is not, as many have argued, a shock, but rather the natural consequence of years of poor corporate governance and regulation, unbridled optimism underpinned by voodoo economics, and good old-fashioned arrogance and greed. Whatever the excesses and failings of the financial world, that chapter is fading, and, as we have discussed previously, the next chapter - economic downturn - is upon us.

Telcos, of course, have been on the receiving end of precisely this dynamic before, during the post Web 1.0 bubble market collapse of 2000 - 2002, when share prices in the European telco segment fell by more than 30% per annum for three consecutive years, the vastly overcapitalized altnet space all but disappeared, and five incumbents came very close to financial oblivion.


With the memory of this period still fresh in the mind of many, it perhaps seems counterintuitive that, against the background of the current turmoil and anxiety, telcos should now be viewed as a defensive sector by investors. However, that is precisely the message coming from recent market performance, shown in the chart below.


We discussed reasons why this might be so in our previous two posts on the subject, and if anything the market recently seems to be validating our views with greater conviction (note that telco finds itself in the company of hardcore defensive sectors like food, healthcare and personal goods), but to recap, the main points to stress are as follows.

Cash generation and levels of financial leverage

Having lost discipline on both fronts during the late ’90s boom, telcos have recovered admirably, with many of the worst offenders from that era now moving towards leverage levels (defined as net debt/EBITDA) of around 2x, and in some cases dramatically less.

Meanwhile cash flow remains enviably strong. A good case in point is the recently released third quarter results from KPN, in which this relatively small company confirmed its 2010 target of free cash flow of at least €2.4bn, i.e., a level consistent with its performance in recent years. Historically, the company has used almost all free cash flow for shareholder returns, typically evenly split between dividends and share buybacks.

Therefore, barring a catastrophe or total loss of management focus, an investor looking at the scarred financial landscape would naturally gravitate to such a company, and unsurprisingly KPN is the third best performer in the European sector year-to-date (and number 51 out of the STOXX 600).

From a longer term perspective, KPN’s cash flow is also attractive for the future option value it delivers: it can be opportunistically deployed by the company to attack, defend, transform, or acquire as needed - the number of companies with such a range of options declines by the day.


Refinancing risk

As the chart below shows, the amounts in question are not trivial, and a loosening of the credit market notwithstanding, refinancing will almost certainly be more expensive. However, it is important to note that in each case, the amounts in question are within the free cash flow envelopes of the companies, so refinancing should rightly be viewed as, at worst, an incremental source of pressure, rather than as a terminal event.

In contrast, many of the private equity-backed companies in the cable and alternative operator space are carrying 4x - 7x leverage, and will face serious challenges in refinancing - a view reflected in the fact that the debt of some currently trades at less than half of its face value.

The message is further underlined by Virgin Media’s recent request for senior debt holders’ consent to defer maturities to 2012, and also by Spanish cable giant ONO’s reported intentions to lay off 30% of its workforce.


While telcos may be attractive to investors in the current climate of uncertainty, this is in a sense a deeply unflattering compliment, akin to “Please hold my hand, you’re the least ugly girl at the dance.” Apart from the aberration of the late 90’s boom, when explosive growth in mobile subscribers and enthusiasm over 3G prospects lent telcos an almost “dotcom” level of glamour, telcos as a group have rarely ever delivered consistently impressive long-term returns to shareholders.

In fact, an examination of annualized total returns for a selection of telcos since IPO demonstrates that the long-term, “buy and hold” investor would in many cases have been better off buying “boring” government debt, or even simply putting cash in a savings account. (In the specific case of the European telcos, Bloomberg data shows that average annual returns over the past 20 years have been 5.47% - bond-like, albeit with an awful lot of volatility along the way.)


It is performance such as this which inevitably brings about investor skepticism over the entire industry’s ability to execute and deliver shareholder value, which from our experience seems widespread and deep-rooted. One institutional investor observes:
“Telcos, particularly in Europe and Japan, need to either gain competence as investors or learn to give 100% of free cash flow back to their share owners. Many telecoms executives see themselves primarily as operations staff (they know how to run networks/businesses) and are not financial investors, but many of these same executives think it is a horrible idea to return 100% of free cash to shareholders, and instead want to do M&A for growth. Logically speaking, these are mutually exclusive perspectives.”
Another institutional investor, in response to the question, “What do telcos need to do better?” responds bluntly:
“A) Anticipate the future and then formulate a vision of how to get there. These guys miss everything, it seems. B) Learn how to make nice with partners and not try to squeeze every ounce of blood from them.”
Still another investor states, this time in response to the question, “What haven’t telcos tried so far which you would like to see them try?”:
“1). Good-faith structural separation.  NOT to keep the regulators happy, but to clarify their own internal cost/return structures.  2). Good faith wholesale service on flexible access terms (especially in wireless).  A simple, clearly-defined/specified, no-human-permission-required means to access a wireless network to achieve whatever ends the end device seeks (rather than having to sit down and negotiate customer terms with the carrier).
3). Auction structures for selling network capacity or some similar way a way to sell currently un-sold network time at say 3 AM (again, especially in wireless).  By definition, this needs to be low cost and low friction. ”

Perhaps most telling in our discussions with institutional investors was the prevalence (among 60% of respondents) of a view that what telcos do best is, in fact, lobbying and engineering regulatory barriers to entry.

Given the apparent investor skepticism around telco capabilities, it is important to maintain a sense of perspective and not become complacent with the current popularity of the sector (nor with the prospect of a number of competitors going to the wall), because as one financial analyst was recently overheard to say, “The secular issues facing this industry make the cyclical challenges look almost trivial.”

It may be safely assumed that, once the market stabilizes, investors will return to a greater focus on long-term strategic issues affecting telcos’ ability to generate sustainable shareholder value, and here the jury is very definitely still out.

Moreover, though we may speak in terms of relative financial strength as a telco virtue currently in vogue, it is sobering to consider the possible long-term implications of the financial positions of a group of companies which we identify, for various reasons, as “encroachers” in various aspects of telco activities. This is presented again in terms of financial leverage (net debt/EBITDA), where a negative number indicates a net POSITIVE cash balance relative to annual EBITDA.


Viewed in this light, telco financial flexibility looks somewhat less enviable, especially as we can expect that many of these truly global (a claim no telco can legitimately make with regard to more than one part of its business portfolio) “encroachers” will continue to innovate and invest through the downturn, emerging stronger in the end.

The challenge, and opportunity, for telcos is to do the same. The real window of opportunity is probably only as long as the looming recession itself, estimates of which seem to grow deeper and grimmer by the day. However, there’s no time like the present to begin the process of repositioning for the eventual turnaround. We believe this process should be guided by the pursuit of two-sided business model opportunities, and consequently, the chance to force a fundamental re-evaluation by investors of long-term telco prospects. Why do we come to that conclusion, and what do we mean in concrete terms?

Lets go back to our fund manager friends for some guidance - after all, their views of “telcos of the future” will have a lot to do with what telcos can do, what they are worth, and what sort of capital they can raise.

“Telcos need to either gain competence as investors or learn to give 100% of free cash flow back to their share owners.”

In practice, the years ahead will probably call for walking a tightrope between the two extremes, but investor response will be determined by how the message is communicated and executed upon. If cash needs to be redeployed in investments for transformation, reinvention, or asset optimization, that’s a saleable message, if it is presented credibly.

What matters most is that it be backed by a well thought out plan, and that will initially require an honest audit of the company - what it’s really good at, what it should and realistically can improve, and most importantly, what it needs to find another solution for.

“Anticipate the future and then formulate a vision of how to get there. These guys miss everything, it seems.”

Reading the tea leaves has never been easy, particularly in a period of unprecedented economic turmoil. However, a few things we seem to know from history. Cross-border incursions and M&A strategies based on footprint have delivered very mixed results - a handful of successes as well as many humiliating retreats. Homegrown innovation has long-ceased to be an area where telcos can really play.

Neither is consumer experience an area in which telcos have covered themselves in glory. Optimization (product tailoring/segmentation/personalization, customer care and churn reduction), on the other hand, is hardly ever a bad thing, particularly when market growth falters. Ditto for a more robust approach to wholesale - not only in terms of the existing range of services, but more importantly, those services which you haven’t created yet.

“Learn how to make nice with partners and not try to squeeze every ounce of blood from them.”

The term “partner,” by definition, suggests someone aligned with one’s own interests, and by implication is someone with complementary attributes - if we were all fully-formed and complete, there would be no need for partners. Leaving aside the accusation of “blood-squeezing”, the salient points for us are:

  1. Having the agility and flexibility to be able to partner with small and innovative companies in an equitable manner, to enable the wholesale platform services which you haven’t created or thought of yet;
  2. Remembering the Peter Principle - “everyone rises to his own level of incompetence.” Partners may also need to include those to whom you outsource (or even sell) elements of your business, if an honest review of your business suggests that they could run it better than you.
  3. Making friends with scary people - The “encroachers” mentioned above have a lot of cash, ability to innovate, and truly global scale, it’s true. They may even have relationships of some sort with many millions of your customers - but what they lack is the level of insight into your customer base that you have. How might you be able to parlay that advantage into a viable partnership or a wholesale service that multiple encroachers would pay to access?

“Good-faith structural separation.  NOT to keep the regulators happy, but to clarify their own internal cost/return structures…  Good faith wholesale service on flexible access terms…” These soundbites from “Investor #3” really bring all the above points to a head, and demonstrate an imminent need to grab the bull (or, perhaps more appropriately in the current financial environment, the bear) by the horns (or ears).

In an era of constrained finance, everyone, from national finance ministers to individual consumers, has to adopt a Darwinist approach to how capital and effort are expended, and to what end. Telecom, like many other industries, is vulnerable to challenges as to how it is organized, and as to whether the status quo actually represents the optimal financial efficiency for the future.

Investor #3’s opinions seem to point to the fact that there may be a confluence of interests between telcos (clarification of divisional financial performance metrics and capital efficiency) and investors in pursuing the broader opportunity to develop new markets around wholesale platform opportunities.

We look forward to engaging with you on practical steps to bring about the changes required to capture the two-sided market opportunity at our upcoming event.

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Guest Post: SAP on really understanding your customer

One of our Telco 2.0 themes is how telcos need to become better retailers. At a client workshop last week with a major mobile operator we were pointedly asked how to go about achieving true customer intimacy. We believe that one key element is to tie analytics to business processes. This topic is covered in our current bedtime reading which explains how data warehouses and CRM systems typically live in different universes. We are not alone in thinking this. In this guest post Mark Johnson, Global Marketing Director at SAP, explains his view on how we will see a shift from reactively managing interactions with customers towards proactively seeking value to bring to customers - something called ‘Customer Value Enhancement’. (Ed - Mark will be stimulus presenter at the Telco 2.0 executive brainstorm next week).

6.30 pm, Miles Davis is about to shut down his PC and leave the office. One last thing - he opens his personal homepage to check the traffic on his route home and, being a sports fan, to take a quick look at the teams for tomorrow’s football match. Miles’ Service Provider pings him a message:
“Hi Miles, coming up - Finals Frenzy - live coverage of FA Cup Final, Heineken European Rugby Finals and the Final deciding Test Match between Australia & India from Delhi - see them all live via IPTV this month for £14.95”.
He clicks through to view details and is offered to view an interactive billing dashboard where he can simulate in real time the impact to his monthly direct debit and can simulate “what if” scenarios in graphical form - what if I wanted an extra 100 texts this month to text friends while watching the matches?
“Hey Miles, you’re booked on a flight to San Francisco which clashes with the Heineken Cup Final - would you like to receive live updates on your mobile and timeshift the full game to watch on-line from your hotel the following morning?”
Miles clicks on “run real-time billing simulation” and decides it’s worth the extra £2.95.
“Miles, other members of your family calling plan have downloaded sports coverage from us in the last 3 months. Why not upgrade your calling plan to include “sports special” - £12.00 per month additional for live scores & updates from all featured events direct to up to 3 mobile numbers and half price pay-per-view offers on all premiership football matches - click to run a billing simulation”.
Miles’ service provider uses predictive modeling to simulate a 12 month view of spend based on upcoming programmed sports events and compares that to the uplift in monthly subscription.
“you could save £35 this year if you upgrade now - click here to upgrade & renew for a 12 month period”.
From the graphic on screen it’s an easy decision for Miles.
“James is on-line now, would you like to send him a personalized text message to give him the good news?”
“Miles, before you go, since there are 30 minutes of delays on your route home tonight why not download the new “soothing classics Vol 3” album from our music store, direct to your mobile to listen to in the car? One-time download & play for only £3.99”.
Miles clicks to check the track listing before purchasing.
“Volvo Cars would like to offer this download for free - just take their short interactive voice survey whilst in the car-park - click here to participate”
6.40pm - Miles leave the office feeling happy -
“it’s nice to know that my service provider knows what I want and keeps me updated with special offers to save me money…..Beep Beep, you have one new message “thanks Dad!”

Miles’ Service Provider has pioneered the concept of Customer Value Enhancement (CVE) - a predictive, adaptive approach to linking front and back office functions through advanced business intelligence and analytics. CVE provides a customer’s-eye view of the world, powering the development of new offers that can be served up in anticipation of customer needs, and in ways that promise to delight the customer, promote loyalty, and improve margins.

That may all sound like years away from reality but today’s analytics platforms offer sophisticated capabilities which, if deployed in the context of customer-driven, closed loop business processes can deliver CVE as a natural evolution of systems & processes already running today - in fact outside of the Telecommunications arena many Retail & Consumer Products companies already utilize these capabilities to great effect.

Customer Value Enhancement (CVE) is the end point along an evolutionary scale begun nearly 20 years ago with Customer Relationship Management (CRM) and fostered by more recent developments in Customer Experience Management (CEM) as shown in figure 1 below. It has as its goal long-term, profitable business relationships that are valued by both customer and supplier.


In a CVE environment, business functions are proactively initiated by the Service Provider based on who the customer is; the products and offers to which they subscribe; the performance of those products and services; the customer’s usage levels; and other attributes and behaviors. CVE also employs demographic and psychographic insight from sources outside the Service Provider world, often provided by third-party data sources. Lastly, CVE gives the ability to predict future behaviors, facilitating the recommendation of the best combinations of services, features, content, and equipment for that consumer.

To further understand CVE, consider the historical context: During the 1980s, telecom operators embraced CRM (Customer Relationship Management) systems to mechanize order taking, and later multiple processes were added to the scope. More recently Service Providers have begun to consider Customer Experience Management (CEM) as the next step beyond CRM. CEM seeks to facilitate better overall understanding of the customer’s end-to-end experience by gathering data from multiple touchpoints, including CRM, billing, and marketing systems and correlating that with fulfillment, inventory and service assurance systems1 to ensure up-to-the-minute status of the complete customer-affecting environment. This is still a bit new, but it holds the promise of making providers better “listeners” to the needs of their customers, and presumably, better suppliers as a result.

CRM and CEM both add to the communications service provider environment in a positive way. The orientation, however, is largely supply-driven (“Here’s what we have to sell today”) and focused on prevention of loss (“If I have data on how well we do, I can understand your behaviors better and compensate you if we fail.”). Instead, CVE is oriented toward anticipating customer demand and building a relationship with the customer to satisfy that demand for the long-term.

Delivering Customer Value Enhancement

In a recent report published by leading Industry Analyst firm Stratecast, a division of Frost & Sullivan, they define five critical ingredients for CVE success:

  1. CVE Mindset - Provider recognition that they are in the business of retailing, not technology. With a retailer’s point of view, the Service Provider will organize business functions according to well-researched customer needs and behaviors.
  2. Executive Commitment - This is a well-documented phenomenon in project success and a critical factor in moving companies to more fact-based decision making cultures.
  3. Back-office/Front-office Operational Integration - Back office operational systems (e.g. ERP, inventory, fulfillment, service assurance and billing) need to communicate to front office (CRM, CEM) systems in a manner that is as near real-time as possible, based on updates that affect customer touch-points.
  4. Robust Business Intelligence (BI) & Analytics Environment - An important part of CVE is the ability to sift through large volumes of operational data, to identify patterns that may reveal business opportunities. Enterprise-caliber business intelligence platforms will be required to deliver the capabilities considered essential to CVE.
  5. Strategy - Operations Linkage - This is the key, the essential ingredient to moving into the realm of CVE. Theoretically, all organizations process customer feedback as a critical input to offer improvement, so what is new here? The differences for a CVE-driven company are many: the decisioning process is fact-based and analytically sophisticated; these decisions are powered by input from all points of the customer experience; and they result in proactive (and in some cases real-time) outreach to customers resulting in a closed-loop process.


Today’s consumers demand more than the standard supply-driven service bundles based solely on their service provider’s internal perspectives. They expect their provider to interact with them in real time to offer highly targeted & relevant products & promotions, based on a deep understanding of each individual customer taking into account the timing, context & format of each individual transaction.

Those Service Providers that can utilise the goldmine of analytical intelligence available in back office & front office systems, as well as 3rd party sources to close the loop between strategy & execution in order to proactively reach out to individual consumers in real time will lead in the field of Customer Value Enhancement and, in turn, reap the rewards of increased loyalty, reduced churn and increased margins.

[Note: the concepts discussed in this article are further explored in a recent report “Customer Value Enhancement: Linking Strategy & Operations for Better Loyalty and Margins” published by Stratecast, a division of Frost & Sullivan]

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October 27, 2008

Mobilkom Meets Fring

So, Mobilkom Austria has signed up mobile SIP developers Fring to create their new voice & messaging service. This is an exciting development; Mobilkom reckons it’s the first time a carrier has taken such a step, and we’re fairly sure they’re right. The nearest example would be BT and Ribbit, and there’s still plenty of uncertainty about how that will pan out. Fring is a mobile VoIP startup we covered in our Voice & Messaging 2.0 report.

The first point to consider here is that Mobilkom is starting right in the middle; although they have networks right across the Balkans and south-eastern Europe, this is happening at headquarters in Austria, under their core A1 brand. In the past, they’ve often tried out new service offerings elsewhere in the group, as they did with their impressive converged carrier VoIP offering and their WiMAX broadband deployment.

Arguably, this shows that they’ve internalised an important point about Telco 2.0; change will require the support of the organisation. BT, for example, launched its Web21C developer environment without answering the questions “Who is in charge of this?” or “Which bit of the company promotes this?” In fact, a reorganisation early in the program actually broke up the organisational unit that had originally been responsible for Web21C and Project Firebird and shifted the executive in charge elsewhere; and the rest is history, as is the project itself.

Another important point about Telco 2.0 this makes clear is that you shouldn’t be religious about any particular technology. Fring, like so many other V&M2.0 startups, launched itself from the work done by the IETF to develop and standardise SIP. Specifically, they’ve always worked exclusively in the IETF’s version of it; Mobilkom, however, has been quite enthusiastic for IMS, and has deployed IMS technology, having started off by developing its own SDP. So long as you’re being well-behaved, though, and not using any nonstandard or nonopen “extensions”, it shouldn’t be that difficult to integrate a third-party SIP client with an IMS SIP network.

It will be interesting to know if the new service will actually use IMS, in the sense of routing its SIP traffic through Mobilkom’s CSCF rather than either simply working as normal, getting only connectivity from the network, or using Fring servers within Mobilkom’s SDP. All this also means that the service could ride on Mobilkom’s Balkan WiMAX networks as well as it does on its Austrian UMTS net.

Thirdly, this is an example of something we come back to over and over again. You’re unlikely to come up with a killer application inside your marketing department; you’re marginally more likely to do so in your R&D department (if you have one), but it’s still not that likely. And the very idea of a killer application is flawed. Instead, people in closer touch with user needs and changing technology are likely to do better, so you need to create the network APIs, community infrastructure, and terms of business they require.

It looks like Mobilkom is going to drop the carrier VoIP service we mentioned, essentially replacing its client with Fring’s, and then start deploying Fring for its mobile customers; A1 over IP was a fairly impressive offering, integrating as it did their PSTN, PC VoIP and mobile services, but no-one will be surprised to learn that a telco wasn’t ideally placed to design a great user interface or user experience. Bringing Fring on board means not only that the feedback cycle for changes to the user experience gets a hell of a lot quicker, but also that Fring’s own developer ecosystem comes along too. So you’re going from major systems integration to widgetry in one deal.

Finally, disintermediation is inevitable; if Mobilkom is going to provide its users with the full Fring feature set, this means that they can choose whatever source of SIP termination they like, or even use SkypeOut instead; wholesale competition will be right there on the handset. But this is the heart of Telco 2.0; it’s about accepting that competition and responding by creating fantastic new products.

Update: We were able to conduct a Q&A with Fring’s VP of marketing, Roy Timor Rousso, and network architect, Boaz Zilberman, and here it is!

How do you plan to build up a developer community around the Mobilkom deployment?
The fring API program is open for all and for all partners, meaning that any add-on developed by the fring community is available for users from A1 just like any other users
Will there be access to any of their network functions (identity authentication, payments, location etc) for Fring developers?
Not at this stage, we will discuss these capabilities in the near future
What is the business model - for Mobilkom? Is it pure data charging, or something more sophisticated? And for Fring?
Value to users, branding , marketing and leadership positioning is leading the relationship. In the future we may discuss potential revenue share.
Is there any mechanism for third-party developers to profit from their work for this?
As I mentioned above any Add-on developed  for the fring community will be also available to the A1 users,
Will the Mobilkom version include the full feature set of Fring, including the ability to choose your SIP wholesaler?
Are you using Mobilkom’s IMS core? Or is Fring staying IETF SIP? Or are there now Fring SIP servers in their SDP?  
Fring is integrating into A1’s IMS core via the SIP/SIMPLE protocol
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Ring! Ring! Hot News, 27th October 2008

In Today’s Issue: 30% discount on broadband; AT&T iPhone overdose; Vodafear; Mauretanian WiMAX; Africa teems with Opera Mini users, apparently; Live Messenger on the SIM; Indian speccy auction slides right; criminal mobile payments; dancing nonsense from Intel, Vodafone, Orange, RIM; horror predictions; Android backlash; BT sues Germany, info wants to be free apparently; Infinera ships units; cracking new voice & messaging app for RIM; Mobilkom ties up with Fring; Blyk in Belgium; Ovi works best as part of iGoogle; Telephony Online’s search for a star

“Industry” economists blast EU net neutrality; they would say that wouldn’t they? More interestingly, they reckon it might increase the end-user price of broadband by about €10 in Sweden and Germany; as nobody is doing un-neutrality now, this suggests that broadband is currently being sold about 30% below an economic price. Which wouldn’t be altogether surprising.

After all, the industry has a way of doing these things; AT&T announces a profit warning due to selling too many iPhones. You read it here first; we blogged some time back that a major difference between the 2G iPhone and the 3G iPhone was that as well as taking a revenue share, Apple has managed to wring an impressive slug of handset subsidy out of AT&T. They are literally paying to shift them, and it’s no surprise this has turned ugly for Ma Bell. $900 million slashed off profits entirely due to iPhones; wouldn’t that effectively be $900 million straight into Apple’s revenues?

Meanwhile, fear stalks the land. After poor results at Millicom, Vodafone shares tanked on the principle that its emerging market interests might be hit by the same problems. Not surprising, really; Mauretania’s getting WiMAX now. A country where the main political news was recently that a former slave was standing for president has wireless broadband — we’re living in the future. The vendor is ZTE, of course.

MTN is pushing Opera Mini to its customers in Africa. Did you know there are 175,000 mobile Internet users in Uganda? Meanwhile, Oi’s Brazilian customers get MSN Live Messenger on the SIM.

Indian 3G and WiMAX auctions have been put off due to trouble with the military over spectrum. The vendor death squad returns to its holding pattern to await further instructions.

More emerging market innovation: some chip and PIN merchant terminals are shipping from Chinese factories with secret and very much undesirable GSM modules that send card details to people in Pakistan.

In other Vodafone news, they get spotted engaging in a spot of dodgy tricks towards Orange UK and certain Blackberrys; as does Intel with some boasting about x86 vs. ARM technology. But then, everyone’s whistling past the graveyard these days: dire predictions for vendors abound.

The Android backlash is underway. The Guardian tech blog thinks the applications on it are dire, and Dan Hesse, CEO of Sprint Nextel thinks it’s not good enough.

It’s been rumoured that there is internal dissension at BT about the Phorm ad platform, setting the BT Retail people against BT Global Services’ security group. Here’s a possible data point: BT Global Services in Germany is suing the German government over its proposals for telecoms data retention. We’ll be thrashing out the controversy at next week’s Telco 2.0 event.

Raging demand for bandwidth suggests that high-performance optical networks are likely to be a business with crunch resistance. So it proves at Infinera, according to Telephony Online.

New voice & messaging application of the week: BlackBerry users can now log, tag, search and otherwise munge their call history. More at Wireless Week. We think that user data is going to be a goldmine of new apps and business processes. The question is who will find their way to the goldfield first.

Better than that; Mobilkom Austria has basically tapped Voice 2.0 developers Fring to make their new voice service based on SIP. The existing A1 over IP service will be rolled into it; then the client will hit the mobile handset. Watch out for it rolling out on Mobilkom’s Balkan WiMAX properties. And don’t forget that Voice & Messaging 2.0 will be a top priority at Telco 2.0 next week as we explore how to apply 2-sided market principles.

Blyk, meanwhile, rolls its ad-funded telco into Belgium with another NSN-managed core network.

The best way to use Nokia’s Ovi services: through iGoogle! This nicely illustrates a bigger point of empowering users to combine and modify services. Sadly, most telco products are completely stuck in “take what you’re given” mode. Don’t like your carrier’s voicemail system? Tough.

And finally, which telecom exec could be America’s CTO?

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October 24, 2008

Being a better Retailer: Martin Dawes Systems Customer Forum 2008

Earlier this month we had the pleasure of presenting and facilitating at the user conference of Martin Dawes Systems (Martin Dawes Systems), a provider of integrated billing and CRM systems, as well as analytics via their business unit Lavastorm, now rebranded as Martin Dawes Analytics.

Martin Dawes Systems’ history is in supplying both large and small operators who want an integrated BSS back office solution. These operators want to avoid the cost and integration headache of the “best of breed” approach. The integrated solution also brings its own benefits, such as enhancing the ability to manage business processes end-to-end. We’ve picked up in this article some highlights of their products, and some new ideas about how to run billing, CRM and analytics systems based on the debate with the senior execs who attended - from AOL, Vodafone, GSMA, Carphone Warehouse, BT, KPN, Orange, Telefonica O2, T-Mobile, DTAG, Thus…

You can view our keynote presentation on two-sided markets here. Ian Pannell, Chief Architect of the GSM Association, covered the purpose of the organisation, and their key initiatives. You can find details of these on their web site, and the newly announced Mobile Broadband marketing program here.

Dewi Thomas, Managing Director, Martin Dawes Systems

In his opening address, Dewi reminded attendees of the four pillars on which their BSS systems are built:

  • Single point of contact
  • Single view of customer
  • Single point of reporting
  • Single view of product

We are inclined to agree with the company’s stratgy. These are the foundation for today’s one-sided market model (selling bundled voice, video and data to end users). Furthermore, without these you have no basis on which to construct a two-sided market, facilitating business processes between users and merchants, such as billing or customer care. The key assets of an operator is not its network, but the customer relationship and the data that represents that.

Cato Rasmussen, Head of Solution Strategy, Martin Dawes Systems

Cato had one central, important idea to share, and it’s worth close attention.

Traditionally, telco networks and services were vertically integrated. That meant one provisioning and billing system per network. When services are combined to cross networks, you have an explosion of complexity due to the many-to-many relationships. A product that bundles WiFi with DSL and 3G data requires multiple sets of interfaces, data repositories, and business rules, all of which need to be kept in sync. It also creates enormous cost. In the course of his career, Cato has seen telcos with as few as eight billing systems — and as many as 110.

Furthermore, customers, payment methods and products were (and continue to be) tightly coupled. This is why, for example, we don’t see prepaid fixed broadband products, despite their obvious applicability to those with poor credit, or low usage.

This contrasts with banks, who have cleanly separated customers from products. It’s perfectly normal to have a savings, current (checking) and mortgage account — and still expect the bank to have some concept of you personally as a customer. Telcos, therefore, correspondingly need to be able to separate payment method from product. That means creating a pick-and-mix of prepaid, postpaid and “pay now” billing methods, and have these span the entire product set. A single product could have a mix of prepaid and postpaid usage, and that prepaid balance could be drawn down by any of the products.

This frees data from process, and is a key competitive weapon of anyone with an integrated billing and CRM system such as the one from Martin Dawes Systems. As telcos evolve more towards general retail with a “long tail” of niche offerings — fitting products to customers, rather than the other way round — these capabilities will rapidly grow in importance.

Gary Steen, Technology Director, Martin Dawes Systems

Gary demonstrated the user interface of several of the company’s products. We’d like to pick up on two themes.

Firstly, customer self-care interfaces need to be a lot smarter and sophisticated. For any users of services like Google Mail, responsive “Web 2.0”-type user interfaces will be a familiar norm. For users of telco self-service portals, long waits and fractured user experiences are the norm. Martin Dawes Systems demonstrated their customer self-care interfaces, including features such as interactive chat with support personnel.

The second theme, also on the topic of usability, was based on making it simple for business operations people to configure and use BSS systems directly, rather than having to rely on IT personnel to write cryptic codes in configuration files that are harder to decipher than Linear B. One example demonstrated was their tariff builder.

This focus on usability and user experience continued through the call centre operator’s dashboard, as well as using Rich Internet Application technologies to offer Web retail shoppers a 3D “carousel” of phones to browse. Whilst other vendors may have the longest tick lists of features, Martin Dawes Systems appears focused on making what it does offer usable and user-friendly.

Drew Rockwell, CEO, Martin Dawes Analytics

Lavastorm was acquired by Martin Dawes Systems in 2005, and the conference announced the company rebranding as Martin Dawes Analytics. Their focus is process analytics in order-to-cash operations, something of extreme interest in credit crunched times.

The CEO of Martin Dawes Analytics, Drew Rockwell, is as American as the Statue of Liberty. OK, more American that the Statue of Liberty, as that’s a bit French. Still, punning on the Obama campaign slogan, he busily distributed “Martin Dawes ‘08 — Analytics you can believe in” badges (“buttons” to our American cousins).

His message — or should we say ‘stump speech’ — was simple. Improved analytics let you create cash, preserve cash and enhance business transparency. To prove the point, he went through case studies. Examples included:

  • Near real time monitoring of credit limits through alarms, preventing fraud.
  • Reconciliation of events along the revenue value-chain to reduce billing errors
  • Detecting the one operator in the call centre making the same mistake hundreds of times over.
  • Eliminating fraud from account applications from relatives of delinquent customers.

In discussions afterwards, the secret sauce of Martin Dawes Analytics is that it helps to capture institutional or tacit knowledge. Traditionally someone skilled in SQL (the database query language) will write each business query. This is unlikely to be the same person who understands the business process. It adds cost, time lag, and potentially introduces undetected errors.

With Martin Dawes Analytics, the components of each query are visually modelled and easily combined and re-used. Thus it becomes easy for business analysts, as opposed to IT specialists, to construct analytic queries. Furthermore, those insights into what kinds of queries are important aren’t lost inside some SQL script, never to be remembered, and totally forgotten once that employee moves on. Again, the message is that the cost of a BSS system isn’t just the purchase and support costs, but the cost of the people who operate it, and the effectiveness of their product.

Customer presentations

Phil Jordan, CIO of Vodafone UK, reviewed the state of the UK mobile market. Vodafone’s UK operation is under more strain than opcos in other markets due to saturation and high competition. Meanwhile, Vodafone UK’s business plans broadly reflect Telco 2.0 themes — growth through stimulation of core voice and messaging revenues, new advertising revenues, and growth through improved wholesale products and market share. This means meeting growing demands on the back office whilst also reducing expenses.

On the cost side, his capex budget is shrinking to reflect the realities of the market. That means consolidating and de-commissioning systems. The ultimate goal is one billing system, one CRM system, one rating system, and one provisioning system. The means is through partnerships with suppliers, and the bulk of his presentation was given to describing the principles that they follow, and how that differs from traditional vendor relationships.

Jeff Wollen, Director of the Carphone Warehouse Group, has clearly been reading the right books on business theory. Each company can excel at only one of three core means of differentiation: operational excellence, customer intimacy, and product leadership. The job of a (retail) telco is to get customers. That’s a customer relationship business. Therefore activities such as building and integrating IT systems are not aligned with that goal, and must be outsourced as a managed service.

Continuing this theme, he told the story of how by using Martin Dawes Systems he had slashed the implementation time and costs of building his business. His internal IT function was focused on those things that created true value to the business, rather than replicating standardised industry components.

As with Phil Jordan, he emphasised the nature of the give-and-take relationship with suppliers. He appealed for two things: for suppliers to help remove bureaucracy from their processes around product changes, and for suppliers to be willing to take risks and trial capabilities with customers. In other words, become lean and agile.

Attendee interactive feedback

We gathered feedback from attendees on the keynote talks. The first question was (as before) how people viewed the industry’s future in terms of revenue, and the strong consensus is of slow decline. This is due to internal and external competition, regulatory pressure, and increasingly utility-like market structures.

When asked to rate the three two-sided market structures (retail platform, wholesale platform and B2B2C VAS platform), all three were rates as being either “strongly” or “very strongly” important to future growth. Again, the VAS platform was highest rated, with a spread of opinion on the importance of new growth via wholesale markets.

Finally, when asked to name the top three BSS initiatives operators need to undertake, there are two clear winners: improved self-care for end users, and an integrated view of the customer.

This links in with what Cato Rasmussen, a Director at Martin Dawes Systems, had to say: “with these enablers, you can start to act like the kind of packager and retailer that telcos need to become, free of billing, provisioning and care systems tied to specific networks or products. If I buy a television, towels and tea from Tesco, I don’t need to go through three different checkouts. You win by having the best customer experience, which is far more than just the product in the user’s hand.”

[Ed - you can meet Cato and the Martin Dawes Systems team in the Innovators Zone at the Telco 2.0 event next week].

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October 22, 2008

Guest post - Mobile WiMAX: an answer to the network capacity crisis?

Technology evangelism can be a dangerous thing; new technologies rarely directly displace incumbent technologies. Each incumbent technology has a surrounding ecosystem that gives it network effect, cost and distribution advantages that the upstart initially cannot match. Rather, new technologies spread by finding new applications, and have properties that the older technologies see as unimportant. They can also acting as a complement to existing technologies. This process was famously documented by Clayton Christensen in The Innovator’s Dilemma.

So, what about mobile WiMAX? We asked Liat Ben-Menashe, Director of Strategic Marketing, Broadband Mobility, at Alvarion, a pioneer in this space with 200 commercial deployments worldwide now:

At Alvarion we passionately believe that mobile WiMAX is going to have a positive, global impact on operators and consumers alike. Not only does this technology fit in with historical patterns of adoption, but also the full range of technological benefits are available right now, and suitable spectrum is also widely available. We therefore anticipate an open mobile WiMAX ecosystem to grow rapidly. The question is: what applications mobile WiMAX will be uniquely suited for?

The answer, we believe, is that operators must adopt a range of access technologies and combine them intelligently to solve delivery problems to a wide range of devices. Increasingly intelligent bearer-aware software will adapt the user experience to the appropriate bearer technology. This fits with the Telco 2.0 team’s “data logistics” metaphor. In the world of physical logistics, delivery is made by combining road, rail, sea and air freight.

This process optimises a complex trade-off between cost, delivery time, and quantity delivered. Likewise in the world of digital logistics, telcos will need to combine multiple access technologies to support a wide range of consumer needs.

What’s the problem?

Customers are changing their communications habits. They are adopting a broader range of devices, and behaviours that were not forecast when 3G networks were developed. For example, over 90% of mobile data traffic can come from laptops.

Consumer electronics devices were historically developed to serve a single market need. Now we see a transition to integrated (‘converged’) devices, supporting multiple markets, and taking previously fixed experiences mobile.

Operators are being compelled to seek new service models, while at the same time minimize costs in upgrading their core networks to deliver these new mobile broadband services. Somehow there remains a belief that one 1990s wireless architecture and technology can support all of this. It can’t.

The emergence and rapid uptake of “always on” mobile broadband is propelled by new applications such as live video news, YouTube-like video sharing, and social media services. These mix a variety of traffic types, each requiring different priorities and air interface profiles. Some applications are very “chatty” presence-driven services, others are more like file transfers, and some are latency-sensitive voice and video streams.

Existing networks may be optimised for only one or two of these, and tend to be inefficient at managing all traffic types. Bringing up and tearing down the air interface to transfer just a few bytes can be very poor use of spectral capacity. The overall effect is unfavourable capacity utilisation and high cost structures. This is causing a capacity crunch in leading 3G markets, where data networks are largely optimised for short mobile phone web browsing sessions.

Operators now seek an effective, unified, technological solution capable of eliminating the capacity crunch caused by increased consumer 3G services demand. At the same time, adopting new technologies must address the issues of lowering CAPEX and OPEX. You’d hardly be surprised to learn that we think mobile WiMAX is the right tool for the job. Just as it costs five times as much to move a container by land as it does by sea, you need to pick the right mode of transport for the job of delivering complex mobile broadband services.

Why mobile WiMAX?

Mobile WiMAX has five specific advantages:

  1. Mobile WiMAX is capable of providing higher, cost-effective bandwidth in comparison to existing wireless services. For operators, this translates into the ability to meet increasing consumer demand for broadband-on-the-go.
  2. It’s built from the ground-up to support Internet Protocol. As a “layer 2” only network technology it retains the proven simplicity, cost-effectiveness and adoption of dominant fixed technolgies such as Ethernet.
  3. It offers an open ecosystem, with easier integration with various 3rd party equipment and consumer electronics compared to the often heavily-encumbered licensing schemes for 3G technology.
  4. It fits with existing backhaul structures and points-of-presence via a single wireless infrastructure.
  5. It’s easier and cheaper to manage.

Proof that it works: Taiwan’s nation-wide WiMAX grid

There has been a recent successful deployment of a proof-of-concept network in Taiwan, which is a step towards creating a nation-wide WiMAX grid there. These real-world test scenarios, executed across two university campuses and a science park, produced excellent results, with trials running across eighteen sectors and stretching over 6 kilometers.

The full gamut of mobile WiMAX scenarios were implemented, including applications such as VoIP, video streaming, IPTV and document exchange during driving and walking. Clear handover reached up to 80 km/hour providing an enhanced user experience and paving the way for Taiwan to consider implementation of a national WiMAX network.

An equally important, but positive side-effect of the tests was that within a few days, tens of handset manufacturers connected themselves to the test network, creating a significant mobile WiMAX ecosystem. Demand for WiMAX is derived not only from the technology, but is driven from market players as well.

WiMAX and “The Net”

In many ways, Mobile WiMAX leverages a duplication of Internet business models. Operators must shift profitably from billable-event business models to more flexible revenue models based on sponsorships, advertising and many other different forms of services. By adopting an access technology more suited to the Facebook generation’s usage patterns, they can build this business on a firm foundation.

[Ed. - Liat and team from Alvarion will be exhibiting in the Innovators Zone at the Telco 2.0 Executive Brainstorm, 4-5 Nov, London]

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October 21, 2008

Guest Post: Next Generation BSS - agile ‘order-to-cash’ systems

Barbara Schmiedinger, Head of Residential Product Marketing at Telekom Austria, will be talking at the Telco 2.0 event on 4-5 Nov about how their quad play product offerings are using a sophisticated BSS platform from Infonova to help them in a very competitive market.

Infonova’s ‘order-to-cash’ platform has been specifically designed to support ‘Telco 2.0’ business models: whitelabeling, rich wholesale products, and innovative partner models. We particularly like the fact that the wholesale angle seems to have been baked in from the start, rather than bolted on as an afterthought.

At the same time, Infonova’s platform helps to optimise existing business models and allows flexible interchange between ‘legacy’ and ‘next gen’…all at remarkably low cost levels.

We asked Andrew Thomson, Director, Infonova Solutions to elaborate on the market opportunity for agile systems like this:

Indisputable facts

Most telcos’ front and back office systems are “hard wired” for the original business proposition and are unable to support new functionality without significant investment. For example, many operators have made significant investment to support additional functionality for complex enterprise customers or triple and quad play bundling.

Disappointingly, much of these additional investments which have often included efforts at systems consolidation, have not delivered the necessary results. And it is going to get worse, as the future will require telcos to orchestrate a wide range of propositions from many suppliers for their customers.

The majority of telco business cases to date have been based on the margin achievable by packaging and selling products and services. This is why most front and back office systems are designed to support traditional one-sided business relationships where services are sold either direct to the end customer or as wholesale to another operator for them to re-package and on-sell.

What has changed?

The problem is that multiple overlapping factors are dramatically impacting the traditional telco business model: deregulation, competition, margin erosion, network services commoditization and particularly IP convergence. It is becoming clear that survival will require that telcos operate both Telco 1.0 and Telco 2.0 business models simultaneously. So what does this mean for most telcos’ front & back office systems?

Most telcos have already commenced expensive programs to integrate and consolidate their front and back office systems. Most have also discovered that upgrading these systems to support Telco 1.0 triple and quad play services is very expensive and often results in significant complexity and higher cost of operations. When the consolidation is “complete” most telcos still need to use some smoke and mirrors and a lot of hard work to deliver and support the functionality desired.

Two-sided business models fundamentally call for a capability to manage a multi-layered business model. On the one side to aggregate multiple suppliers into wholesale and retail offers, where those offers for example include NextGen, legacy and other products and services including all types of devices.

On the other side, multiple retail operators and channels will brand those offers and bundle them with their own services. Each of these virtual operators may require different charging and revenue sharing models simultaneously. This needs a complete re-think as current front and back office systems design are designed to support single sided business models.


For example, new channels like supermarkets and equipment manufacturers (ie Apple) are also seeking order-to-cash propositions which they can brand as their own - but most operators do not have the front and back office systems to support this whitelabeling functionality. Simply put, most legacy systems only support a “one brand” functionality and cannot support multi-whitelabel branding scenarios.

The changing world described above is a challenge for 90% of the world’s telcos! With the lack of front and back office systems capabilities, telcos are not in a position to even trial these ideas. This is why IDC commented: “It’s likely that Telco 2.0 will be the engine to drive the industry’s growth over the next several years, but without the right BSS (front and back office systems) to support these initiatives, service providers may stall right out of the gate.”

So, given that Heads of Strategy and Marketing are increasingly expecting to pursue radical new Telco2.0 business models just as the Heads of Operations and the CFO are struggling with the complexity and the mounting costs of re-structuring IT systems to support of Telco 1.0 business models…is there a silver bullet solution that can provide the business capabilities and functionality to deliver both business models simultaneously?

Infonova’s Next Generation BSS is a technology neutral front and back office business platform that has been designed to support multi layer business models. It supports white-label order-to-cash operations at wholesale and retail levels simultaneously, providing highly automated real time order fulfilment for suppliers, customers, channels and end users. Both the wholesaler aggregator and the virtual operators get their own product management configuration, customer management, fulfilment, billing and collections capabilities.

From one perspective it provides the service layer to manage and aggregate application services (eg IP Telephony), next gen (Broadband), legacy (Mobile, PSTN) and products (eg devices such as handsets etc) as well as commoditized network services (eg wholesale traffic) from multiple parties. Its multi-layer functionality enables a telco to choose what services, products and pricing are made available to each retail operator. In turn the retailer can define what products and offers can be sold by a channel.

The platform partitioning enables each retailer to operate their own brand of product bundles at their own pricing - and of course they can also add in their own products into the mix (which for example would enable Apple to define, launch, and market their own branded products and services and bundle them with other products and services on the telco’s multi whitelabeling platform).

Infonova’s product management also enables the operators to individually define their own pricing and revenue / loyalty sharing definitions so that the user of a service can be a beneficiary from payments by another entity. It can also be used as a non-intrusive overlay to telco’s hardwired systems to deliver Telco 1.0 and Telco 2.0 business models simultaneously.


[Ed. - The Infonova team will be demonstrating their capabilities at the Telco 2.0 event]

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Enterprise Contact Centres - a revenue opportunity for telcos?

HTK is a specialist supplier of ‘voice 2.0’ services. They’re one of the interesting group of companies who’ll be participating in the ‘Innovators Zone’ at the Telco 2.0 event. We’ll be presenting some of our new analysis on the (significant) market opportunity for telcos to provide services to enterprise contact centres on Day One of the event. In the meantime, we asked Marlon Bowser, HTK’s Managing Director, for his thoughts on this topic:

Chasing the Rainbow

The telecom industry is going through a time of arguably unprecedented change, with more opportunity for “service innovation” than ever before. With change comes the need to adapt and many Telecom Service Providers are opening up their networks to enable integration of third-party application services. The question is whether fostering such a culture and community of innovation is a business model that makes sense, and how it can be harnessed to generate significant financial growth.

Companies like BT and Microsoft are catalysing the market for innovation, with service delivery platform vendors waiting in the wings to prove that they’re the best bet to host the next big thing. The problem is that innovators and early adopters of new technology are often driven by an agenda of “cool” rather than one of “cash” - it may create excitement, but it rarely creates significant revenue growth.

Solving a Big Problem

One obvious area where network services could make a difference is in the management of communications between organisations and their customers. Most organisations have their own or outsourced Contact Centres to provide customer support; to answer questions and help people get where they want to go. The faster and more efficient the process and the better the emotional response the more successful that operation will be.

Empowering customers to make informed decisions about how they want to communicate with organisations is becoming a key factor for Contact Centres especially where customer retention and satisfaction are critical success factors. Providing customers with personalised services and the ability for customers to “self-serve” also requires an increase in the level of integration between business process applications and communication services.

To be successful these services need to be able to adapt to changing customer requirements. Constantly changing in-house service platforms can be disruptive and expensive, making network centric hosted services an attractive option.

Presence and availability information are two of the key features of next-generation telecom network architecture. If we couple both features with the increasing availability of rapid service innovation through access to third party applications we have the perfect environment for the development of intelligent, personalised self-service capabilities. Flexibility and cost could be the main drivers for growth in the adoption of network based services in the Contact Centre market. There is certainly plenty of scope for growth as shown in Fig 1.

Fig 1. Potential for provision of hosted services.


Taking this concept of intelligent routing a stage further there may also be an opportunity to extend into the consumer market providing intelligent routing services integrating telephone and data services. Thus providing the ability for individuals to manage the routing of incoming calls depending upon their relationship with the calling party.

Some calls they may want to receive regardless of their physical location so be routed to mobile or another landline. Other calls they may want to route to messaging services that provide intelligent features such as links to diaries for automatic appointment entry.

Whether it is organisation to individual communication or individual to individual communication, the potential exists for intelligent, decision based routing services to be a key enabler for new revenue growth in the telecom sector.

The Practicality of Going to Market

So how does a Tier-1 telecom service provider enter the market quickly, with a value-added service portfolio that will provide a significant uplift in both revenue and margin? Moreover, how can a Telco manage its own financial risk of investment in a service delivery platform and portfolio of next-generation applications that may be slow to take-off? What if there is no pot of gold at the end of the rainbow (or more likely, what if another service provider finds it first)?

One answer can be to work with a partner who will not only provide innovative new services, but who will take shared responsibility - on a financial risk and reward basis - for the operational infrastructure, hosting, management and market success of those network services. I.e. A vested interest. Out-sourcing has become increasingly popular for reasons of cost reduction, business agility and lean-operation, but in the context of application delivery it can also help to drive new sources of revenue. Combined, that can make it a highly effective and low-risk strategy.

It may come of no surprise to you to discover “that’s what we do” here at HTK. In fact many of the service features discussed earlier form part of our Virtual Contact Centre vision and portfolio for the Telco 2.0 marketplace.

[Ed. - do look out for Marlon and HTK at the Telco 2.0 event on 4-5 Nov, London].

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October 20, 2008

Credit Crunch: Is there a silver lining for telcos? (Part 3)

As a preview to the Telco 2.0 event in a few week’s time and a follow up on our analysis of the credit crunch, we were delighted to take part in a panel on TelecomTV last week:

This is how they billed it: The troubles affecting the world’s financial markets is having a knock-on effect on just about every industrial and business sector on the planet. However, the good news is that telecoms is suffering much less now than it did when it experienced its own recession between 2000 and 2005. Today, mobile operators facing a potential slowdown in developed and saturated markets are able to move quickly to exploit growth opportunities in emerging economies whilst the big incumbent fixed line carriers suddenly find themselves back in the limelight and investor’s good books. Watch the panel to find out why the Telco market could just survive the current economic storm and act as the lubricant to the digital economy.

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Ring! Ring! Hot News, 20th October 2008

Just when I thought I was out, they drag me back in: Siemens shows a concept phone using the “big touchscreen” iPhone design meme to include a large solar panel in the device. Nice; but hasn’t Siemens given up making phones?

Ah, another week in the snakepit. No-one can get away from shiny gadgets. After last week’s collective orgasm over the first Android device (if you missed - it’s a bit like one of HTC’s big ugly Windows devices from two years ago), here’s the disappointment; Google may have taken powers to zap apps it doesn’t like. We’ll see how this develops, but it’s desperately ironic that Google of all companies would re-implement both Apple’s notorious iPhone NDA and Microsoft’s remote forced reboots.

Microsoft, eh? There’s concern about what will happen to their new ads’n’websites strategy in a recession; ad spending is famously an exaggerating indicator of the underlying economy. And even Google is facing a nasty antitrust problem., even if improved ad-buying products boosted their Q3 numbers. We told them but they wouldn’t listen; a company whose main product is called “Office” has no business being a consumer media player.

However, it looks like the long-predicted push e-mail bust is on; maybe a Microsoft/Salesforce or RIM tie-up could still be a goer.

Back down at Layer Zero, Handelsblatt reports that Deutsche Telekom is at long last coming around to the structurally separated future. The troubled monstercarrier has declared a willingness to deploy high-speed infrastructure - fibre in the access network - to “as many areas of Germany as possible”, and to cooperate with other networks in doing so, which implies sharing the wealth.

Apparently, talks have opened with Netcologne, Cologne’s munifibre project, about the terms on which the two parties could share the use and costs of a fibre network there. The next step will be an approach to the regulators. Speaking of whom; there’s a revision of US intercarrier termination coming. More detail at Telephony Online. Whilst we’re there, check out this AT&T provisioning horror story; for an industry whose business model historically been based on huge billing databases, we’re still not very good at it.

At least we’ve got a business model though… In other messaging news, Telephony Online’s Rich Karpinski has much more detail on last week’s Verizon SMS shock.

Ericsson is so proud of their results they released the numbers four days early; and who wouldn’t be? On the other hand, the margin scissors between handsets and networks continue to bite; things are very different at Sony Ericsson.

Telco business models are under siege - even in New Zealand.

Uganda, meanwhile, becomes the world’s mobile commerce hot spot; France Telecom enters the East African nation’s GSM market, and probably will bring its mobile banking service as proved in Senegal and elsewhere with it. They face fierce competition from MTN, Celtel, and Safaricom; is this the first competitive test for MPESA?

John McCain, meanwhile, has no fear of THE RAYS!! And Linux is 17 years old this week.

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October 15, 2008

Balanced computing: Intel’s vision of our networked future

Intel is a sponsor of November’s Telco 2.0 event. Its Embedded and Communication Group/Performance Products Division will provide their view on the future of the Telecom business model and technology. Intel’s approach to the telecoms industry stretches across the whole value chain end-to-end, from handsets and PCs to radios, switches and servers. Intel has a unique and commanding viewpoint across the whole digital communications ecosystem. We spoke to Intel’s Director of the Service Provider Sector within the Intel Digital Enterprise Group, Kevin D. Johnson about this.

Q: Intel has traditionally been associated with manufacturing microprocessors, but increasingly is focused on networking. What’s causing this change?

A: The network is becoming more important to Intel as network access becomes a key enabler for many businesses to grow. In a few years, most client end-user devices will be connected. While this started with PCs, there are more and more embedded applications, such as IP multimedia devices, in-car entertainment, automated energy management, home security monitoring, in-home media entertainment devices, even displays on refrigerators, requiring always-on connectivity…
Intel offers high-performance, power-efficient processors and components for all parts of the network, from service hosting with Intel® Xeon® processors to client devices with Intel® Atom™ processors and Intel Centrino® processors. We know that there are many opportunities to make these components work together more intelligently across the various platforms. Some examples include automated provisioning for ease of set-up, power management for battery life and energy savings, trusted computing for data and user integrity, and balanced computing for optimized end-user experience. We want to emphasize that Intel cares about the network as an end-to-end Service Provider technology ecosystem. Our job is to make the necessary technology investments for the Telecoms industry to flourish into the future.

Q: So what’s Intel’s unique value proposition to a Telco?

A: We’re very focused on energy efficiency and going ‘green’ from Data Centers through network infrastructure to consumer and business devices. We have a long history of driving down transistor sizes and lowering power dissipation. This technology conveyor belt will continue to deliver products long into the future. Yet there’s more to be done. We have a Data Center of the future initiative that goes beyond standard applications.

This means taking a fresh look at our products and how we integrate and offer features and functions for telecom workloads. For example, we may use system-on-chip technology for the Data Center as a way of reducing chip count and power consumption. Rather than throw big iron at every problem, we are working on smarter ways of managing computing power, such as more parallelism, virtualization, network distributed computing, balanced workloads, etc. To make this work, you need more than just an addition of a software layer to general purpose CPUs. The solution needs to be baked into the processor itself.

Another major initiative is embedded security for networks. Security management is going to be a key issue. With 15 billion connected devices and “tridgets” in the next 10 years, there is a huge risk forming. The network must help filter and block the bad things.

In a sense, this is a counter to the ideas in the famous white paper by AT&T research scientist David Isenberg, “The Rise of the Stupid Network.” This paper argued that Telcos should be “dumb pipes” because that creates the maximum innovation since no applications are tied to the assumptions of previous network designers. This view, however, appears too narrow in scope since it believes in goodness of the endpoints.

The network doesn’t have to become smarter to change the business model of service providers at the signalling and applications layer. Rather, it needs to handle risks of malicious use, or even just unintended behavior that is trying to slow down the network performance, potentially leading to significant business impact. It becomes important for the network to understand the nature of the traffic; we call this trusted computing.

There are also challenges, such as video delivery, that require a smarter network service architecture for increased quality of consumer experience and satisfaction with the content-service-device interactions.

Q: What does this mean in practice?

A: We see a need for processing capabilities in every node of the network, including the edge, and for these components to work together as part of a whole approach to an intelligent network. Network services such as Deep Packet Inspection, intelligent traffic management, network firewalls, VPNs, in-line transcoding, Ad insertion, and context aware location-based services work best when the parts of the network cooperate with one another - just as Internet Protocol is a means of allowing co-operative behaviour between networks.

For example, transcoding can be done in the device, in a base station, in some content delivery network node, or some central server at the Data Center. The best approach is a complex balance that considers network capability, delivery latency, device battery life, and capital expense. A company like Intel in cooperation with its extensive ecosystem can help solve these kinds of problems and provide a profitable path to your next generation network.

This is the new “balanced computing” model for the network; Adapt the service or balance between server and client, depending on the client’s capabilities and network intelligence. Maximizing the QoS for the end-user is typically a processor-based performance issue of the device itself. Think of it as the networked equivalent - and evolution of - the MMX multimedia extensions that processors acquired in the 1990s.

Now, the focus is on distributed computing - done on the fly. The network interactively provides the right service in conjunction with the device, depending on screen size, memory, processing and even conditional battery capabilities. The difficult job is to manage and finesse the non-functional device issues - performance, battery life, and security.

Any new class of user friendly, smart consumer devices will under-perform when the network is not optimized to work with it and vice versa. For example, the current user experience with a Smartphone could have badly formatted web pages, resulting in a poor navigation experience. Various software approaches have been proposed, as a network-based service that resizes images per the device before transmission.

Some of this kind of control may be in software, but capable processors will definitely shape the future optimizing this performance on the fly, thereby maximizing the end user’s “Quality of Experience” (QoE).

Mobile Internet Devices (MID) offer the network the open PC model, the PC performance needs, and PC user behavior models. When you buy a MID device at a retail store, you expect the usual PC broadband model of working ‘out of the box’. Without these technologies, consumers may be disappointed by the experience they receive.

So on one side we need to prevent bad things from happening through the network , and on the other enable business model evolution through distributed computing technology built into the network and devices cohesively. We do that by enabling intelligence in the network.

A good example might be an IPTV switch, equipped with one or more blade servers that allow the Service Provider to add local services. For example, personalized Ad insertion, a lucrative revenue generator for SPs, creates new challenges in running business logic from multiple sources, ensuring a secure and high-performance system, and managing QoE across the technology stack.

We are also looking at possible new tiered service architectures. For example, there could be a prepay module on the client, as opposed to embedded in the network, which provides a customer entry level service agreement. The end user could opt for additional services on a pay per usage tariff if desired. Service providers would be very interested in that, given a more flexible cost structure for their billing system.

Q: And what about your business model?

A: Our message is that Intel cares about the network, services, IT (BSS/OSS) and devices. An intelligent network means accelerating the vision of broadband for all - both wired and wireless. Smarter and better connected devices equates to more prosperity. In doing this, we need to start thinking about two-sided market models for the enabling capabilities. This could open up various future revenue models as the network intelligence increases to provide a portal to new lifestyles and new levels of service to business owners. Our end goal is to get everybody connected with a rich and convenient device experience wherever you are and whenever you need it and the network obviously is a critical factor to that.
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How BMW uses mobile marketing

As readers will no doubt have seen, we have a major session with strategy execs on ‘telcos role in the marketing/advertising value chain’ on the second day of the Telco 2.0 event in November. It builds on output from our ‘Advertising & Marketing 2.0’ research practice and work we’ve been doing with the GSMA and others (see also new analysis re Blyk here). In particular we will will be drilling down on:

* The practicalities of exploiting the rich customer data that resides within telco networks?
* How to help marketers and content owners engage more closely with consumers via the telco channel?
* Where and how should telcos collaborate in this market to deliver the reach that marketers value from a medium?

We have a great panel who will bring some new perpsectives to stimulate the debate: Paul Magelli from NSN (on the first point, more here); Will Hodgman, EVP from ComScore/M:Metrics (on the GSMA’s recent metrics project); Mark Johnson, CMO of SAP (on how to integrate processes with the content industry and the practicalities of real-time segmentation); and Hugo Drayton, CEO of Phorm (the pioneering and ‘controversial’ online advertising service in the UK, talking about industry collaboration, how to engage with consumers and deal with regulatory issues!). We’ll also be sharing some of our future ‘use case’ work in this area, pulling on best practices in marketing/advertising from around the world.

In the meantime, one of the best practices, from a brands perspective, of using mobile as a marketing tool is BMW. The case study and interview below demonstrates the huge potential of the medium. But you’ll see that there’s very little value that the telco operator currently extracts from these scenarios. Our ongoing efforts are to define a far more valuable role for the telco in the marketing/advertising value chain:

This case study comes from Jim Cook at MobiAdNews, the best information resource on mobile marketing you can find. Jim writes:

BMW is one of the world’s most recognizable brands. As part of their on-going effort to build stronger connections with consumers, BMW has established a Marketing Innovation Department, which, among other things, has responsibility for developing mobile advertising and marketing.

Marc Mielau is the Innovation Manager for Mobile Marketing at BMW. In this two-part interview in MobiAD News (links below), Marc explains how a major brand like BMW with a large complex organization can effectively address new opportunities such as mobile advertising and marketing.

It is Marc’s view that mobile advertising really needs to be looked at in a broader context. “People took their ads from TV and moved them to online, and now they are trying to find space for ads on the little screen. This is fine, but its not the whole truth about the mobile channel.”

Mark also shares several of the very interesting campaigns that BMW has run, and explains that having a strong customer orientation is of primary importance. The campaigns he reviews include a QR campaign for the BMW 1 Series, a video call campaign for the new BMW Museum in Munich, and a “situation based” marketing program for snow tires that yielded a 30% conversion to sales!

The interview demonstrates all the different aspects of mobile marketing that a leading brand like BMW is working on, what has worked, and what they see for the future.

Interview Part I here
Interview Part II here

[Ed. - you can meet Jim at the Telco 2.0 event on 4-5 Nov, London].

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Telcos’ 2-Minute Drill - Industry Standards for accelerating change

Telco 2.0 is working closely with the TM Forum on a number of important cross-industry projects, not least our research into new business models for video distribution. We’re delighted that Jim Warner, their Deputy Chairman and VP of Digital Media, will be a panelist at the Telco 2.0 Executive Brainstorm on 4th November in London.

Jim’s been playing a leading role in brokering relationships between Hollywood and telcos. He’ll be sharing his experiences on dealing with the Motion Picture Association (among others) and stimulating the debate on how to increase effective collaboration. In the meantime, below is Jim’s preview of the TM Forum’s own event in Orlando, 16-20 Nov. (We recommend you go or send a colleague if you’re at all involved in “Creating, Delivering and Monetizing Digital Services”):

With time running out in an American Football game, the team that’s behind goes into their “2 minute drill.” In essence, they abandon their strategy or game plan and start doing whatever it takes to score. Risks are taken, the pace is frenetic but the alternative is defeat. It’s a gamble worth taking.

I think telecom is getting close to this situation.

You’d have to have been asleep for the past 3 years to not understand the situation most Telecom Operators face. The cash cow of basic voice and data services is running out of milk and soon may only produce stinky cheese. It’s a commodity business with margins worse than retail. Yet most operators continue with a business model not suited for this environment.

That’s not to say being in a commodity business is bad business. Oil companies sell commodity products and they make out just fine. But they’ve tuned their business model to the market they’re in. There’s no shame in providing a superior communications service as a utility. Just don’t try to do it with a value-added business model.

If you’re like most operators though, you want to add value. You want to dip your beak into the revenue stream of enhanced digital media style services. You want to be a player in the online advertising game. You want to be more than a dumb pipe. That’s fine. But what are you doing about it right now - today because the clock is winding down. It starts at the top.

How’s your attitude? Are you willing to take risks and do you reward the people who do? Or are you happy to wait and see how things shape up? Does your company need an attitude transplant?
What sort of culture do you foster? Do you (and your people) wake up every morning obsessed with creating new things your customers will love. You better believe the people at places like Google, Facebook and Hulu are. They eat innovation for breakfast and wash it down with a large mug of creativity.

And speaking of creativity, how abnormal is your thinking? Because in this case, abnormal is good. Are you willing to open things up? What about monetizing your back office by selling access to your billing, location and security capabilities? What about providing customer metrics? Not the usual network level stuff but things that truly measure the customer’s experience and delight with a brand. That’s what advertisers will pay dearly for. Make your technology perform unnatural acts and it will vault you ahead of many web-based offerings.

If you need to see some examples of the above, just visit TM Forum’s Content Encounter at our upcoming Management World in Orlando. Content Encounter is an incubator where content owners and distributors, communications providers and device makers come together to experiment with innovative ways to target, deliver and monetize digital media and advertising services.

I could go on but I hope you get the idea. It’s time to get on a war footing. Time to invest in technologies and standards that will enable you to accelerate your pace of change and re-invention. Time to go to your 2-minute drill.

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October 14, 2008

Subscriber Data Management - Review of Nokia Siemens Networks User Conference

Buying Apertio earlier this year has put Nokia Siemens Networks (NSN) right at the forefront of the Subscriber Data Management (SDM) movement. This is an increasingly interesting topic, since customer data is the bedrock of future two-sided business models. We were asked to provide some Telco 2.0 context to stimulate their User Conference a few weeks ago and facilitate a debate. The event focused on exploiting NSN’s OneNDS product, created by Apertio. This is such an important part of NSN’s overall market proposition that their CEO came in person to the event.

Telco 2.0 Keynote

For the content of our own opening keynote presentation, click here. With respect to subscriber data, there is one specific take-away worth noting. We don’t see the opportunity being the direct exploitation of that data by selling or sharing it. There are common business processes that every consumer-facing organisation undertakes. Telcos can remove friction from these processes, and will be rewarded for the improved process outcomes. The customer data is the raw material, not the good for sale.

As one delegate observed in the interactive feedback, “The companies that make this [two-sided market] work are the next winners”. However, there were concerns: How do you get buy in to this concept at the senior management level? How to deal with privacy and data protection issues? How to overcome the risk-averse culture of telcos, and regional fragmentation of industry? [Ed - We’ll be digging into these and other go-to-market questions in our research, and during our events, including November 4-5, as well as on this blog.]

Nokia Siemens Networks executive presentations

Simon Beresford-Wylie, CEO of NSN, presented an overview of where the industry was heading from the viewpoint of the captain’s deck. His principal concern was that the vendor segment was suffering from malnutrition and starvation, whilst the operators continued to feast on subscriber revenues. Yet operators continue to turn to vendors for their R&D, with low levels of investment themselves. Several (named) vendors are suffering severe distress, but even as one of the leaders of the pack, NSN feels the pain. Whilst cost-cutting continues apace, something will have to give for the ecosystem to come back into balance.

He observed that the cost of energy was an increasing factor in telecoms. NSN has already reduced the power consumption needs of base stations by two thirds. GPON fibre architectures require lots of powered cabinets in the field, which increasingly suggests that point-to-point architectures, more like the traditional telco central office, are worth the incremental cost. Finally, in some emerging markets with low ARPUs, some customers were not even covering the marginal cost of the diesel used to power the network.

Moving away from networks to services, he recalled how Club Nokia had incensed the operators, who felt that the customer was 100% theirs, and they were in a position to control that customer. How times change, and Nokia’s Ovi suite, which complements handsets with online services, is a pointer to a world where operators had accepted the need for external innovation and partnership. That innovation can only occur, however, if suppliers and partners are healthy.

In closing, he noted how every telco needs to undertake four key subscriber data management initiatives:

  • A single customer identity, to support a converged experience.
  • Intelligence and analytics to provide customer insight.
  • Policy enforcement, for a managed customer experience across multiple networks and services.
  • Profile repository, for a personalised experience.

Paul Magelli, Head of Subscriber Data Management at NSN, gave a comprehensive tour of the state and future of SDM. Internet companies like Yahoo! are recognising that customer data is a strategic business asset, and have recently created new executive positions and organisations to manage it appropriately. In undertaking this journey, there are four stages to pass through:

  • Recognising the importance and value of customer data, and aligning process and organisation to this need.
  • Unifying the data.
  • Profiling behaviour across services to drive internal business processes.
  • External exposure of subscriber data to drive business processes along value chains.

The greatest value comes from being able to integrate static, dynamic, operational and transactional data. NSN’s OneNDS product is aimed at performing this for real-time applications. There are many ways in which this data can then be used, but as an example, users should be able to redeem a discount voucher for any one of a number of services across multiple network types (WiFi, 3G, DSL, etc.). This type of rating or policy decision (“is this payment type valid for this service?”) is something that is impossible in most of today’s business systems.

Google created a $100bn company from one single piece of user data, he said. Telcos have much richer information which is there to be exploited…

Survey results

We used our ‘Mindshare’ interactive technology to get feedback from participants based on what they had heard from the presenters. In the first question we asked them to judge how today’s telecoms business model will fare:

Today’s telco business model is primarily based on a ‘one-sided’ market focused on selling voice, video and data directly to retail users. If this model continues, what will happen to industry (fixed and mobile operator) revenues 5 years from now, in the mature markets of W. Europe and North America?

The result is a clear belief in a gradual decline. This poses a challenge to operators, who have been used to growth. It requires new priorities, leadership and business models.

Future of telcos is not rosy with current business model.

In our second question we asked delegates to judge how credible our Telco 2.0 two-sided market models are.

Support for telcos becoming more general-purpose retailers was strong:

Importance of enhanced retail platform: selling many more third party products to the telco base, as well as enabling third parties to sell core telco products

Meanwhile, belief in growth through new wholesale products was more muted:

Importance of new wholesale distribution platform: allowing third parties to package voice, video and data delivery in with their own digital goods and services

One respondent commented:

I don’t think we need a fundamentally new wholesale platform (“network”). It can already largely do what’s required. The critical steps will be in developing the capability to package that and approach the (vendor) side of the market with an “it just works”/technology agnostic proposition. Underpinning this, a new mindset: Let the market build it, or even, let the customers build their own services, not us.

Another adds:

Increasingly, the innovation will be externalised. Operators facilitating this in the most attractive way (cost effective, speed of integration, etc.) will drive the standards and therefore dominate.

This follows what we see the role of the wholesale platform being: an enabler for others to build digital goods and services with “postage and packing included”, and without having to negotiate the bizdev maze of dozens of telcos to get there.

Strongest of all, however, was the need to use subscriber data to take friction out of everyday B2C interactions and business processes:

Importance of new B2B2C Value Added Services platform: facilitating common business processes between consumers and merchants/government

Respondents noted how operators are in the best position to act as a broker to access the customer, be it in terms of confidence, direct business relationship, or customer knowledge.

We then asked how do telcos today compare with other service industries (supermarkets, airlines, banks, utilities) in terms of their effectiveness at increase revenues by exploiting subscriber data.

Telcos still have much to learn from other industries in extracting value from customer data

Finally, we asked attendees to rank the following in terms of the commercial opportunity they offer telcos from exploiting their subscriber data:

  • Segmenting and promoting telco products to the telco customer base
  • Promoting 3rd party products and services to the telco customer base
  • Personalisation of advertising
  • Helping enterprises (big and small) improve the efficiency of their everyday business processes and interactions with the public. (“Everyday business processes” include authentication, market research, content delivery, order fulfillment, payments, customer care.)

The results are below; the shorter the bar, the higher the rank. The top priority is selling what’s already on the truck.

Graham Baxter, CTO, 3UK

Graham Baxter, CTO, Hutchison 3G UK

Graham gave an overview of where UK operator 3 was heading in its business. He was clear that 3 sees internet-based players as an opportunity, not a threat. The job of the telco is to deliver the best Internet and communications experience to its users, at a price they can afford. That means getting the network, provisioning, handsets, service, and support to all “just work”.

Telcos in particular need to focus on daily communications needs, not infrequent media sales. Just from the top search terms on 3’s portal, it is clear what the end users want. Hence the Skypephone as a response to that demand.

The alliance with Skype hints at deeper forces at work. Termination fees act to keep new entrants like 3 at bay, since they have to pay (and pay heavily) for the net imbalance between inbound and outbound calls. This outflow of cash exists because new entrants typically have to offer more minutes at a lower price, which stimulates more outbound calls. Skype is a means of having “termination-free” communications. Graham indicated that 3 are keen to see regulators take another look at rules that were more about balancing the interests of a small group of oligopolists than creating genuine competition and innovation.

Graham also expounded the significant benefits of a single real-time view of the customer. For example, you could enact spending limits for roaming customers, and detect fraud (or high usage) immediately, allowing you to alert the customer and manage their overall experience.

Breakout sessions

A few things struck us from attending the breakout sessions:

  • Traditional vendor models of selling cheap and then getting the money from overpriced change requests won’t wash any more. Operators want open systems — like OneNDS — that let them use standard protocols to get at their own business data.
  • The hot action is in emerging markets, where Darwinian forces are intense. Arakin Rakchittapoke of Thai operator AIS gave an impressive overview of the forces on his business and their architectural response. At peak times, they are processing 200,000 transactions per second against their OneNDS subscriber repository.
  • The complexity of managing subscriber data is increasing. In the past, all applications were internal. Now, many applications are external to the operator. However, there are privacy issues that may prevent the release of identifiers such as the customer’s telephone number or handset ID, so you need to substitute some kind of anonymous synthetic identifier when passing data externally. Keeping track of all this is what OneNDS is for.

How the OneNDS technology works

What’s the secret sauce of OneNDS? It’s an in-memory database tailored to consistently quick lookups of data needed in real-time processes, such as call processing. Unlike relational databases such as Oracle, it’s not designed to support complex queries. The business justification is to consolidate your data in one place, lowering costs of management and inconsistencies, and eliminating licensing costs for multiple databases.

NSN provide a reference data model that each operator can customise. There are 30-40 applications that are pre-integrated via the standard LDAP API. This means it doesn’t require vendor intervention to get at the data, unlike with many HLRs, for example.

And finally…

Corporate events always come with their share of fine dinners, entertainment and gifts. Whilst the Nokia Siemens Networks branded power adapter will no doubt come in handy, this event has a special place in the heart. Your correspondent’s souvenir comes from his five year old daughter, and is a re-interpretation of the NSN corporate swoosh on the back of an NSN business card, re-drawn on the back of one of a blank business card.

Rothko eat your heart out!

[Ed - Paul Magelli from NSN will be among the stimulus presenters at the Telco 2.0 event in November].

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October 13, 2008

A Quick Slick Unpick of Blyk’s 2-Sided Business Model Trick

The title is Doctor Seuss’ fault as his rhymes are lodged in this writer’s head after years of reading them to his children:

Look, sir. Look, sir. Mr. Knox, sir. Let’s do tricks with bricks and blocks, sir.
Let’s do tricks with chicks and clocks, sir. First, I’ll make a quick trick brick stack.
Then I’ll make a quick trick block stack.
You can make a quick trick chick stack.
You can make a quick trick clock stack.

We thought it might be helpful to review the Blyk business model in a bit more detail following our pre-launch analysis where we were bearish on the company. Its business model ties in nicely with our 2-sided strategy for operators about which we have written on numerous occasions on this blog.

This piece, therefore, seeks to answer the following questions:
1.How does Blyk make money?
2.What are the benefits and risks of the business model? (Are we still bearish?)
3.What are the broader ‘Telco 2.0’ lessons for other operators?

News Glorious News
News flow from Blyk has been positive recently. It announced a few weeks ago that it has reached 200,000 customers in its first year of trading (versus its target of 100,000). This follows press releases in June that the company is set to expand operations in 2009 into other European markets, notably the Netherlands, as well as Belgium, Germany and Spain. All this follows investment (of an undisclosed amount) from Goldman Sachs and IFIC in January. The current squeeze on credit can hardly be helpful to an expanding start-up, but it looks like Blyk was lucky in securing funds ahead of the summer problems.

The Blyk Business Model

Blyk is an ad-funded MVNO focused on the 16-24 year old market (although they position themselves as a ‘media company’). It gifts minutes and texts to customers in exchange for the right to send advertisements to them. Users complete a set of questions about themselves when they sign up, giving Blyk information about their preferences. Advertisers market their products and services via text to Blyk users based on this profiling and Blyk gets paid to deliver the advertisement. So, at first glance, Blyk reverses the normal revenue model for operators: it collects money upstream and pays out for delivering services to customers:


But this is too simplistic (and many who have commented on Blyk’s business model have been guilty of this) because Blyk actually makes money from both sides - from end users as well as advertisers:

1.Termination charges from off-net callers. This is effectively shown in the lower diagram of the chart above where we show operators as both receivers of money from end users (when originating the call) and receivers of money from other operators (when terminating the call). So every time a Blyk user receives a call or text from an off-net customer the originating operator pays Blyk for termination. In turn, Blyk obviously pays some of this termination charge out to its network supplier (Orange) but we guesstimate that the company still makes some margin on this.

2. Overage. Typically 16-24 year olds, like the rest of us, have a pre-determined communications budget - “I will spend £x on my phone each month”. The fact that Blyk gives users free calls and texts does not stop users from spending this money. Blyk’s users will simply display the same behaviour that every Telco exec is familiar with: increased communications usage as the price reduces (see this excellent piece on elasticity and pricing from the Ericsson Business Review). Because Blyk offers 217 free minutes and 43 texts, we believe that users will be profligate with their communications. They will use this free allowance up and STILL spend at least some of their previous budget.


So how much revenue and margin does Blyk make? Well, we developed a model of the company and plugged in the following assumptions:

Usage Assumptions (Average per User per Month)
Makes 230 texts (13 more than 217 limit) Makes 50 minutes of calls (7 more than 43 limit)
Makes 5 minutes of voicemail calls (all above limit)
Consumes 1MB of off-portal web browsing
Receives 100 texts
Receives 50 minutes of inbound calls
Receives 120 advertising SMS
Receives 30 advertising MMS
Pricing Assumptions
Calls to any UK mobile network or landline (over and above free): 15p/min Calls to Blyk voicemail: 15p/min
Text messages to UK mobile networks (over and above free): 10p each
Browsing off Blyk portal: £1 per MB
Price charged to Advertiser per SMS: 7p
Price charged to Advertiser per MMS: 22p
Cost Assumptions
Off-net texts are terminated at 3p each On-net texts are terminated at 2p each
80% of outbound texts are off-net
Off-net calls are terminated at 5.1p per minute
On-net calls are terminated at 4p per minute
80% of calls are off-net
Off-portal browsing costs £0.50 per MB
On-net MMS are terminated at 9p each


Our analysis suggests that, by combining user and advertiser revenues, Blyk could be making as much as £26 in revenue per user per month at a gross margin (defined as revenue less network costs only) of around 28%:


In other words, Blyk makes around 2/3rd of its revenue from upstream customers (advertisers) and 1/3rd from users (overage and inbound):


It is worth pointing out that Blyk has, thus far, been pretty successful at (a) attracting advertisers and (b) managing campaigns. In fact, response rates over a four week period of 116 campaigns were a staggering 29% last year towards the end of 2007:


29% compares very favourably to other forms of digital advertising (Source: e-consultancy, September 2007) and suggests both that young people are open to this value exchange (receiving ads and giving information up about themselves in exchange for free communications) and that even basic targeting is effective:

* On-line Advertising 0.02%
* Paid Search Advertising 0.2%
* Email 0.1%
* Direct Mail 2.0%
* Magazines 0.2%
* Direct Response TV 0.04%
* Radio 0.01%

Benefits and Risks of the Business Model

There is a lot about Blyk’s business model to admire. Compared with a traditional one-sided mobile operator Blyk has the following strengths:

Higher ARPUs. By introducing a second revenue source, Blyk can potentially more than double the ARPU levels achieved by a traditional one-sided player.

Strong appeal to advertisers. Response rates appear to be so good that advertisers cannot fail to be impressed with the Blyk platform as a means of communicating with a traditionally ‘hard-to-get-at’ segment. They certainly seem to have signed up plenty of high-profile brands including WDK (drinks), Penguin (books), Sky Box Office (TV), Local Government (elections), Brylcreem (male grooming products), Boots (Retail). There are lots of examples on the Blyk media portal.

Strong appeal to youth market. Students on a tight budget will be seeking value for money and Blyk offers this in spades in return for relatively limited intrusion (users receive a maximum of 6 ads per day).

Speed to market. The simple approach to targeting (capturing user preferences when they sign up) is not particularly sophisticated and certainly way short of providing real-time behavioural targeting but it has allowed Blyk to launch and grow quite quickly - no operator has yet launched anything similar.

However, as we pointed out before, there are large risks for Blyk. Specifically:

Network pricing. Because it is an MVNO, Blyk is to a great extent dependent on the prices charged by operators for network usage (for origination, transmission and termination). In a competitive market like the UK, these are unlikely to be excessive but there is a margin risk for Blyk if these rise. Blyk would presumably be able to pass on the increase on the revenue it generates on inbound minutes and text but this would not be enough to offset the margin hit. In our model, we calculate that a 10% increase in network costs would see gross margin drop from £7.27 per user per month (28%) to £5.95 (22%).

Declining response rates. A 29% response rate is mighty impressive but this figure is likely to come down as the initial enthusiasm for receiving advertising diminishes and as Blyk penetrates more deeply into this segment and captures users who are less wedded to the ad-funded model. This has two potential impacts:

It may make advertisers less inclined to use Blyk which would reduce the premium prices that Blyk can charge advertisers for SMS and MMS messages.

It will impact the number of SMS and MMS messages sent over the course of a campaign which could have a substantial impact on advertiser revenues. To illustrate this, suppose that Blyk conducted a SMS campaign for an advertiser to 20,000 of its user base and achieved a 29% response rate overall (additional messages are sent only to those who respond up to a maximum of 3). We calculate that such a campaign could be worth £2,345 to Blyk. However, if the response rate drops to 10% (still quite high), then Blyk’s revenue drops by nearly 30% to £1,694:


Given that advertisers account for nearly 2/3rds of Blyk’s revenue, this would equate to a 18% revenue hit overall (assuming stable subscriber numbers).

Operator competition. To date, no operators have followed Blyk into the youth market with an ad-funded model. But if Blyk shows signs of success, you can be sure that other operators will look for a piece of the action. Orange, Blyk’s network provider, has a youth skew and if it sees ad-funding as providing incremental value (rather than cannibalising subscriber revenues), then they are likely to follow suit. And Virgin also has a strong youth bias and could potentially copy the Blyk model relatively easily. Moves such as these are likely to drive prices down for advertiser media purchases.

Scalability. Even if Blyk could capture a large proportion of 16-24 year olds (which seems unlikely in saturated and competitive European markets), the cost Blyk spends on acquiring customers is likely to mean that EBITDA margins will be razor thin. Our 28% gross margin excludes operations, customer care (where it looks like they have had some problems) and marketing and sales costs. The latter is particularly concerning since Blyk uses people at university campuses to sign up prospects and capture profile information. This simply doesn’t scale effectively and the sign-up and data capture process will need to be automated as Blyk grows to improve both efficiency and the effectiveness of targeting.

Growth - eats itself. Ironically, it is because Blyk is so small that we calculate that 25% of its revenue could come from inbound termination of off-net calls and messages. If the company grows and more and more call and texts are on-net, Blyk continues to pick up the costs without the associated termination benefit. Like the voice arbitrage players, that make money by using the internet to reduce voice and fixed calls, it is to some extent a beneficiary of its small size for if it grows it loses a key revenue stream.

Lessons for Operators

1. 2-sided market opportunity is real. Perhaps the most obvious lesson for other operators is that there is value in 2-sided markets! Blyk may struggle to make a return for the reasons mentioned above, but it has already done enough to show that for operators with large existing (youth) customer bases the ad-funded model could be fruitful. We think this also shows the wider potential for 2-sided opportunities in the areas outlined in our report on the subject.

2. Different Business Model = Different Business! It is not mere marketing fluff that Blyk refers to itself as a media company rather than a MVNO. It shows that Blyk’s management considers the advertising community as its primary market and end users as ‘members’ rather than customers. This is important - a different business model is a different business. A two-sided approach for operators will require new customers, new metrics, new operational procedures and processes, new skills and assets (see below). It will be very, very difficult to build this within the existing organisation structure and operators should consider carving out the new unit and making it a customer of the core business.

The core business could even charge the new unit for using the customer and network data and other assets it requires for success. The ‘differentness’ of this future business was brought home to me recently in a meeting with two strategy executives at a leading European mobile operator who said that one of the key barriers to developing a two-sided business model is the current metrics used for business planning. Unless projects are shown to replicate the 40-50% EBITDA margin enjoyed by the current business, they fall at the first hurdle. The two-sided business is likely to be much less capital intensive than the current business so, while it may not generate such high EBITDA margins, EBIT margins could be equally impressive. .

3. Scale for success. We have oft pointed out the need to build scale on at least one side of a platform. I was delighted to see a media agency also voicing this recently when Grant Miller, joint MD of media agency Vizeum, explained why they had chosen AOL’s Platform-A for promoting Oasis’ new album:
“We need a property that has scale, tools and the technology to build a communications platform that delivers on all fronts. By bringing together all its individual properties, Platform-A represents a great opportunity to build a dialogue with the target audience.”
Blyk has done well from a standing start and its 200,000 users are clearly attracting brands.

The real value to advertisers (and merchants, governments, developers, enterprises and other upstream customers) is from seriously large numbers of end-user customers willing to accept advertising and other telco-enabled VAS services. This makes the 2-sided telco opportunity most valuable to larger operators OR the operator community working collaboratively.

4. The power of a 2-sided pricing strategy. Blyk isn’t the first company to give stuff away. Google gives 99% of its products and service away to end users and Microsoft gives away its SDK for Windows to developers. What these companies do is subsidise one side of the platform and charge a premium to the other and thus seek to maximise value across BOTH sides. In Google’s case, its efficiency means that it can undercut other advertising channels’ prices and still make a handsome return. The ability to understand and use such a pricing strategy makes 2-sided players tremendously powerful as they can attack the markets of competitors that charge for services that they give away.

5. Cost control remains king. You’ve got your customer base on one side and you are building scale on the other side, so you’re sorted, right? Absolutely not. The platform will only thrive it not only provides an effective service (identification, authentication, advertising, billing, content delivery, customer care, etc.) AND does it more cheaply than can be found elsewhere. Google is winning because advertising is cheap for brands, Microsoft won on Windows partly because the platform, when bundled in with a PC purchase, was negligible. This means that driving costs out of the platform is critical. The high-cost nature of Blyk’s sales model and customer data acquisition is a worry and other operators looking to enter the market should seek to ruthlessly drive cost out of the system.

6. Customer data and CRM is core. Even with its relatively low-tech data acquisition approach, Blyk shows that targeting customers with the right message/product/service/solution really does work. Operators should seek to invest heavily in this area whether they pursue a 2-sided strategy or not because understanding their customers better can only improve the delivery of their own retail services anyway. A strong CRM capability becomes a must-have if they wish to become a platform player like Google.

Finally, what is Blyk’s plan for the emerging world of Voice & Messaging 2.0? After all, its target demographic is made up of exactly the same young early-adopter kids who most of the new V&M players are targeting; but its product isn’t really geared to that. For example, they’re keeping a tight grip on the data pipe, and it’s 2G only. And there’s no sign of a developer community.

However, Blyk does have capabilities most MVNOs don’t - it has its own complete Nokia Siemens Networks-provided core network, not just an HLR plugged into a partner’s network. So, how long before there’s a Blyk API to play with? Or do they fear cannibalisation too much?

[Ed - these issues will be debated on Day Two of the Telco 2.0 Executive Brainstorm, on 4-5 Nov, London].

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Ring! Ring! Hot News, 13th October 2008

In Today’s Issue: Crunch crunches Chinese corporate creativity; Nextel spinout shaky; Sprint execs “industry’s most overpaid”; WiMAX smartphone leaked; VZW starts charging for bulk SMS delivery; IfByPhone understands your call centre campaign; vendor-pays data is here; RIM’s AppStore for enterprises?; Comcast gets social TV; Vodafone buys more of Vodacom; IBM: still has money; Indian cellsites get fuel cells; MBNL-BT backhaul superdeal; xG shenanigans; yet another security nightmare at DTAG; GSMA without the GSM; mobile filmmaking to fight the Taliban. scary!

This week’s main theme was telcos calling off planned corporate action in the face of the financial crisis; Huawei, like so many other vendors, has been thinking of getting rid of its handsets business, a low-margin job better left to cheap Chinese ODMs…hold on, some of us remember when Huawei was a cheap Chinese ODM. But this week, the sale was put on indefnite hold for fear someone might bid one euro and get it.

Similarly, PCCW’s plan to sell 45% of its core Hong Kong Telecoms unit is on standby for better weather, and the sale of Nextel’s iDEN network is looking shaky. And Sprint executives have been named as the industry’s most overpaid.

The only good news for them is that the first WiMAX smartphone is out and it looks sort of iPhoney, and as everyone knows, large matt black touchscreens make phones indefinably gooder. And perhaps that Verizon has started charging to deliver business-to-customer SMS, so all those Twitter addicts will probably have to churn. This puts VZW in a sort-of two-sided position - they’re charging both the recipients and the senders - but it’s possibly not one we’re very keen on, as it’s almost certain to ruin a lot of new V&M services.

Speaking of which, here’s your new V&M of the week. IfByPhone lets call-centre operators integrate data from their phone system with Google Analytics information from their Web site. Meanwhile, device maker-funded data is here with the latest PocketSurfer, a minimal palmtop which comes with unlimited lifetime data transfer (at GPRS speeds, mark).

Telephony Online’s Telephony 2.0 points us to the possibility of an App Store clone for RIM devices, perhaps with an enterprise focus and payments to developers via carrier billing. Now that’s Telco 2.0, and it’s no surprise our ally Thomas Howe is cited in the story. So is this: Comcast’s new social-network/social recommendation service for its TV programming. It’s intended to compete with Hulu chiefly; perhaps there is hope for the old TV model after all?

There are some people left in the industry with money; Vodafone, for example, which announced a bid to take control of Vodacom. IBM, which announced strong Q3 results despite the general financial anarchy. And Indian telcos, still in raging buildout mode; one just ordered fuel cells to provide back-up power for tens of thousands of cell-sites.

3UK and T-Mobile’s network joint venture, meanwhile, signed a huge backhaul contract with BT to bring its Ethernet wholesale network to their cellsites.

Naturally, you can count on a mysterious Swedish billionaire in Swiss banking in times like this. Johan Bohman is supposedly funding a roll-out of the controversial xG Technology’s xMax system in the US. This comes after their first customer and first OEM both pulled out of the deal; there is wide doubt as to whether the technology actually exists. Which can only be fuelled by the fact Bohman’s company is also a substantial shareholder of xG, so he’s essentially buying the equipment from himself.

There’s a new security crisis at DTAG; it turns out any fool with Internet access and a few details could get read/write privileges on a database of 30 million subscribers. Fascinatingly, T-Mobile’s response to this is to start developing their Identity & Authentication VAS capability; in future, a request to look up a subscriber record will send a randomly generated transaction authorisation number by SMS to that subscriber, which the requester will have to provide in order to open the file.

Brough Turner takes a critical look at the GSMA’s publicity, and specifically its tendency to talk about absolutely anything but GSM. Finally, the GSMA-backed short film project from a couple of years back is resurrected as an anti-Taliban propaganda campaign.

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October 9, 2008

Fixed/Mobile Video Distribution - Survey ends tomorrow

Our survey looking at future business models for internet video distribution closes at midnight tomorrow (Friday).

Last chance to have your say here.
It takes 10-15 minutes to complete. We guarantee it will be stimulating. If complete it, you’ll get a free summary of the analysis in a few weeks time. A big thank you to all those who have taken part to date.
Background to it here. It’s part of a major new study being published in November (described here).

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Telco 2.0 Executive Brainstorm, 4-5 Nov - Participants update

We’re delighted by the response to the event. There will 250-300 people taking part in the mass brainstorm, drilling down on how to turn two-sided business models into reality. Here’s an example of some of people booked in:
* Senior representatives from the corporate strategy departments of: BT, Telenor Group, FT/Orange Group, T-Mobile and Telefonica O2 Europe.
* Senior technical people: SVP/CTO, TeliaSonera; VP Technology Strategy, T-Mobile International; CTO, Telstra; CTO, Carphone Warehouse; CIO, Colt; VP Technical Strategy, 3UK; CTO, HP.

This complements the list of senior speakers/panelists which includes: CTO, Amazon.com; Group CTO, BT; CEO, BT Wholesale; CEO, Habbo Hotel; Group Director Internet Services, Vodafone; Exec Director, JP Morgan; CEO, Phorm; EVP, M:Metrics; VP Payments, France Telecom; VP Europe, Intel; CTO, Microsoft; Chair, Mobile Entertainment Forum; CTO, T-Mobile International…
Readers of this blog can claim a 10% discount on the price of attendance. Just contact us here. There are only 50 places left.

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October 8, 2008

How YouTube wins with Web video

YouTube has been so successful that it’s become one of the three applications that have fundamentally changed the infrastructure of the internet (email and the web are the others). As the first real ‘broadband’ application it has more than filled the pipes that were overbuilt in the boom time and it’s forced carriers to peer with a content provider for the first time (see our recent analysis of its impact here).

So, how has YouTube coped with the traffic? Below is a short case study of YouTube’s business model and its impact on others. It deals with the vital importance of aggregation and a major shift in the industry’s internal economics. [Ed - this is a short extract from our new report on ‘Fixing the broken Internet Video distribution value chain’, to be released in November. Pre-order now for a 10% discount here]

Everyone knows YouTube - home of any video clip you can imagine, the world’s richest source of stupidity, and the guys who made all videos exactly 425 by 344 pixels. But how did they get to be more than 70% of the Web video market, and one of only three applications that changed the Internet infrastructure itself?

Let’s hold that thought for a moment. In the 1980s, e-mail made it necessary to hook up enterprise systems to the Internet, or at least to wide-area data networks, for the first time. In the 1990s, the World Wide Web became the first Internet application to reach the masses, and created the dynamically addressed, asymmetric access networks we know and love (up to a point). YouTube was the next application after that to achieve sufficient success to force changes to how the Internet works.

The basis of YouTube’s success wasn’t infrastructure; loads of other companies have big data centres, and there are plenty of content-heavy services that depend on Amazon S3 and any given CDN to work. The takeover by Google, of course, gave them access to unrivalled infrastructure resources, but YouTube’s explosive growth forced them to look for a partner with such resources. It wasn’t the other way around.

Neither was it any engineering aspect of the network layer - it’s basically a naive streaming model, and until very recently you could observe from the UK that your YouTube content came at least as often from datacentres on the US West Coast as it did from the East, and forget about serving it up from anywhere in Europe. That’s something like the opposite of a CDN, even if they have now begun serving a lot of stuff from uk.youtube.com.

In fact, the success of YouTube has been down to two things - the first is that 425 by 344 pixel Flash object. YouTube realised that the best way to get people to look at their content was to get people to promote it themselves, for their own reasons; therefore, it was vital that it fit easily into the then-new blogging tools and social networks. It was also very important that it be as cross-platform as possible.

The second was YouTube’s concern for easy content ingestion. YouTube has value because it has liquidity; you know that you can find what you’re looking for there, because everyone else goes there first. Creating a simple (and free) upload process was crucial in creating a huge hoard or honeypot hub of holiday Hollywood. Essentially, YouTube is an aggregator with a maximally promiscuous ingestion policy; it slurps up all the spare video, hence drawing immense amounts of traffic, which made it a valuable advertising property and hence a business.

It’s possible to imagine a YouTube using third-party cloud computing for the back end. It’s been done. It’s possible to imagine something like YouTube with a different network stage in the middle; in fact, it’s been done. Pushing the video over the cable-TV half of a cable Internet connection, perhaps into a local cache, wouldn’t change the user experience much at all, nor the business model, because the value is concentrated in the user interface and the aggregation. It would, however, spare the ISP.

This is where we get to the impact on the Internet. A fundamental concept in Internet operations, engineering, and economics is peering; the word is used in various different ways, but it specifically means the process by which two networks (or groups of cooperating networks) agree to exchange traffic to and from certain prefixes on a reciprocal basis, so no cash changes hands. The alternative is transit; the relationship is between supplier and customer, the scope is defined as being the whole Internet (except any peering you may have), and every bit is paid for.

Traditionally, peering was for telcos and ISPs, and the less transit you used, the more status you had. Hence the term “tier-1” network, for a carrier that obtains all its connectivity from peering. The Tier-1s were the gods and everyone else was a customer - the advantages of this position should be clear enough. But YouTube’s historic bandwidth consumption changed all that; for the first time, carrier networks extended peering to a pure content network. The advantages are that you get to replace an uncertain and rising bill for transit, dependent on the vagaries of the wholesale transit market and possibly subject to the power of a monopolist, with a fixed sum of CAPEX required to bring your wires to the IX and link up directly with YouTube.

We analysed BGP routing data from RIPE to look at how much of YouTube’s connectivity it gets from the peering ecosystem. You can’t directly tell the nature of the commercial relationship between two networks from the routing table, but you can infer quite a lot; for example, if you announce your prefix into AS174, Cogent, and flag this as IMPORT ANY so they announce everything behind them to you, you’re obviously a transit buyer. YouTube, AS36561, has some direct peers (AT&T, AS7018, looks to be one), but the bulk of the action is over at Google (AS15169). Google operates a community called AS-GOOGLE which includes its production and corporate networks, Postini Networks (the spam filter in Gmail) and YouTube, and which peers with everyone it can at most global IXen, as you can see here; note that almost everyone is announcing a restricted set of prefixes to Google, as you’d expect of peers.


For example, if you’re a BT, KPN, DTAG, Tiscali or NTT customer, you’re reaching YouTube through Google’s peering presence. If you’re with AT&T, you’re peering with YouTube. Other than that, there are a few networks which YouTube gets transit to via AS3356 (Level(3)) and Global Crossing (AS3549), and a considerable number of small emerging market ISPs which are scooped up by Cogent. (Mongolian State Telecoms, anyone?) Cogent accounts for 19% of the prefixes YouTube can see; Google’s peering community some 40%. L(3) and the rest don’t break double figures; and the Google peers include a lot of big, big networks.

It’s precisely the sheer bulk of video pouring out of YouTube that gave them the bargaining power to achieve this. It goes to show just what you can do with good aggregation.

In the video distribution value chain, it’s easy to assume that either controlling content or the pipes will necessarily give you a powerful position. But this is naive. Good aggregation is as good as good content - in fact, it’s a guarantee of having good content. And controlling the pipes can just mean that distribution becomes your problem.

Don’t imagine, either, that your status as a big carrier will help you maintain margins or get you into a two-sided position; the emergence of YouTube as a peering actor demonstrates clearly that content providers, eyeball networks, and everyone else on the Internet are willing and able to disintermediate you.

[Ed - fixed telcos are already very fearful of the impact of video distribution on their costs, mobile operators are just starting to think about this issue. We’ll be discussing how to address the issues and create a more viable business model at the Telco 2.0 event on 4-5 Nov.]

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October 7, 2008

Guest Post: Device Management - The last leg is in your hands

Operators are familiar with the benefits of device management for their own services. The challenge ahead is to re-model the device management architecture that was originally put in place to address in-house needs so that it becomes a revenue generator in new two-sided business agreements with third parties. This involves a change in mindset, away from the “blackbox” telecom culture and towards more open thinking. Dominique Schmid, CEO of Sicap (a specialist in this field) explains further…

The VAS business model issue

The development of mobile value-added services has until now consisted of marketing an offer, then pushing content and, to a lesser extent, applications across a network. Sub­scribers hopefully discover it and may actually consume it, providing their device is com­patible. This “stab in the dark” model has obvious limitations, both in terms of user interest and availability across the device base. Most mobile users have already had some kind of negative first experience while trying to download content or an application, either on the content delivery side, or the device-compatibility side.

Common problems for the user may be as simple as for instance not being able to locate the download in the device menu. In this kind of case where complexity of the operation is a barrier, users not only experience frustration, but are also charged for multiple and identical downloads that they have never actually used! That the customer doubts the success of a download is not unreasonable. Recent studies have shown that on average 50% of all application downloads fail on a mobile device, and 85% of mobile TV users abandon the service after first use.

Common problems for the operator include a lack of marketing knowledge associated with their device base. Marketing questions such as « Are enough of our customers using devices capable of syncing with a PC for us to launch a bluetooth service? » cannot be answered without a “snapshot” of device capabilities in that particular market and a means of predicting potential ROI. It is clearly not about “what” or “how much” is on offer but on “whether” customers will actually be able to use services.

Changing the business model towards one where marketing teams can make informed choices before launching services will add value to the operator role as regards third party service and content providers connecting to the network. But how can operators break away from the limits of simple revenue sharing with content and service providers and justifi­ably position them­selves as matchmak­ers and audience builders in a broader value chain?

Tangible benefits, manageable challenges

Operators around the world are now familiar with the benefits of device management for their own services. Automatic service configuration has enabled them to reduce the average duration of customer calls related to device setup from 20 minutes to around 5 minutes. Firmware updates allow them to save on the 20€+ cost of recalling a device for repair.

Traditionally, Mobile Device Management has been used by telecom operators to provide post-sale device support. This usually entails sending configuration files for over the air download of “settings” Initially from customer care or self-care web interfaces; they are now often performed automatically based on certain events such as the detection of a new device, or failure to handover to another network technology.


In the fixed world, Device Management involves sending firmware updates to correct bugs in the “triple play boxes”, first using basic proprietary protocols, and then using standardized interfaces allowing other parameters to be provisioned in the box.


In both mobile and fixed environments, access to the device management platform is restricted to the operator customer care or network management personnel.

The Device Management joker

There is a growing need to achieve consistent service provisioning across multiple devices and channels. Being able to open up access to the device is a unique asset operators have and could capi­talise on. Device management therefore emerges as a strategic tool for enabling the next genera­tion of telecom business.

Playing a new match-making role in the Telco 2.0 two-sided business model implies the ability of the operator to profile mobile subscrib­ers and target them with personalized content and self-service capabilities. The device that used to be a simple phone is more than ever the last mile for achieving that contact. No amount of profiled information on your subscriber (from his favourite colour to the district where he spends his lunch hour) is of any use if he is not able to receive and respond correctly to the information you serve him. Additionally, an operator who is able to install, update and generally ensure seamless usage of evolving services for his customer will create brand loyalty. Mobile users will trust and enjoy using services proposed by the operator, and prefer to use them rather than shopping around on the mobile web for alternatives. If an operator can achieve this level of brand satisfaction through effective device management, it is in a good position to attract well known businesses into a two-sided business model arrangement.

There are four key principles of effective device management: know, set-up, update, secure.

Firstly, an operator needs real time knowledge of which device is currently being used by a subscriber, what its capabilities are, and what has already been configured. Knowledge should be real time because subscribers may switch to a device with different capabilities and thus no longer be able to access certain services such as mobile banking.

Most mobile service providers cannot meet the challenge. They rely on declarative information from end-users to determine the type of mobile phone used, but the multiplication of device models with very similar form factors as well as the device branding strategy of operators renders that quite challenging for end-users and somewhat archaic in method. Service providers with some knowledge of mobile web browsing tend to use “user agent profiles” (the ID sent by a device which visits a web site) to determine the model used by visitors to their mobile sites. Most of the time those are not accurate and do not give enough information on the real capabilities of the device.

Setting up

The next step is to allow third parties to setup their own services complementing the operator offer, with anything from email accounts to video streaming. The operator is well positioned providing he controls not only the device but also the SIM, on a converged platform. An over-the-air Dynamic SIM platform can enable an operator to remotely control device menus, providing flexible and personalized services which third parties could benefit from.

In terms of multimedia service client provisioning, device manufacturers increasingly bundle powerful device-side clients which give access to mobile TV, push mail, instant messaging, data synchronization and the like. These clients are sometimes configured for the device manufacturer’s services such as Nokia’s Ovi for example. In the Telco 2.0 business model, operators can configure for their branded services. However, they could also set them up for third party service providers. Operators have the opportunity to charge those third parties to set up eligible devices through advanced device management. They could even go as far as remotely diagnosing and fixing device problems with third party over-the-top services.


Operators could allow third parties to update certain parts of the device, through installation of client applications that extend the capabilities of branded devices. As the hype around the Apple iPhone App Store and the Android market mounts, all actors in the mobile value chain are starting to realise the value of Mobile Software Management. Additionally, the current economic downturn could spell a longer average life span for devices.

Although not many operators will be able to successfully roll-out an application store to compete with Apple’s, device management platforms can provide tools which securely deploy (and may remove) third party applications on the handset base, not for one device model but for a large selection.

As we move into the so called “internet of objects”, operators can go a step further by allowing device manufacturers or corporations to update their devices themselves, using the operator infrastructure. A trucking company may wish to regularly update the GPS/GPRS module embedded in all its trucks. A manufacturer of WLAN digital frames may want to use the facilities of the operator device management platform to regularly deploy new firmware upgrades, without having to build its own infrastructure. For operators it would be a simple extension of the device management systems that they already exploit, albeit way below their potential.


Last but not least, the security issue around sensitive data is one that can be effectively and lucratively addressed by Device management. When devices are lost or stolen, operators need to be able to remotely wipe and lock content to prevent it from being misused. They may also remotely recover data for backup, allowing a quick restore when the user switches on a replacement device. Knowing that 30,000 devices were left behind in taxis this year in New York, and 20,000 left behind in London, and considering that it generally takes 3 months until activity gets back to normal when a device is lost or stolen, there is huge potential for operators if they react appropriately to the situation.

Open standards

The main challenge ahead is to re-model the device management architecture that was originally put in place to address in-house needs, so that it becomes a revenue generator in two-sided business agreements with third parties. Operators need to make sure that the architecture is open enough to be able to integrate their third parties. This means moving away from the “black box” approach that is prevalent in the telecom world, towards a more “web friendly” infrastructure.


Operators also need to choose the right “open minded” technology partners, ones who will be able to support them with mash up platforms, without locking them in a single vendor relationship.
Vendor lock-in is very common in the Device Management space today, for example through the use of proprietary device side software which guarantees long term dependence on a single management platform from a single vendor. This approach contradicts an “open” model based on standard device management clients embedded by manufacturers. According to a recent study from Ovum, next year close to 1 billion handsets will ship with embedded device management clients supporting OMA DM standards.


Early adopters of next generation device management include large Telco groups like Vodafone or Orange who have mutualised their infrastructure between all their affiliates. The latter is also quite advanced in aligning its device management strategy for all types of devices, mobile or home and in adopting an “open” model for its infrastructure. As other operators merge their mobile and fixed infrastructure and teams they should certainly be looking at device management as a way to quickly create a revenue story around convergence.

To achieve this, and to avoid “locking-in” to proprietary device and SIM vendor solutions, they should choose a device management platform vendor which not only guarantees open standards, but one which covers a large number of segments in the Telco 2.0 value chain.

{Ed - Dominique will be presenting on next generation device management at the Telco 2.0 event in London, on the 4th-5th of November.]

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October 6, 2008

Ring! Ring! Hot News, 6th October 2008

In Today’s Issue: Sprint selling Nextel; personalisation is dead; new enterprise voice at Sprint; harassing your customers; Apple iPhone NDA dropped; new Nokia, HP iClones; bloggers drool over Gphone; no new Nokias before Noel; S60 5th Edition; Web apps vs mobile apps - synthesis achieved; Nokia music; T-Mobile phone-router; weird concept phones; BT outsourcing whole of Openreach?; C&W/Thus spaceship gaffe; T-Mobile in 17 megacustomer datafart; MTN buys small country in West Africa; transit costs the same in London and Bucharest; Georgia seeks revenge in the courts

Having finally launched its WiMAX service, Sprint is moving closer to a sale of the Nextel iDEN network it bought for $35bn and has since written down to zero. Because of the vast accounting writeoff, the sale is certain to make Sprint’s books look a sight better, at least for those with short memories. It also opens an interesting opportunity for someone interested in better voice and messaging, what with its specialisation in push-to-talk and emergency service comms; however, it’s more likely that private equity buyers will squeeze it for cash.

Want an example of what you could do with a Nextel? Try this post at Telephony Online, on why personalisation is yesterday’s news and why your users should be able to take their phone service apart and put it back together. Sprint does get this, up to a point; they just started a new enterprise fixed voice unit.

Alternatively, you could always just send threatening messages to randomly selected subscribers and hope they are cowed into paying up early. Telecoms - where the customer is always wrong.

Apple is usually better at this, and this week they decided to get rid of the much-reviled NDA imposed on iPhone developers. We predict the sky will not fall in as a result; but pressure on the iPhone mounts, as Nokia’s much-awaited touchscreen gadget arrives, HP sets about launching a rival,and the blogosphere lights up with excitement over the G1 Android gadgets.

Interestingly, the new Nokia will launch in Asia, the Middle East, Russia and Spain first; is this Nokia missing the Christmas rush or is it a deliberate tactic to dodge what looks like a dire sales season? There’s an overview of changes to the Symbian look-and-feel in S60 5th Edition here.

Robin Jewsbury revisits the Web apps vs. mobile apps controversy, and concludes that far from one of them superseding the other, the distinction itself is becoming increasingly irrelevant, as browser scripting gets access to more low-level functionality and persistence, and native programs increasingly use a browser-like user interface. In other Nokia news, they launched some music service or other.

T-Mobile subscribers are encouraged to share their HSDPA with others using a new gadget, a small WLAN router which your phone plugs into. It’s a cool idea, but the form factor looks like a BT DECT phone; not terribly mobile, in other words, compared to some third party products like this one.

Via Masood Mortazavi’s blog, here is a new concept phone from KDDI; the “Ply” is made up of autonomous modules which each provide a different function - core voice & messaging, full screen browser, keyboard, games controller, printer (really?). It sounds a cool idea, until you realise that you’re bound to lose a crucial element on the bus, or down the back of the sofa…

BT is progressively turning itself into something similar; independent layers of telconess, loosely coupled together. It is reported they may be considering a monster outsourcing deal to maintain the Openreach network. Curiously enough, the Global Services layer of BT is itself a major IT and telecoms outsourcer, and one of its major customers is Alcatel-Lucent; which is also in the frame for any Openreach outsourcing…

Another big enterprise comms operator, C&W is celebrating its merger with Thus in a slightly unfortunate manner.

BT is going to have another attempt to trial Phorm, hopefully without the PR disaster this time. Rather, this week’s privacy horror show was at Deutsche Telekom; T-Mobile has lost addresses and telephone numbers of 17 million Germans including the former Federal President, and it wasn’t even connected with the ongoing spy scandal there.

MTN is a fixed operator in the Ivory Coast, having just bought its biggest fixed-line operator and ISP. That also gives them control of yet another WiMAX network.

According to Telegeography, Gigabit Ethernet transit now costs no more in Bucharest than it does in London. A flat world, after all?

Finally, sometimes you can’t win, even if you have the support of the Russian army. MegaFon has lost an appeal against a fine imposed by a Georgian regulator. The Georgians claim MegaFon took advantage of the war with Russia to move cell sites into the Russian-occupied zone, thus using Georgia’s radio spectrum illegally. It’s a far cry from this post; apparently having bigger tanks doesn’t necessarily give you control of the airwaves, but you wouldn’t bet on the Georgians collecting.

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October 3, 2008

Why 3G ­Embedded Notebook Forecasts are Overhyped

We’re delighted to be working more closely with Dean Bubley, one of the most insightful analysts on wireless technology and author of the superbly acerbic Disruptive Analysis blog. Dean will be helping us to create more tangible roadmaps to the two-sided business model.

After our upbeat post on embedded broadband, we asked Dean to share some of his detailed analysis and give us a ‘reality check’:

The last few weeks have seen much fanfare about notebooks shipping with built-in 3G modules. Vodafone announced it was selling Dell’s new Mini 9 netbook, while T-Mobile is working with LG, Acer and Asus on embedded notebooks of various types. The GSMA has just announced its “Mobile Broadband” certification scheme and sticker for PCs, backed by $1bn of marketing. It hopes this will emulate the past success of the WiFi Alliance and Intel’s Centrino badging in driving the “attach rate” of embedded connectivity. In the background, various silicon and module providers (notably Qualcomm and Ericsson) have been loudly evangelising their products.

Disruptive Analysis has been working on a new report, due for publication soon, on Mobile Broadband Computing, which examines the various options for connecting PCs and new “MIDs” (Mobile Internet Devices). One early finding of the research is that embedded-3G (and, for that matter, embedded-WiMAX) notebooks will not follow the rapid growth trajectory of WiFi. Instead, the overall proportion of PCs attached to mobile networks will grow relatively slowly, and those that do will use a mix of dongles, embedded modules and other options.

Really, there are two separate questions here:

What percentage of notebook buyers really want or value mobile broadband at all? This defines the addressable market as a subset of overall laptop shipments.

For those that want mobile broadband, is an embedded module better than the alternatives?

The first point to make is that a sizeable proportion of notebook users have little need for mobile broadband in any form, or little ability to justify it on cost grounds:

23% of notebooks are sold to emerging markets - a figure that will likely rise to 30%+ over the next few years. At present, there’s no 3G in China or India yet, and it will still be immature in 2010. There is little point putting in expensive, unused, functionality into PCs being sold to cost-sensitive markets. 60% of notebooks are sold into businesses. Corporations are still only slowly adopting mobile broadband, and the majority of employees still do not warrant the extra cost. Senior executives, and frequent travellers who would otherwise rack up large ad-hoc WiFi bills are the key targets - not the average worker who occasionally takes his PC home at the weekend.

A sizeable fraction of notebook buyers purchase large “desktop replacement” PCs, and leave them in a static location at home or in the office. These have little need for mobile broadband at all, especially in regions with poor indoor 3G coverage.

Overall, the realistic overall “addressable market” for mobile broadband remains well below 50% of all notebook purchasers. Within this segment, it is then worth considering the strengths of embedded options, against alternatives like dongles, or 3G handsets used as “tethers”. Disruptive Analysis believes that the comparison of the uptake of embedded 3G, with that of WiFi from 2003, does not bear close scrutiny, despite the industry rhetoric that the two are analogous:

When launched, Centrino included considerably more than just WiFi - it also significantly improved battery life and heat dissipation, enabling thinner and lighter laptops. There is no equivalent “side benefit” from 3G modules. The price premium of integrated WiFi capability essentially fell to near zero in 2003. Conversely, integrated 3G in notebooks still commands premiums of $100+, and even though new modules are getting cheaper, Disruptive Analysis believes it will take several more years to fall to $20 or below, particularly for the most up-to-date chips.

WiFi adoption was catalysed by a variety of access models - especially private WiFi in homes and offices and one-off public hotspot access. While 3G offers greater general coverage, it not useful for home Internet-sharing, or use as a LAN extension inside corporate offices. The main competing form-factor for embedded WiFi was PCMCIA cards. These were expensive, fragile and required complex driver installation. Today, USB dongles are cheaper, easier to use/install/sell and relatively robust. Phones acting as 3G “tethers” are also becoming more practical.

Put simply - embedded 3G in 2008 does not add as much to external 3G, as embedded WiFi added to external WiFi in 2003. It is also critical to recognise that only around 10% of WiFi notebook owners generate services revenues through hotspot use.


The industry’s motivations for wanting 3G notebooks are understandable - operators and the GSMA want to get further momentum for HSPA ahead of the imminent launch of WiMAX-enabled PCs. They feel (probably correctly) that more users will be tempted to sign up for services if the capability is in the PC when it leaves the shop. They’re also very keen on charging €35 a month for a full notebook, rather than just €15 for a 3G dongle on the same data plan - especially if their auditors allow them to book it all as “data services” revenue, rather than equipment resale, or if the customer continues to pay at the same rate after the end of the contract.

The PC OEMs are looking hungrily at the operators as new distribution channels, with billions in the pot for subsidies - and the possibility of moving PC users to a 2-year upgrade cycle. And the silicon vendors want to sell high-end chips - and stimulate demand for their network-infrastructure products as well.

For end users, the benefits of embedded modules vs. dongles or tethered 3G phones are less clear-cut. Potentially, radio performance and battery life can be better. Maybe there will be some new pre-installed PC-based operator applications that are seen as valuable, perhaps even based around forthcoming Telco 2.0 business models, but these are still in their infancy. Most of the other advantages are generic to all forms of mobile broadband - even the option of subsidised or “free” PCs is possible by bundling the notebook with a dongle.

And these benefits are set against downsides. Some operators’ data plans for embedded notebooks are more expensive and use slower modems than their own dongle offerings. Built-in 3G notebooks risk users being tied to specific operators on long contracts, perhaps with onerous “fair usage” policies, difficult-to-remove operator-custom software, or even application blocking. Where they are sold via operator channels, there are huge outstanding questions about the quality of technical support. Roaming is expensive, and switching SIMs to those of a different provider while travelling may cause glitches.

Nevertheless, there will certainly be a good number of consumers tempted by embedded notebooks and netbooks, especially as the price delta versus “unconnected” ones falls to perhaps $30 or less. One possible factor which could drive greater uptake is the availability of innovative business models and payment methods - something already seen in PCs sold with fixed broadband via Microsoft’s FlexGo proposition. On the other hand, any shifts in perceived reliability of HSPA as networks get more congested - or embedded notebooks start to be used in homes with poor coverage - could put a brake on the market.

If all goes well, consumer notebooks sold in developed markets could enjoy WWAN attach rates of 15% in 2009 - especially lower-end netbooks. Given innovation and acceptable network performance, this could potentially grow to 50% by 2013. However - not all of these will necessarily be “activated”, or if they are, use could be occasional rather than a typical monthly subscription.

For enterprise customers, the total cost of ownership (TCO) is still too prohibitive to offer mobile broadband as a default option for all staff. And using external modems enables them to maintain a single low-cost notebook “build”, but give broadband selectively to those that justify the extra spend. They can also easily switch to other operators if they choose, or even use WiMAX if it becomes available. As an estimate, for business laptops overall, we will maybe get a 7% attach-rate of embedded 3G in 2009, perhaps increasing to 25% in 2011, and more beyond that point.

Overall, the industry needs to see beyond the PR blizzard about embedded 3G in notebooks. Yes, it will be an important trend. But it won’t happen ubiquitously, and it won’t happen overnight. And there is also an open question about what proportion of embedded 3G will ever actually get activated and used - or generate meaningful mobile broadband services revenue.

[Ed - you can meet Dean at the Telco 2.0 event on 4-5 Nov, London.]

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October 2, 2008

Credit Crunch - Silver Lining for Telcos? (Part 2)

Two weeks ago we presented a very gloomy picture of the developing stress in the financial markets, and its likely implications (positive and otherwise) for telcos. Two weeks is an awfully long time in today’s markets, and while it hardly gives us pleasure to acknowledge that much of what we previously envisaged is now playing out before our eyes, it probably makes sense to revisit the topic.

In short, things have gotten much, much worse since our original post only two weeks ago. Unless you’ve been hiding in a cave in Afghanistan, you have probably noticed the fitful attempts in the US to pass an economic stabilization package, to the tune of $700bn, with a lot of enhanced corporate governance provisions and regulation attached. The independent investment banks once known as the “Bulge Bracket” no longer exist, and the stagnation of the credit markets is now resulting in a wave of nationalisations, quasi-nationalisations, and government-orchestrated private sector bailouts in Europe, as well as in the US. Business confidence in Europe is at its lowest ebb since the shock and awe of 9/11, and investor concern over the health of commercial banks, as reflected in a flight of capital into Treasuries, is at its greatest point since the Great Depression.

As the Western governments trudge through a multi-trillion dollar rescue exercise in the banking sector, from which they themselves will emerge as highly leveraged stakeholders in the financial markets, the alternative sources of liquidity on which companies have often relied in the past, namely hedge funds and private equity, are both under increasing pressure.

Beyond the direct effects of the banking crisis on private
, the voices predicting an implosion of PE financing structures from the most aggressive vintages are growing in number and volume. The hedge fund industry, which is down by 10% overall year-to-date, is now grappling with a ban on short-selling of financial stocks, with talk in some circles of wider restrictions on short-selling if the market deteriorates further. This is hardly welcome news, as short-bias funds are one of the few bright points in the industry, up 9.4% year-to-date at the end of August. These additional constraints merely fan the flames of investor discontent, which manifests itself in rising redemptions.

The asset sales under duress which look likely to end up in the alternative investment space will place additional pressure on the currently healthier participants in the market, leading to intensified asset price deflation. The popular mood in the current climate means that few on Main Street will cry for Wall Street; however, as the current financial crisis shows, failures in complex systems often have far-reaching and unforeseen consequences, and ancillary industries (legal and transaction support, professional services, consulting, corporate advisory, IT, commercial property, corporate entertainment, catering, travel) are going to be directly affected, as are pension funds exposed to alternative asset classes.

So, in short, the picture is not pretty, and unravelling somewhat faster than we had expected. However, as we argued two weeks back, this grim background actually highlights the relative strength of telecom, a view seemingly shared by the stock market. Over the past week of turmoil, the telecom sector in Europe, as captured in the DowJones STOXX 600 definition, is at the bottom of the first quartile of industry groups in terms of performance - albeit not in positive territory.


At a time when investor concerns are tightly focused on ‘leverage’, telcos also look relatively conservative, certainly in comparison to the previous market downturn. Analyst consensus forecasts show leverage (defined as the ratio of net debt-to-EBITDA) at well below 2.0x for the vast majority of major telcos over the next two years, and in some cases (e.g., China Mobile), companies are sitting on significant net cash positions. Forecast leverage profiles are set to decline, or remain flat, even without the aggressive capex cuts and dividend haircuts which the companies could invoke should things turn really nasty. The contrast with private equity-backed cable companies, some of which carry 4.0x or more in leverage, could not be more striking.


Even taking for granted that current analyst estimates may be too optimistic, and that the cost of refinancing the not-inconsiderable debt maturities of the next three years (€76.8bn combined for AT&T, DT, FT, TI, Vodafone, Telefonica, Verizon, KPN and BT) might pose headwinds in de-leveraging, it is exceedingly difficult to picture any of these companies actually going bust - which makes them highly attractive in an era of rampant risk-aversion.


So, overall, things could certainly be worse for telcos. As we stated in our previous post, the sector possesses the financial flexibility to step up to emerging investment opportunities as we work our way through this crisis, be they distressed assets, stranded venture investments, or organic development programs. We think there are several important points to hold in mind to ensure that telcos emerge stronger once the storm is over:

1. Don’t be in a hurry. We are nowhere near the bottom of the current downturn - the systemic issues are profound and will take time to flow through the broader economy. Valuations will compress much further as levels of distress increase. However, potential opportunities should be firmly on telco radar screens and drawing boards.

2. Expect the unthinkable. We may be on the verge of widespread business failures, high unemployment, and a significant level of mortgage defaults. If telcos haven’t drafted a doomsday scenario, then it’s time to rally the troops and do so, and to be prepared to be frank with the capital markets about what might lie ahead. Certainly the financial sector itself serves as a salutary example of how nervous markets are inclined to punish companies which are less than forthcoming on the realities of their situations, or which don’t understand them.

3. Don’t unnecessarily give customers an excuse to leave. Economic forces will hit the customer base, it’s inevitable. However, when customers are already feeling vulnerable, there is no point in further frustrating them to the point of capitulation. Redouble efforts on improving customer care - voluntary churn due to dissatisfaction should be anathema like never before.

4. Pitch the proposition carefully. Abandon silly, frivolous and aspirational marketing campaigns, in favour of a more down-to-earth message: telco services offer good value for money (little white lies are permissible in an economic crisis), cheap entertainment, empowerment through access to information, and are as essential as electricity and water.

5. Most of all…Take the chance to change. Crisis has a unique power to focus minds. There is no downside in being open to some new approaches when in uncharted territory. In our previous post, we suggested that telcos could take the opportunity to diversify their DNA, create better structures (here is an interesting example) for interfacing with small, innovative companies, possibly even including equity participation - and we stand by that view. There is also now an opportunity to take a long, hard look at current areas of activity, and to reassess whether they actually make sense in this changed climate.

Where to start?…We believe of course that the Telco 2.0 Manifesto provides the direction. The tangible next step towards this is to pilot one or two two-sided business model concepts (see our Use Case project here). Here’s a tip for readers of this blog: our analysis suggests that supporting enterprise Customer Care processes offers the best new opportunity…

We’ll be demonstrating why at the Telco 2.0 event on 4-5 November (details here).

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October 1, 2008

Use Cases for Telco 2.0 - making it tangible

Our readers and clients are asking for more details on how the two-sided business model concept can work in practice. As a result we’re developing a set of ‘use cases’ that illustrate how telcos might get to the $375bn opportunity that we modelled and sized in great detail in our recent report (currently selling like hot cakes).

Below are details is a draft list of the Use Cases we’ll be developing. We’ll be presenting some of these at the Telco 2.0 event on 4-5 Nov in London. (PS: early bird discounts end this Friday).

First, though, here’s a new presentation on the two-sided telecoms business model that we’ve been presenting around the world to senior execs recently.

The Use Case project is described below.

Telco 2.0 Use Case Project - Draft Approach, Oct 2008

It has been well-documented, by us and others, that telcos continue to frequently find themselves on the wrong side of rapid changes in consumer behaviour, technology evolution and regulatory reform. This cocktail of adversity demands a fundamental re-think of the role and position of the telco in the value chain, moving away from the traditional one-dimensional service model to something more suitable to the new landscape.

In the recent Telco 2.0 report, “The 2-Sided Telecoms Market Opportunity: Sizing the Platform Play,” we defined the new opportunity for telcos and put forward some very detailed ideas and illustrations of how this might work in practice. We determined that the new opportunity for telcos, which we estimated at $125bn in incremental revenue terms (which builds on $250bn of potential incremental revenues from new wholesale platforms, see this report), lay in repositioning the business to serve as an enabling platform for transactions between upstream and downstream customers. We further identified four key definitional aspects to a platform created for a “two-sided” business model:

1.It is a catalyst enabling two or more parties to contract directly using the platform;
2.It does not directly participate in the contract;
3.Its value is in helping parties to contract more easily, more efficiently, and more effectively, by reducing transaction costs and friction;
4.Its value comes from scale, on at least one side of the market, which then drives usage on the other side.

Furthermore, we identified seven key areas of service capability where telcos can claim a range of strategic assets vital to constructing a value-added services platform strategy to capture the two-sided market opportunity:

1.Identity, authentication and security;
2.Advertising, marketing services, and business intelligence;
3.E-Commerce sales;
4.Order fulfilment, offline;
5.Order fulfilment, online;
6.Billing and payments;
7.Care and support

In each of these areas, telcos possess assets, in many cases traditionally underused, which are uniquely placed to develop a successful platform business. These include trusted authentication mechanisms, customer and billing relationships (both consumer and enterprise), customer data and meta-data, voice and messaging APIs, and experience in quality of service delivery.

Use Case Project plan

The use-case project (which will culminate in a major report in November) will isolate real-world examples from each area of service capability wherein the telco can fill (or, indeed is already filling) a void in a transaction space to reduce friction, in the process forming the final piece of a platform business which can be replicated in other industry verticals. On our current report roadmap, sample use cases would include the following:

1.) Identity, authentication and security - Despite evidence of growing consumer reliance upon online transaction spaces, telco upstream customers in the commerce arena continue to encounter challenges in identifying/authenticating customers and preventing fraud.

Online gambling site Betfair, for example, is constrained by a legal requirement to confirm the nationality and age of players, with a high cost of compliance ($22 per registered user) and unacceptably lengthy process. Telcos possess customer meta-data which may form the basis of an authentication mechanism to reduce these costs and remove friction from transactions.

Mobile operators already perform some interventions to prevent minors from accessing adult content on their handset, and so probably already have many of the relevant assets and process in place. Such a platform could be repurposed for other industry verticals, and also potentially be developed into a subscription service for end users.

2.) Advertising, marketing services, and business intelligence - Advertisers continue to struggle with shifts in media consumption and consumer behaviour which demand a new approach to targeting and performance metrics. Marketers want to target users with the right offers and measure the success of their marketing campaigns as this allows them to demonstrate marketing ROI.

Whether it be online advertising or via traditional video/IPTV platforms, telcos have valuable customer relationships and meta-data which can be harnessed to more effectively target and measure, opening up new markets in the process.

3.) E-Commerce sales - Innovative content and applications developers often find it difficult, if not impossible, to penetrate the walls of telco HQs, and telcos are not typically structured to deal smoothly with small suppliers or partners.

A number of operators have wished to enrich the suite of services and applications available across its properties, without committing to their own expensive development programme. Instead, one or two leading players are creating a developer environment, exposing APIs to allow third parties to showcase services and applications on its network. If these are successful, they can then be commercialized across the operators’ entire footprint on commercial terms agreed with the developer.

4.) Order fulfilment, offline/customer care - Real-world order fulfilment, customer care, and credit management are fraught with complexity and unnecessary costs, which telcos have the tools to mitigate. A major catalogue company has been looking to streamline its customer interaction routine to make deliveries and credit collection transactions more efficient. It has employed a solution sourced from a specialist software company, and realized efficiency gains, as well as lower debt insurance costs as an added benefit.

Telcos have extensive corporate customer bases on managed service offerings often tied to internal network and data management. By more closely aligning the offering to specific business processes, in partnership with innovative players in the space, telcos have the ingredients to create and market a platform which could be deployed widely across multiple industry verticals, in some cases generating incremental sales from existing customers.

5a.) Order fulfilment, online/content delivery assurance - Investment banks face significant challenges in managing data effectively on their trading systems in an era of extremely high volume electronic trading, wherein even tiny amounts of latency/congestion can invalidate large volumes of transactions.

The systems integration arm of a large telco was awarded the managed service contract for an international bank, but has needed to partner with small, early stage company to find a solution. As the solution is proven, the telco will end up with a managed services platform which can be marketed across the industry, with a trusted reference client for validation.

5b.) Order fulfilment, online/content delivery assurance - Terrestrial broadcasters in Japan are faced with competitive pressures from P2P and over-the-top video applications, while currently being barred by regulation from offering linear programming over the web. As a result, they have been relatively slower than some of their overseas peers to develop an internet presence.

In cooperation with consumer electronics players, they have now taken their first step forward, in anticipation of a change in regulation, by forming a consortium to bring time-shifted, on-demand content to networked televisions using Japan’s enviable broadband access infrastructure for distribution.

For local access providers, the associated network load may be an increasing source of pain, but an affiliate of a major local telco, which manages the CDN behind the consortium, is a leader in P2P research, and is potentially capable of deploying a network cache element on the platform.

In so positioning itself, the telco affiliate might be in a position to generate revenue both from upstream (broadcasters) and downstream (local access companies) customers, as well as facilitating a localized advertising platform in which all could take a revenue share.

6.) Billing and payments - Social networking sites and virtual worlds face numerous challenges in billing and payments, particularly when their target demographic group may not yet be part of the conventional banking system.

On fast growing social network, focused on a particular demographic, derives significant revenues through the sale of virtual goods, with payment typically tendered via SMS. However, telcos have customer and billing relationships beyond the mobile arena which may also be harnessed to create alternative payment mechanisms, rather than leaking such opportunities to the likes of Wallie or Paysafecard.

[Ed - Do contact us with ideas and input. here, or use the ‘comments’ function below.]

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