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December 22, 2008

Telco 2.0 is seeking your views…and hiring

1. Drive the Telco 2.0 Research Agenda - Please help direct our 2009 research agenda via a short survey here (5 mins max). We will donate to charity for every respondent (details here).

2. Telco 2.0 is hiring world-class staff - Due to the tremendous interest in the Telco 2.0 Initiative and our approach to business model innovation we are hiring staff at all levels, senior and junior: a.) Researchers/analysts, b.) Strategy Consultants, c.) Business Development Execs.

Flexible remuneration packages: employment (UK-based) or contracting (anywhere). Fluent English required.

To apply, please email us i.) with a critique of the ‘Telco 2.0’ manifesto, ii.) detailing how your skills and experience could add value to our business, iii.) with descriptions/examples of world-class business model analysis you’ve done in the Telecoms-Media-Tech sector. (Please do not send CV’s without this information.)

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Ring! Ring! Hot News, 22nd December 2008

In Today’s Issue: Virgin Media loves DPI, goes shaky on Phorm; do you really want to compete with iTunes?; Phorm declares victory, execs leap overboard; bizarre disinfo campaign over Google’s homebrew CDN; “Stellar Wind”, it’s like OpenSocial for spooks; Yahoo! makes nice with privacy advocates; Vodafone crunches CDRs, asks for more; Telstra left standing by SingTel, turns to Chinese spy stories; gloom descends on vendors, even iPhone vendors; traditional Christmas Cable Cut Crisis; TV studio in a box promises more, heavier UGC. Joy!; Holland, France, and Brazil sort out their fibre issues; UK - no nearer to real broadband in 2008

Much churning and stirring in the world of digital rights this week. So Virgin Media is buying a gaggle of DPI gear from Israel. Teh horrors! On the other hand, they are blowing distinctly hot and cold on Phorm and behavioural advertising in general. And they are talking about restricting BitTorrent traffic in particular as opposed to having a bandwidth cap in general, on the grounds of “fairness”.

Well, not really, as this quote makes clear:
For example, Virgin Media is known to be in advanced talks to launch a legal, licensed peer-to-peer music service. DPI would be used to monitor the popularity of music files, enabling it to fairly divide subscription revenues among record labels.
It seems an incredibly baroque way of launching what is essentially yet another MP3 shop; and what with iTunes, Amazon and several record label-owned players in the field, that doesn’t sound like the first market you’d leap into. Meanwhile, there was more “corporate action”, as they say, at Phorm, where the company announced BT still wanted to go ahead with their superduper behavioural-advertising scheme, and half the board promptly resigned, including UK chief Hugo Drayton [a speaker at the last Telco 2.0 event - interview here]. You could call it a mixed message.

Meanwhile, there’s been a bizarre furore after the Wall Street Journal claimed Google had secretly abandoned network neutrality and was making side-deals with the telcos that violated it. However, strangely enough, the activity the report described was clearly a content-delivery network, closely akin to Akamai; which isn’t a neutrality issue, as for every bit that is served out of the CDN, one less is carried over the backbone, or whichever link the CDN is intended to relieve. David Isenberg was unsurprisingly one of the first to dish the story; but the question is, as Telecom TV points out, whose interests are served by what looks a lot like an anti-neutrality propaganda campaign?

Gradually, more details are seeping out from the National Security Agency’s warrantless surveillance project. It’s now confirmed that, as most telecoms people guessed, it was a huge CDR-crunching exercise which ran from September, 2001 to March, 2004 and which went under the codename of Stellar Wind. It was this project that led to mass resignations from the Justice Department and the infamous late-night hospital confrontation between Alberto Gonzales and Thomas Comey. There’s an interview with the whistleblower here.

Yahoo!, meanwhile, has promised to eliminate all personally-identifying information from its logs after 90 days. Which is handy, given that some of their new projects like OneConnect, FireEagle, and YQL add up to a sort of pocket NSA. Vodafone in the Netherlands is very pleased with its data-mining efforts.

In Australia, meanwhile, someone’s decided to shake out the old Huawei conspiracy theories one more time. Recap; the new Australian government wants to build a big fibre access network, the National Broadband Network or NBN. It issued an RFP to that effect, which attracted a couple of bids. One, from the incumbent Telstra, essentially ignored all the requirements set out by the government - no open access, and no offering for small businesses. The other, from SingTel’s Australian division Optus, offered something along the lines of Singapore’s new national fibre network, which provides for openness at layers zero to three. Unsurprisingly, Optus took the cake.

The serious question now is whether SingTel has the capacity to do the Singapore deployment plus the equivalent of three or four more, at the same time. The unserious question is whether the Optus bid is a sinister Chinese opium conspiracy, probably orchestrated by Fu Manchu in person, to sell Australia’s routers into white slavery. Whoever is pushing this story surely knows that if Australian telecoms is anything like the rest of the world, there will be a fair amount of Huawei gear in there already. Including all those E220 3G dongles…

If the contract goes ahead, at least Huawei will have some orders. Not many other vendors can say that; not even Balda AG, makers of the iPhone’s touchscreen.

We’re coming up to the end of the year, and as Renesys points out, a major submarine cable break or other global telecoms disruption is almost traditional. This time, SEAMEWEs 3 and 4 and FLAG were cut somewhere between Tunisia and Sicily, causing serious disruption in the Middle East, South Asia, and Africa. For some reason, Egypt seems to be the place to be if you don’t want Internet connectivity; just like last time, it was the champion in terms of numbers of lost prefixes and also in terms of the percentage lost. France Telecom’s ship Raymond Couve was reported to be on the scene with 20 kilometres of spare fibre.

Don’t expect any drop in the flood of video over your network any time soon; check out the Tricaster, a miniaturised live-TV studio in a box.

Meanwhile, fibre is coming, as the KPN-Reggefiber joint venture is signed off. Telia is invited to unbundle its fibre access network. French fibre operators have settled details of how they will share infrastructure and where they will compete. And five Brazilian cities get 100Mbits/s GPON from Brasil Telecom.

And the UK is officially no further forward than it was this time last year. Merry Christmas!

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December 18, 2008

Guest Post: “Medianet” - Optimising the Network for Video and Rich Media

At the November Telco 2.0 Event Simon Aspinall, Managing Director of Cisco’s Internet Business Solutions Group, described how video creates a major threat to the cost assumptions and business models of fixed and mobile operators. Building on that and Telco 2.0’s ongoing analysis of Online Video Distribution, Cisco describe below a new strategy called ‘medianet’ - building a network that is optimized for video and rich media based on a new generation of media-aware technologies…

Service providers know that the basic delivery of TV services is no longer enough. Today’s consumers want a richer, higher-quality media experience, and they want access to more kinds of content than ever before. They want to enjoy the same kind interactivity, personalization, and control that they have come to expect from the Internet with their video entertainment. And they want the ability to access any type of content they choose, whenever and wherever they choose, over a variety of devices and screens.
Video traffic growth is undeniable. Based on the Cisco Visual Networking Index Study:
  • Global IP traffic will reach 44 exabytes per month by 2012 — more than six times the total traffic in 2007
  • Nearly 90 percent of all consumer IP traffic in 2012 will be video


With robust broadband connectivity, the media consumption paradigms have changed. However, for service providers, the media distribution paradigm has a major impact on their networks. As service providers strive to meet evolving customer demands, they are challenged to adapt to several overriding trends.

To take the advantage of the opportunities provided by the market trends and unleash a new generation of customer experiences, service providers need to build a medianet, which is a network that is optimized for video and rich media with new generation of media-aware technologies. This medianet built with media aware technologies will deliver a more visual, more social, and more personal experience for customers - in a more efficient, flexible, and scalable way for the service provider.

Building Blocks of a Medianet

A medianet encompasses four overarching technology pillars:

  1. Transforming video experiences tools to enhance and differentiate the user experience
  2. A media-aware IP network to deliver outstanding quality of experience (QoE)
  3. Virtualization capabilities to manage extraordinary complexity and scale
  4. Monetization through new business models and advanced advertising tools

Transforming Video Experiences

To increase market share and improve customer loyalty, service providers must be able to offer a media experience that is a clear step beyond what competitors can provide. The key to differentiating services is the ability to deliver rich social, interactive, and personalized media experiences. A medianet that is a network built with media-aware technologies will enable service providers to shatter the conventional video model and deliver a new generation of media services. With the medianet, service providers can deliver the future of personal, social, and interactive media experiences for consumers and business customers right now.

Media-Aware IP NGN

It’s not enough for service providers to deliver new types of content. To meet today’s customer demands, they must meet two fundamental requirements:

  • • Ensuring exceptional quality of experience (QoE)
  • • Scaling the experience efficiently and cost-effectively

Achieving both of these essential requirements demands a scalable, intelligent network that is optimized for rich media services. In a media centric environment, service providers must deploy technologies that will offer broad range of Quality of Experience (QoE) enhancement by correcting bit errors and dropped packets before subscribers even notice a problem, eliminating visual artifacts and delivering stunning picture quality. IPTV Service Provider should further look into deploying the medianet technologies in the set top box (STB) -that can help speed channel change times and alert service providers of quality issues over last-mile networks. It is important that the medianet technologies provide intelligent per-session admission control to prevent congestion and help ensure consistently high quality for all users. By incorporating the consumer home into the medianet, service providers can reduce CapEx and OpEx, increase revenues, and improve customer satisfaction.

In addition, to achieve greater scalability while minimizing costs and complexity, service providers need a medianet built on an intelligent IP network with high-performance multicast capabilities and guaranteed quality of service (QoS).


As service providers look to add additional media capabilities and thousands of hours of video to content libraries, they need new tools to manage growing complexity and efficiently scale video offerings to more customers. Consumer media consumption trends are driving service providers to deliver any type of real-time, time-shifted, or on-demand video content to any screen, across a national or transcontinental network. To deliver such services cost effectively service providers would need to ingest content once for all markets, store that content in a centralized library, and accelerate distribution to any customer, anywhere. This is virtualization. The medianet built with virtualization technologies can accelerate service velocity, deploy services to many markets at once, exponentially expand content, reduce operational costs and achieve nonstop service availability.

Another advantage of virtualization technologies is that it can enable service providers to offer IP contribution network services to content producers, providing much more flexible and efficient mechanisms of transporting video programming from the source (such as a sports stadium) to the studio. By applying IP efficiencies to processes that traditionally have relied on legacy technologies, both service providers and content producers can realize significant benefits.

In addition, a medianet built with IP and video technologies can bring legacy processes that require any content producers to still rely on analog tapes for video editing and post-production into a modern digital environment, providing a more dynamic and collaborative media workflow that reduces costs and speeds content delivery.


Service providers building a medianet can unlock new revenue opportunities beyond traditional video subscription services, incorporating online media marketplaces and new business models such as those built on advanced advertising.

The ability to make content available whenever and wherever customers want it provides ample opportunity to monetize new offerings and services tiers. The ability to expand the traditional “walled garden” of video services to encompass web-based content also allows service providers to support lucrative media marketplaces and link customers directly with content providers, offering opportunities for a variety of transaction-based and revenue-sharing business models.
Service providers can also monetize the exceptional QoE of the medianet itself.

In addition, service providers have an opportunity to turn an investment in ad placement infrastructure into a lucrative new business, offering ad placement services to content providers. So while a service provider stands to derive incremental direct revenue from the deployment of new, non-linear advertising inventory, there is considerable revenue generation potential from partnering with broadcasters and cable programmers to place targeted ads on their behalf.

With a single medianet that delivers services to both consumer and business customers, service providers can even extend advanced advertising capabilities beyond TV entertainment. With a medianet built with virtualization technologies that delivers content to any screen and advanced advertising technologies ,, service providers can link TV advertising, online advertising, mobile advertising, and digital signage into an integrated network. Ultimately, operators can unlock a new generation of high-impact, lucrative advertising services.

In summary, the medianets built with media-aware technologies will provide a differentiated user experience with more content, control, and personalization. It will increase efficiency and reduce costs by collapsing operational silos and improve scalability by virtualizing content, infrastructure, and services, allowing operators to efficiently deliver more content to more subscribers. It will further help service providers increase service velocity by allowing the launch of new services simultaneously in multiple markets or to national or transnational audiences. Lastly, it will dramatically expand advertising opportunities and revenue models and provide long-term flexibility to adapt to evolving business models and changing customer demands

To learn more about the medianet, please visit http://www.cisco.com/go/sp/medianet.

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December 17, 2008

Akamai: Blueprint for Building a Platform Business

Akamai operates a classic two-sided business model and has moved well beyond its roots as a pure content delivery network (CDN).

The recent product development and acquisitions activity provide a great lesson to all how to leverage a platform and build barriers to entry. Even before the credit crunch, the plethora of new entrants into the CDN space would find competing with Akamai difficult.

Below we explain the roots of Akamai’s success and how it stays one or more steps ahead of the competition.

Akamai’s 2-sided business model

Akamai has a compelling proposition for downstream players: allow servers to be hosted within your network and we not only reduce your transit costs and pay a co-location fee, but improve your end-users online experience. This is classic subsidisation of one side.

For sure, downstream players can refuse to co-locate Akamai servers deep inside their network, but there is no incentive to do this as Akamai can reach their customers anyway - albeit slower, but for free.

Akamai also has a compelling proposition for upstream players: for a fee, Akamai will deliver your content or applications faster, reduce your requirement for investment in servers and bandwidth, and most importantly take away the worry and complexity of building a highly available service.

Upstream players have a lot of choice - the CDN market is highly competitive and yet Akamai is the market leader, has low churn, and manages to charge a premium price.

Excellence in Distributed Computing Theory & Practice

The best way to think of the Akamai platform is as a super-computer with over 20,000 nodes in over 70 countries processing over 300bn transactions daily. The first key skill of Akamai is managing this super-computer without a huge army of engineers scattered across the globe - this is not a trivial task and something often overlooked by new entrants.

The next key skill of Akamai is the ability to rewrite some of the inefficient internet protocols and deploy within their own super-computer. BGP routing doesn’t do the job? No problem, Akamai will invent our own and call it “SureRoute”. TCP is slow and messy for certain applications? No problems, Akamai will invent its own “IP Acceleration” technology. Database queries taking too long? Akamai will invent its own pre-fetching technology.

Performance management is another key skill and allows Akamai to build up a body of data to prove that Akamai performs the best and deserves a premium price. Akamai quarterly “State of The Internet” is fascinating reading, but could also be seen as a list of reasons to use Akamai services.

These Computing & Communications skills are not easy to acquire, but Akamai seem to have them in abundance.

Targeting the high spenders with vertical offerings

Akamai has around 2,800 customers with average spend of US$300k/pa and they have more than 100 customers spending over US$1m/pa. They deliberately target the top-end of the market. The bursting of the tech bubble in 2001/2 taught them a very painful lesson - customers can disappear in a downturn.

The Akamai sales force organise themselves around specific verticals. This is an important message to all platform players - sales teams need to understand industry challenges and must be able to package & bundle standard platform capabilities to solve specific Industry issues.

Obviously they are very strong in Media & Entertainment, where content delivery is a basic online requirement. In the first 9 months of 2008, Media & Entertainment represented 48% of revenues or US$275m - a year-on-year growth of 30%. This is highly competitive sector, future growth will come from the adoption of High-Def and thereby higher volumes of data.

High Tech companies are also a strong sector where application delivery is important. In the first 9 months of 2008, High Tech represented 22% of revenues or US$125m - a year-on-year growth of 16%. Akamai expects growth here coming the adoption of SaaS or cloud services.

Application Acceleration is vital in the B2C and B2B commerce where customers are only one-click away from not making the purchase - Akamai sees the important commerce verticals as retail, travel, pharma, finance & manufacturing. n the first 9 months of 2008, Commerce represents 26% of revenues or US$153m - a year-on-year growth of 43%. This is very little competition in this sector - future growth will come from the macro-economic shift to ecommerce and B2B legacy apps moving into the cloud.

Intriguingly, Akamai also targets the Public Sector which although small in overall size (first 9 months 2008, US$25m) presents an excellent opportunity for funded R&D. One can only guess which US agencies, Akamai deals with.

Continually launching new services on the platform

Akamai continually updates the platform’s capabilities either via internal development or acquisition.

A good example of this is the acquisition of Red Swoosh in 2007 for US$15m, which gave Akamai p2p distribution capabilities. Akamai doesn’t sell a P2P-based content distribution services, viewing p2p as an ingredient delivering more nodes on the super-computer.

The Nine Systems acquisition for US$190m delivers a capability of media management. Renamed as “StreamOS” and integrated with the Akamai platform, this gives Akamai the capability of selling more value-added-services - capturing more revenue per customer and reducing the probability of churn. A great example of StreamOS in use is the Association of Surf Professionals, which also serves as a great success story for other customers.

The recent acquisition of Acerno for US$95m shows that Akamai is moving into Advertising Services. Acerno has a very interesting twist on advertising with a co-op model, sharing purchase data. It seems blindingly obvious that actual purchase data is far more valuable than the context of someone browsing the web. It also seems equally blindingly obvious that Akamai’s Media & Entertainment will gladly look at any capability which offers the opportunity of increasing revenue with online video.

Akamai doesn’t do everything by acquisition alone. An example of internal product product development is the Move Networks clone named “Akamai Adaptive Edge Streaming for Silverlight”. Akamai also is moving into providing security services. Akamai doesn’t stand still - it has the base platform and can leverage it to continually add new services of value to its customer base.

Wrapping Up

Akamai has created a market leading platform over the last ten years - it has a world leading team making sure the platform operates reliably and efficiently, and it continually adds new capabilities to the platform making it more attractive to both existing and new customers.

Anybody thinking of launching a platform business can learnt a lot by studying them.

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Telco 2.0 World event - 6-7 May, Nice, France

We’re delighted that the next Telco 2.0 event (our ‘world’ event) will be co-located with the TMForum’s Management World event. As such Telco 2.0 will take place on 6-7 May in Nice (South of France). It will follow a similar format to the November event (with a few new features), but will share a morning plenary with TMForum (2500 people).

Our research agenda for 2009 will inform the design and agenda of the event. In summary, we will be focusing on these areas:

• Digital Kids/Generation Y - how to retail to the next generation of consumers
• Online Video Distribution - how to re-incentivise the value chain
• Enterprise 2.0 - reinventing Customer Contact and Management

• Open API commercial model - agreeing an industry framework: strategy, developers, customer data
• Devices - Mobile, Consumer Premises Equipment

• Telco 2.0 Reference Architecture - Exploiting Customer Data (User profiles and preferences), OSS/BSS (on demand), Network Provisioning/Activation (on demand)
• Operational Agility - Building the low cost transactional platform

The draft agenda for the Telco 2.0 ‘world’ event in May is as follows (website to follow soon):

Day One am - Joint plenary session shared with TMForum Management World:

Strategies and Tactics for Tough Times: New Priorities - New Business Models - New Profits
• Simon Torrance (CEO, Telco 2.0) and Keith Willets (Chair, TMForum)

Opportunities for Growth - Understanding what customers want and what ‘the market’ needs
• Sanjiv Ahuja, Chairman, Orange
• Rory Sutherland, Vice Chairman, Ogilvy Group
• Simon Wright, CEO, Virgin Entertainment
CEO, Major Media Co (tbc)

The Practicalities of Telecoms Transformation:

Part 1: Operational Challenges
• Kevin Peters, EVP Global Network Operations, AT&T
• Matt Desch, CEO, Iridium Satellite
• Albert Hitchcock CIO, Vodafone Group

Part 2: Service Offerings
CEO, Major Operator (TBC)
• Hossein Eslambolchi, CEO, Divvio
CTO, Major Operator (TBC)

After the shared plenary, the rest of the Telco 2.0 event is made up of the following sections for the remaining 1.5 days using our normal ‘Mindshare’ process (250 senior execs). Speakers are currently being invited:

Day One pm:

• Digital Kids/Generation Y - how to retail to the next generation of consumers
• Online Video Distribution - how to re-incentivise the value chain

Day Two am:

• Enterprise 2.0 - Reinventing Customer Contact & Management
• Open API commercial model - agreeing an industry framework: strategy, developers, customer data
• Devices - Mobile, Consumer Premises Equipment
• Telco 2.0 Reference Architecture - Exploiting Customer Data (User profiles and preferences), OSS/BSS (on demand), Network Provisioning/Activation (on demand)
• Operational Agility - Building the low cost transactional platform

For more information please email us.

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Credit Crunch (Part 5): Escaping the Ghost of Telco Past

This post is the fifth in our series on telcos and the credit crunch.

The audience at our November event seemed comforted by the appeal which the capital markets currently find in telecom as a defensive sector. However, we also stressed that this is likely to be a fleeting phase, as underlying concerns about the industry’s ability to generate sustainable value will return. The key challenge is to invest now in the sort of transformation which will allow the industry to emerge from the current crisis with a different story, the “Ghost of Telco Future” rather than the “Ghost of Telco Past”. We look below at three examples of companies which made bold investments in new business models during periods of pessimism and disruption, and emerged transformed.

At our November event, we examined in detail why the capital markets would naturally look to telecom as an island of relative defensive stability. In support, we showed ranked returns for the EuroSTOXX 600 which placed telecoms in the top quartile of performance, and sought to explain why (those who weren’t present can watch the presentation here). Our reasoning will by now be familiar to regular readers of this blog (balance sheet strength, cash flow generation, and a growing recognition of telecom as an essential service), and the audience seemed to take comfort from the message.

However, one point we were keen to stress is that the current market love affair with telecom is a temporary infatuation driven by the relative pain generated by other sectors, and that as the market eventually stabilizes, investors are certain to return to the secular challenges facing the industry and go in search of sustainable value elsewhere. The key, as we stated, is for telcos to seize the opportunity to invest in emerging on the other side of the current crisis with a new story for the capital markets.

Indeed, in the past month, the investor’s eye seems to have begun to wander as the market has staged a rally of sorts. The updated chart of ranked performance of European industry groups over one month to 15 December, shows a number of beleaguered sectors rotating back into the top quartile, at the expense of defensive names, including telecom, which is now firmly second quartile.

DJ STOXX Europe industry ranked returns, 1 month to December 15


Source: STL Partners, from Bloomberg data

Even if the market is sending somewhat more ambivalent messages regarding confidence in telecom, it is still capable of voting with its very large feet when it has conviction. Verizon’s recent success in gaining commitments from eight institutions to provide $17bn in acquisition financing for the Altel transaction was nothing short of stunning in the current glacial credit market. Equally stunning, and coming in the same week, was the collapse of the $43bn leveraged buyout of BCE by a private equity consortium. If there is a message to take away from these two developments, it is probably that the market is currently minded to back strong incumbent management teams over private equity interlopers - a reversal of the consensus views of two years ago.

So, it appears in broad terms as though the capital markets have generally given telecom and telco management a vote of confidence, but is this a new lease of life or merely borrowed time? Do investors back companies with expectations of more of the same (The Ghost of Telco Past), as the Verizon news would seem to suggest, or of something different (The Ghost of Telco Future)? Most importantly, do investors really know what they want on a long-term view? In general terms, probably so, but companies have a crucial role to play in shaping expectations and opinions by defining publicly where they’re investing and to what end.

We stressed in our message to the audience at our November event that there is a risk of complacency developing in the current crisis, as heretofore aggressive competitors become financially constrained and more risk averse, giving incumbents a license to ease off the accelerator. As the Amazon Web Services example so clearly illustrates, sometimes a company has to actively invest, with conviction, against conventional wisdom, and be misunderstood for a time before its vision is vindicated. We live in difficult times, true enough, but history offers some encouraging examples of companies which invested through periods of intense uncertainty and disruption, only to emerge either entirely transformed, or with very different prospects:

  1. 1991: Collapse of the Soviet Union - This event caused severe disruption to the Finnish economy, forcing many companies to revamp their business models. For an obscure industrial conglomerate manufacturing rubber boots, tyres, paper, and electronics on an OEM basis, this appears to have been a key catalyst in forcing greater focus on its early work in analogue mobile telephony. True enough, Nokia had already established the building blocks of its future business, but the decision to exit businesses it had been in for 100 years in order to redefine itself in an emerging market (remember that as recently as the mid-90s, forecasts of peak mobile penetration were in the range of 20 - 25%) was perhaps not as obvious (or popular) at the time as it might appear retrospectively. Nokia’s market value today is 6,900% higher than in July 1991.
  2. 1997 - 98: Asian Crisis and Russian default - NTT DoCoMo was very much a victim of its own success as market leader in Japan’s explosive wireless market. The company had suffered a number of very high profile network failures in Central Tokyo during peak usage times (e.g., New Year’s Eve), and there was much scepticism about the company’s ability to scale with its growing customer base. This was an unwelcome background against which to conduct its long-awaited IPO, a situation made more challenging by two major financial crises in as many years, and there was very real concern that the October IPO (then the largest in history) would be delayed. Unbeknown to anyone on the outside of the company, a small working group was already at work on a solution to drive traffic towards data and away from voice. In a move uncharacteristic of NTT and Japanese companies generally, two of the principal figures in this development were company outsiders, and one was a newcomer to the industry. The launch of imode in February, 1999, was the first step in DoCoMo’s ongoing journey towards redefining its service as a platform to enable transactions.
  3. 2000 - 2004: Post dotcom tech bear market - From the peak in the NASDAQ on 10th March 2000 to the close of trading for the year, Apple Computer underperformed its benchmark by 52%, quite an achievement even in those days of fear and loathing towards technology stocks. Little did the world know that the first iPod was under development, to be unveiled in October the following year, as the basis for an ecosystem of products which has entirely reinvigorated the company and the brand, generating a halo effect in the process. Apple has outperformed the NASDAQ by 1,085% since January, 2004.

Admittedly, these are extreme examples of success derived from outside-the-box thinking and countercyclical investment programs, but they demonstrate how the process can work, and coincidently two (iTunes and imode) are examples of two-sided business models. The circumstances may be different this time around, but our view remains that telco’s destiny is still very much within its own power to shape and define. The process requires some DNA diversification, huge conviction, and a lot of good communication with employees and investors, but it’s far from impossible. The question is whether the “Bah, humbug” mentality of complacency leads to the industry again being haunted by the Ghost of Telco Past.

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Marketing Services: Adverts are just the start

_Whilst many telcos focus on creating inventory for adverts (e.g. via IPTV), or optimizing advert insertion (e.g. BT’s trial with Phorm), there is a potentially much bigger opportunity lurking in the background. A few weeks ago we presented a Use Case demonstrating a rich advertising opportunity. Here we look beyond advertising towards the bright future of telco-powered marketing services._

Sitting on the London Underground a few weeks ago, your analyst correspondent was struck by one of the adverts opposite. Travelling on the tube is never the most pleasant of experiences. A claustrophobic train crammed with sickly commuters is a potential hazard to both your physical and mental well being. The marketing men know it, and are more than happy to play on your fears.

Where does advertising end and a relationship begin?

The product in question was a herbal concoction designed to immediately cure your paranoia of winter illness. The only action required on you is the simple application of money to the nearest vendor of these life-giving pills.

Send your germs to them, not to me

Note the instructions. Send a codeword, your name and address to the SMS short code, and get a free product sample. The problem is the amount of friction in this system. How many people are going to be bothered to triple-tap this all in? And what will the error rate be? And the rate of fraud or mischief?

Here lies an opportunity for a telco to use its knowledge of the customer to improve the business process of a third party. What this example highlights is the difference between advertising and marketing services, and hints at the much broader role that telcos can stake out in the future digital economy.

Grow by taking friction out of everyday business processes

In order to grow telcos must continue to attract and retain retail customers. Additionally, they must provide platform-based services that support businesses in becoming more efficient in their everyday interactions between with customers. One key area of opportunity is to support the marketing industry in making their processes more efficient. (This could be worth $34bn to telcos in 10 year’s time in mature markets alone - see Telco 2.0 analysis in our report The 2-sided Business Model Opportunity).

As you might remember, there are seven core Telco 2.0 business-to-business value-added services:

  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

The biggest opportunity is in the second item. However, contrary to received wisdom, we believe that the biggest part of making marketing more efficient is not advertising, but other marketing-related activities.

Defining the role of marketing

Marketing is much more than advertising of course. The best definition is from Philip Kotler:

“Marketing is the business function that identifies needs and wants, defines and measures their magnitude and potential profitability, determines which target markets the organization can best serve, decides on appropriate products, services and programs to serve those chosen markets, and calls upon everyone in the organization to think and serve the customer.”

“In short, marketing’s job is to convert people’s changing needs into profitable opportunities. Marketing’s aim is to create value by offering superior solutions, saving buyer search and transaction time and effort, and delivering to the whole society a higher standard of living.”

“The marketers role is to build a mutually profitable long-term relationship with its customers, not just sell a product. This calls for knowing your customers well enough to deliver relevant and timely offers, services and messages that meet their individual needs.”

Clearly, traditional brand awareness advertising isn’t going away. However, interactive marketing is going to replace badly-targeted sales campaigns. A good example of mastery of this skill is BMW. Specifically, knowledge of the customer’s desires is the key to turning a profit. This “personalised market intelligence” is very valuable. Consider how well Google has monetised the expression of desire through search.

Understanding what the customer wants, and helping to fulfil that need

Critically, business intelligence services will help match digital propositions from partners to consumer markets in an agile manner. “Market pull” will draw resources into supply chains, rather than “product push” of inventories piled high. This is similar to how, for example, clothing manufacturers like American Apparel or fashion retailer Zara work - turning market intelligence into products faster than the competition can react. In many ways it mimics the military’s OODA loop: Observe - Orient - Decide - Act, where the winner is the one with the tightest loop, or who can disrupt the loop of their adversaries.

Thus enlightened companies have ‘Strategy & Marketing’ aligned as a single function, splitting off into Planning type functions and Marketing Services functions. This re-thinking of the role of marketing needs to be accompanied by a supply chain of intelligence about the customer, and a suite of capabilities to help the marketer interact with that customer more efficiently and effectively. Isn’t this precisely what a communications services provider is in business for?

The future role of marketing

The CEO of marketing agency OgilvyOne expressed it well at the Mobile World Congress CMO Forum in February 2008:

  • From Product to Experience: It is no longer sufficient to focus on product features, instead marketers need to focus on the full brand experience associated with a product or service. The digital age with its greater interactivity enables marketers to achieve this in ways that have not been possible in the old static mediums.
  • From Place to Everyplace: Mobility has enabled consumers to experience products and services anywhere, anytime. No longer is the consumer confined to store locations or other static locations when buying or using products - they can be anywhere.
  • From Price to Exchange: The digital world is increasingly about consumer control and intervention. End users don’t just pay for things with cash; they may offer value in the form of attention, participation or information. Thus the digital age can lead to more complex exchanges of value which the marketer needs to consider in product and service development and promotion. And talking of promotion….
  • From Promotion to Evangelism: There is a need to unite people around what Ogilvy term ‘The Big Ideal’ - something which inspires people and causes them to evangelise a brand. Brian noted the success Dove has had with its concept of women feeling good about themselves for what they are rather than aspiring to model-like proportions.

The opportunity for telcos is to reconsider their market offering in the light of each of these. For example, if you receive a push advert via MMS, shouldn’t it come with a little message at the bottom: “Forwarding this message to your friends is free!”. Evangelism in action — that requires new telco wholesale products and platform services.

Rethinking the interactive marketing experience

Going back to our example of pills for sneezy Londoners, how could it be different with a telco-powered marketing platform? The opportunity lies in solving problems like this. How to enable people to quickly and easily get hold of product samples?

The kind of experience we would imagine users having might be more like the following. The advert would say: “Text ‘germs’ to 60066”, with the following text given prominence: “Privacy notice - your network operator will share your address with our postal provider.” (Note how we don’t even need to send the address to the advertiser, just the postal service.) For postpaid users (or prepaid users who have registered their address with the operator) the correct address would automatically be passed on to the mailing service. (Potentially they would be sent an SMS with the address, and told to text an alternative one back if it is not the right one.) For all other users, they would receive one or more text messages asking them to pass on an appropriate address. This would be retained by the operator, so it would not need to be entered again.

Just as with emergency service calls, where you have a different expectation of privacy, users would come to expect that short code interactions don’t come with the same privacy level as messages sent, for example, to standard mobile number ranges. The human and social factors of the system need to be considered from the outset.

Rather than charging for the business process input of bulk SMS, the operator would instead charge for the uplift to the business process output - correctly delivered samples.

The service could be considerably more sophisticated than the above. For instance, the operator could try to match the product to be mailed to the demographics of the customer. Hypochondriac males could be sent a different marketing message to sniffling females. Ultimately, this is a battle about what you know about the customer, and your ability to integrate that knowledge with your own and third party business processes. And nobody is better placed to perform that function in the digital economy that the telco that gets you online in the first place.

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December 16, 2008

How Does YouTube Make Money?

As part of our forthcoming Online Video Distribution report, we asked Alan Patrick, the report’s co-author, to model the internal economics of some major video distributors on the Web.

We looked at Hulu and most of all, at YouTube…The models use public domain information and make some of our own assumptions as to underlying economics. Before you read this, you should probably read this post.

The dynamics of the 2 businesses are different in that YouTube serves an enormous volume (reportedly 1 billion plus downloads a day) of small files (around 2.75 minutes on average) at a low ad-inventory fill ratio - only 3-4% of videos carry advertising at all - and low CPMs (around $10, if that). Hulu serves a far smaller volume (about 3-4 million per day) of larger files (around 27.5 minutes), with dramatically higher ad inventory served (we have assumed 80% in the models) with higher CPMs ( $15 — 20).

Regarding content creation, we assume YouTube, in effect, pays nothing for its content (recent mainstream deals will change that going forward of course), whereas Hulu has to pay 70 to 72% of its income to the content providers. Aggregation is assumed to be hosting costs, upload and transcode costs, and all staff and SG&A costs. As can be seen, they are fairly small compared to video distribution costs as volumes grow.

The costs of distribution we use are based on Amazon S3 and Akamai pricing; we reckon Hulu’s paying roughly the S3 pricing, and YouTube is paying 50% of that due to its use of Google data centres and extensive peering. Interestingly, the widely-quoted figure of $1 million a day in bandwidth appears to be accurate; our estimates using two different methods converged on a bandwidth bill of $30 million a month.


The main business dynamics revolve around average ad value vs cost per video served — the higher the CPM and Ad inventory % served, the better the revenues (favours Hulu), the bigger the file size and payment to content producers, the worse the costs (favours YouTube). The percentage of outgoing streams that carry any advertising is crucial; whether it’s a macro-advertising play like Hulu (comparatively few but high-value) or a micro-advertising play like Google Ads (low value but extremely high volume) is secondary, as both stand or fall on how much of their content actually carries ads.

We estimate that Hulu is marginally lossmaking today, losing around $9m this year on revenue of $52m, and YouTube will lose about $91m on revenues of $118m. We conclude that, for YouTube to break even, it needs to either drive down its transport costs to 33% of major CDN equivalent or radically increase the percentage of streams that carry advertising. Major change factors which could perturb this include the impact of high-quality (HQ FLV or H.264) video on YouTube’s bandwidth budget, the relationship of both competitors to their parent companies, and their relations with content providers.

Our bandwidth estimates are based on Adobe’s documentation of the Flash video protocol and the actual size and other details of YouTube videos, which give a bitrate of 384Kbps; providing high-quality video could increase this by as much as a factor of five (assuming H.264 High Predictive, 320×240, frame rate 36). Obviously this would pose a significant challenge to YouTube’s profitability.

YouTube is increasingly making deals with content providers to share ad revenue with them in return for the use of their copyrights. This is of course a hit to revenue, but it can be confidently assumed that YouTube will make sure that if anything carries ads, it will be the videos they are paying for. Depending on the distribution of traffic among the videos, it may be that the 3-4% ad ratio is enough to fund the long tail of free material, if the hits all carry advertising; a sort of balanced portfolio approach. (They may also choose to advertise preferentially on high-quality videos.)

Hulu, being owned by content providers, has the feature that its profitability is a function of their tax policy - the owners could choose to set the price of their content high enough to secure the whole of Hulu’s potential profits as sales, or alternatively they could keep it low or even free and take any surplus after distribution costs as a dividend.


However, the fundamental issue is the same even if they choose to obfuscate the business model; funding online video from advertising is all about how many ads per stream you serve up. If YouTube could sign some more peering agreements and keep moving things to cheap sources of power, increasing the ad ratio from 3 to 4% would be enough to reach breakeven. Essentially, it’s a traditional media sales desk - first of all, you’ve got to fill ad space. You can choose whether you want a margin-first strategy, like traditional advertising, or a volume strategy, like Google Ads; but either way you must sell.

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December 15, 2008

Mobile Broadband in 2009: ‘Credit Crunch’ and ‘Capacity Crunch’ demand new business models

In a previous article for Telco 2.0, Dean Bubley of Disruptive Analysis discussed the likely slow adoption of embedded-3G laptops. Now, having published the full report on Mobile Broadband Computing, he examines what happens when huge long-term potential market growth clashes with more short-term business model challenges.

2008 has been a banner year for mobile broadband computing. It is already one of the most successful new service areas for wireless operators. In parallel with their well-publicised adoption of smartphones, business and consumer users have also demonstrated a huge appetite for mobile Internet access on laptops.


The picture varies significantly by region and country - in the US, wireless carriers have largely kept focus on the business user marketplace, with monthly price plans typically at $60 and above. Elsewhere, various countries in Europe and Asia have seen the mass consumer market targeted, with tariffs dropping to $15 and below. Among the brightest spots in terms of uptake have been Austria, Singapore, Sweden, the UK, Australia and Portugal. 3G dongles have been a huge success in retail channels, representing easy-to-understand propositions for both customers and sales staff.

But despite this growth, some of the short-term optimism is unjustified.

Above all, the global economy faces a vicious downturn in 2009, which will impact notebook and “gadget” sales. The debate about embedded vs. non-embedded becomes moot if nobody is buying anything. The recession will make customers and OEMs cautious, spendthrift and slow to make decisions. It will focus minds on inventories and margins. It will make distribution channels fragile and prone to cashflow problems.

Moreover, it will also impact the telecoms operators. CFOs will look to delay capex on network upgrades. Investors will look nervously at profitability metrics and encourage management to be wary of customer acquisition costs. There will be other constraints, like a lack of easy supply of cheap debt to fund spectrum purchases and large-scale deployments of new technology. There may be a fear that device subsidy (especially on laptops) starts to look like a cheap and therefore risky alternative to consumer credit.

These are not the fault of the mobile broadband industry - they are largely external, and beyond its control. The glass may turn out to be half-full, with strong recovery in 2010, but it is nevertheless prudent to call it as half-empty, based on current trends.

In addition to economic problems, Disruptive Analysis also believes that some of the mobile broadband business model assumptions have serious flaws.

Although the market for datacards and dongles has grown up on long-term, monthly contract subscriptions for data usage, there is a natural limit to this. Many consumers will not want an additional monthly commitment - especially if they already use cheap prepaid models for their cellphones. WiFi has gained mass adoption mostly through session-based, free or “sponsored” use in homes, offices and hotspots, not through subscriptions. Mobile broadband must adopt similarly flexible models.

At the same time, some operators’ marketing teams have become over-zealous about competing with fixed broadband. In some markets, HSDPA is now cheaper than ADSL/cable. This is unsustainable, as the cost structures differ hugely. There are physical limits to the capacity of mobile data networks, which will rapidly be reached with the explosion of low-cost traffic. Some cellular networks now see more than 90% of 3G traffic from PCs.

Mobile operators are hoping that their customers only use a fraction of their allocated 3GB or 10GB monthly caps. But that means that they are now hostage to future high-bandwidth Internet applications gaining viral adoption among mobile users. And where they are pitching HSPA or EVDO as a straight alternative to fixed home broadband, they also geared into the ever-rising amount of video traffic consumed by people sitting on their sofas, from YouTube, iPlayer, Hulu and social network sites.

The popularity of flatrate data plans and cheap HSDPA modems has accelerated the market to reach 35 million subscribers worldwide at the end of 2008, more than doubling in a year. New innovations like “free” subsidised netbooks, perhaps sold through mobile carriers’ channels, are driving expectations of a continued explosion in 2009 and 2010. Looking further out, over 340 million users of mobile-enhanced notebooks, netbooks and new, smaller “MIDs” (Mobile Internet Devices) are expected by 2014.

Disruptive Analysis identifies a significant risk. The impact of the recession and “credit crunch” on customers, vendors and operators will coincide with a “capacity crunch” as networks become congested by cheap mobile data traffic. The combined effect of price erosion, sudden traffic increases and capex constraints on upgrades does not bode well.

One outcome will be a shift to new business models for mobile broadband. As well as revised prices and bandwidth caps, and a reversal of ADSL/cable replacement marketing strategies, Disruptive Analysis expects to see new payment mechanisms emerge, including:

  1. Prepay (“pay as you go”) accounts are already popular in some markets and this will increase.
  2. Session-based access, similar to the familiar WiFi hotspot model.
  3. Bundling of mobile broadband with other services, for example as an adjunct to fixed broadband or mobile voice services.
  4. Free, guest or “sponsored” mobile broadband, paid for by venue owners or event organisers.
  5. “Comes with data included” models, where the upfront device purchase price includes connectivity, perhaps for a year.
  6. Two-sided business models, with mobile access subsidised by “upstream” parties like advertisers or governments, rather than direct end-user payment.


Transition to these models will not be easy. There are question marks about the convenience of using physical SIM cards, especially for temporary access. Distribution, billing and support models will need re-evaluation. Definitions and metrics will need reevaluation. Terms like ARPU and “subscription” will have less relevance as conventional “subscribers” drop to 40% of the overall MBC user base. Operators and vendors need to face up to these challenges as soon as possible.

Overall, Disruptive Analysis believes that Mobile Broadband will continue to thrive in the medium term. But 2009 might not be quite as euphoric for market participants as 2008 as been.

(All this ignores some of the more apocalyptic scenarios proposed for the recession - but if we really are facing the “End of Days” or a rerun of the Fall of Rome AD479, we’ll all have better things to worry about than dongles).

For more details on the Disruptive Analysis report on Mobile Broadband Computing, please click here.

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Ring! Ring! Hot News, 15th December 2008

In Today’s Issue: Chinese 3G is go; China Mobile wants to get on to 4G ASAP; Lenovo’s mystery iClone; Orascom unwiring North Korea; access line growth stalls, dongles boom; ChinaTel implants CDMA phones in employees’ cranium; doom! rush to flog stock; doom! ALU managers slaughtered; doom! US R&D shuttered; Amazon: still investing; government hydroelectricity - it’s the secret sauce of cloud computing; EC2 comes to Europe; Mobile Windows Live out; Gphone hits data roamers in the wallet; fascinating new ForNok app; Stallman vs Cisco; Safaricom faces M-PESA audit; more faster Internet now in Holland; Comes With Music hacked

Aaaand it’s here…! The Chinese 3G licences are out, and the complex reorganisation plan associated with it is a go. We liked this quote:
“We think that China Mobile will muddle through in 3G and concentrate all resources on directly leaping into LTE,” says a scholar who is part of a government-affiliated industry think tank.
You could say that…China Mobile never wanted TD-SCDMA anyway, so the oppportunity to ditch it for LTE will be all the more tempting. As we said not so long ago, the standards wars are over.

Lenovo, having swallowed the IBM PC division, is stepping into the smartphone business with a big-touchscreen gadget supposedly running Google Android. It’s rumoured to be exclusive to China Mobile; so is it a TD-SCDMA puck?

Not so far from China, Orascom has just confirmed its reputation as the industry risk lover; after Palestine and Iraq, they’re opening a network in North Korea, where mobiles are actually illegal. Apparently the Great Helmsman has promised to let ordinary citizens have them. It shows how far you have to go for subscriber growth these days.

Speaking of which: fixed-line broadband access growth in the UK grinds to a halt. Telco 2.0’s Keith McMahon reckons they haven’t taken account of the boom in HSPA datadongles, though; update your backhaul before the traffic wave hits. Whilst we’re on the subject of subscribers: China Telecom has been accused of forcing its employees to sign up for its new CDMA2000 network.

For everything else, the week’s basic theme was doom, as Nokia complained of a frantic rush to get rid of stock at any price. Frantic unit-shifting was blamed on the fear of approaching deflation, a major threat for a business where prices have been falling structurally for 30 years, and the risk of having to take huge accounting charges on the value of inventory. Ben Verwaayen, meanwhile, announced his crisis plan at Alcatel-Lucent, which involves hanging on to the mobile division, consolidating R&D in Europe, and 6,000 layoffs.

(We may be in a world without Bell Labs, Nortel, or General Motors by January.)

Some people are still investing, though; Amazon is buying clue, with the recruitment of database guru James Hamilton (hey, he wrote IBM’s C++ compiler) to its infrastructure division, and capacity, with the construction of a giant new containerised data centre in Oregon. The valley of the Columbia River is rapidly becoming a huge concentration of computing power; Google has a huge facility, Amazon is building, Microsoft isn’t far. The reason? Cheap, state-owned hydroelectric power and cooling water from the Bonneville Federal Power Administration. Cloud computing is a brutally industrial business. And something like this may be coming to a valley near you, as Amazon pushes EC2 machines out around the world.

Microsoft, meanwhile, announced the mobile version of its Windows Live services, and there’s been another bad data roaming incident, this time with the Gphone.

Interesting things are happening over at Forum Nokia, where David Caabeiros is showing off an application that tags whatever is in front of the camera with a data overlay. And the Free Software Foundation is suing Cisco about the open-source code used in the hackers’ favourite WLAN boxes.

We’ve said before that mobile payments have special problems. Safaricom’s world-famous M-PESA is to be audited by the Kenyan government; its managers say they are keen for the audit to provide further proof of their trustworthiness, as M-PESA operates outside the law as it regards banks. Some might say Safaricom is financially more trustworthy than the Kenyan government, but this is a great example why Orange’s strategy of signing up a bank as a partner in each country it has an Orange Money operation is sensible.

And there’s yet more really high speed Internet rolling out in the Netherlands.

Finally, we wondered if there was any way Nokia could make money out of Comes With Music. Here’s one way: the DRM has been cracked and it’s a great way to fill your boots for Christmas.

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December 9, 2008

Guest post: Integrated billing and policy management is key to Telco 2.0

Today’s ISP model frequently fails to align behavioural incentives of users, costs of this behavior to the network operator, and revenue. In a guest post, Openet’s CMO Michael Manzo looks at the crucial transition to what might be called ‘Telco 1.5’:

The industry is generally in agreement that “Telco 1.0” triple play bundling of voice, video and data will lead to a long slow decline for network operators. Price erosion and disintermediation will drive revenues down and churn up. Control of the value chain will move upstream to content and application providers. I do subscribe to the Telco 2.0 vision of obtaining new revenues by servicing the needs of new ‘upstream’ customers who want to interact with the ‘downstream’ telco retail customer base. However, I also believe mainstream adoption is a ways off. Most operators are still grappling with the “ex-land grab” implications of their Telco 1.0 businesses, trying to understand a more classical segment marketing approach, and embracing the long tail phenomenon.

The reality is that operators today would be happy to just stop retailing a “bit pipe”. Today’s ISP model frequently fails to align behavioural incentives of users, costs of this behavior to the network operator, and revenue. Operators can at least stabilise their business, and possibly achieve continuing revenue growth, by sending their pipes to school. I call this a “smart pipe” business model — “Telco 1.5.” Our definition of a smart pipe is one that is not just technically smart, but is commercially smart too: it enables the operator to realize revenue that matches the value of the network resource utilization delivered to each subscriber. Ultimately, subscribers who use fewer resources pay less, and subscribers who use more pay more.

Some in the industry associate this model with “consumption-based pricing.” However, this is not so. Instead, operators can deploy a number of non-metered billing models in conjunction with the ability to govern the use of network resources.
In the Telco 1.5 model, operators have three key objectives:
  • Prioritize traffic on overloaded network resources
  • Enable subscribers to personalize services to create “stickiness”
  • Apply creativity in pricing models and service packages to differentiate offerings
Ideally they should do all three of these at the same time: ultimately developing creative, personalized price models and service packages based on the ability to prioritize traffic. Accomplishing this means that operators need to deploy the following strategic capabilities within their networks:
  • Control subscriber usage of network resources and services
  • Real-time control over the allocation of network resources to each usage session
  • Deploy more flexible and real-time billing capabilities

Again, operators need to do all of the above together. This is based on an array of real-time session and subscriber data including subscriber location, date/time, current network capacity, subscriber billing plan, subscriber usage history, subscriber contract terms, and usage and spending limits set by the subscriber. This integration of “control” and “monetization” requires a new breed of policy management capability that is seamlessly coupled with a next generation billing infrastructure.

There’s a lot of talk today about “policy management,” and it is certainly the key to accomplishing what I’m describing. First, it’s probably wise to define what I mean by “policy management” because, like so many things in our industry, this area is also going through a transformation.
Policy management is:
  • A dynamic function in an operator network making real-time decisions concerning subscriber access to services and the allocation of network resources based on requests from the network via policy enforcement points;
  • Subscriber and session aware - by using an array of data in real-time to make decisions. Subscriber-aware information includes location, billing plan, usage history, contract terms and personalized usage and spending limits. Session information includes date/time, current network capacity, source of the traffic (internal vs. third-party application) and type of traffic (protocol or service type); and,
  • Convergent - works across voice and data services, legacy and next generation; wireless, broadband and cable/television.
Policy management isn’t:
  • A static, network provisioning function,
  • Either subscriber access only or network resource only function,
  • One-size-fits-all,
  • Non-contextual authentication and access control to services,
  • A data-only, wireless-centric function as specified in the IMS standards concerning policy; or,
  • A next-generation only function.
At the same time, there’s a lot of talk in the industry about next-generation billing models which is market-speak for a set of billing models that includes, but isn’t limited to:
  • On-demand pricing - event based billing
  • Service passes - billing for access to services for a set period of time (commonly seen with WiFi hotspots)
  • Pricing tiers
  • Multi-service/application bundles
  • Subscriber customized bundles
  • Flexible or compound account and payment plan structures
  • Advice of charge to alert users ahead of usage what the charges will be

What we haven’t heard much about is the integration of the above policy management capabilities with the above next-generation billing capabilities. This is where control, monetization and personalization meet. This is foundational to the delivery of not just Telco 1.5, but the Telco 2.0 model as well. This is because many of the network control and charging capabilities can be leveraged by ‘upstream’ third parties who offer services to end users. This is best illustrated through a few usage scenarios.

Scenario One - Fair Usage

This scenario is being deployed by a number of fixed and mobile broadband operators today and represents the first integrated control and monetization solution. In this scenario, monthly download capacity on a broadband connection is capped. Monthly usage is measured for each subscriber and, upon reaching the cap, the user is redirected from their requested content or application to a self-care page where they can purchase additional capacity. Alternately, the user could be allowed to continue usage with downgraded performance in terms of speed or traffic priority. This scenario could also be made more robust by:

  • Evaluating historic subscriber usage such that the limit is only imposed for users who have reached the threshold twice in a six-month time period
  • Evaluating subscriber tenure so that subscribers who have had service for more than five years are not metered
  • Traffic to and from “preferred” partner applications are not measured, thus incorporating Telco 2.0 concepts.

Scenario Two - Dynamic Traffic Prioritization

In this scenario, the network is self-healing during times of congestion in that it is able to detect a state of congestion and apply policies designed to ensure that premium customers get premium services. Traffic can be prioritized or blocked based on:

  • Violation of contract terms
  • Pricing plans that include premium service quality, such as users that agree to pay more for prioritization of peer-to-peer traffic, voice over IP and streaming video/audio traffic
  • Roaming customers versus non-roaming customers
  • Traffic to and from “preferred” partner sites, thus again incorporating Telco 2.0 concepts.

Scenario Three - Corporate Controls

In this scenario, the operator offers a service to enterprises that allows the administrator to govern the use of services to ensure spending is limited and access to services is restricted to business usage. For wireless services, the administrator could, via a web-based application, create classes of service (executives, salespeople, everyone else) and set policies based on those classes of service. Examples of policies include:

  • Set monthly usage limits on the corporate account with other spending to a personal account. This entails a single service bridging across two accounts, which is feasible with more flexible or compound account and payment plan structures enabled in next-generation billing systems
  • No international calls
  • No calls outside of business hours
  • No usage of specific services
  • No usage of specific content (P2P, video streaming, etc.)
  • No usage of a broadband connection on PCs other than a specified MAC address

Telco 2.0 may very well be on the horizon of the future, however operators need to be able to first understand and incorporate the Telco 1.5 concepts to be successful. In fact, many will find themselves comfortable in the Telco 1.5 business model, only incorporating necessary components of Telco 2.0 strategies to continue to maintain their competitive edge. It will require a fine balance to not bite off more than they can chew. The same tools that create the near-term business model innovations also support the ultimate next-generation billing models—and in the end better business models.

[Ed: Michael Manzo, CMO of Openet, can be reached at michael.manzo@openet.com.]

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December 8, 2008

Ring! Ring! Hot News, 8th December, 2008

In Today’s Issue: IWF denounces Wikipedia, mysteriously lets Amazon off; fighting HIV with SMS; Orange launches another m-bank; man literally SMSs arm off; EDGE gets progressively faster; putting ads in your SMS; Facebook as malware-delivery network; unlocked developer G1s; EFF seeks DMCA sicknote for iHackers; Nokia launches N97, prophesies doom; lastminute.com widgets; S60 GPS alerts; AT&T wants two single smartphone platforms; Sprint XOHM - Is an MVNO; Obama presses Keynesian button, Renesys angles for FTTH; should Alcatel-Lucent try doing less?

Digital rights and digital wrongs; the UK’s discreet Internet-censorship provider, the Internet Watch Foundation, seems to have accidentally eaten Wikipedia this morning, hilariously due to the cover of a heavy metal album. Some users of participating ISPs are reporting degraded service as literally all the UK’s eyeball network traffic tries to make its way through a transparent proxy server (or should that be poxy server?). Killer detail: the album in question is available on Amazon.com and the image appears in Google image searches, and for some strange reason the IWF didn’t feel confident enough to nullroute either of these dastardly porn pushers.

In less chuckleheaded news, here’s a fine example of what you can do just with SMS. In KwaZulu-Natal province, South Africa is using SMS messages as the basis of an anti-HIV campaign. Specifically, they’re using an interesting feature that developed locally. As in quite a lot of emerging markets, it’s common to send a text message reading “Please Call Me” rather than paying for a call; local mobile operators have taken to offering these messages free of charge and inserting an advert in the remaining 146 characters. Now, instead of an advert for whatever, you get a message about condoms, testing, or anti-retroviral drugs. As KwaZulu-Natal has an HIV rate of 39% and a GSM penetration rate of 80%, you can see the benefits — especially as the people most likely to use PCM are the poor, who are also most likely to get HIV and the hardest to reach by other media.

In other emerging market news, Orange launched its latest mobile banking operation in the Ivory Coast. As Telco 2.0 speaker Mung Ki-Woo presented at last Mobile World Congress, Orange has evolved something like a standard operating procedure for these. On this occasion, BNP Paribas is the banking partner, which may not be very local but who probably know what to do when a depositor dies and both his wives claim his balance.

It would be remiss not to mention the doctor in the Congo who carried out a difficult operation following instructions sent to him from London by SMS, either. When you think telemedicine, you usually think really, really high-grade teleconferencing/telepresence gear. However, sometimes 160 characters is enough. However, don’t forget the EDGE; NSN’s latest update to “the poor man’s 3G” is now faster than the first version of HSDPA…

God knows what kind of adverts he would have seen had he been using free-SMS social network Wadja, which is trying to answer the question “cool! er, how can we make some money?” by letting advertisers sponsor individual words, a bit like Google AdWords but with SMS messages. (Speaking of social networks, watch out: Facebook is the latest malware delivery network.)

Meanwhile, if you’re a developer you can now get an unlocked Gphone, by dint of forking over $424. And then you’ll be able to do anything you like to it, including installing a different OS. How soon before someone decides they’d rather have OpenMoko? Things are of course very different in the Apple world, so the EFF is trying to get legal protections for iPhone tinkerers fearing fruity lawyers.

Nokia, meanwhile, launched its new flagship gadget, the N97, and revised down shipments for the year.

In other apps developer news, there’s a widget out for Nokias that lets you drive travel site Lastminute.com from your phone. Interesting question — where’s the two-sidedness? If Last had any sense here, they’d sign up the developer as an affiliate and pay them a cut of the incremental sales. But then, if they did that they’d be Amazon.

Symbian developers now have a ready-made application to generate alerts based on GPS location data, which can also be used as a sort of location message bus to call other applications. Not great fun in itself, but more importantly, it could be right handy for developing almost anything location-based.

AT&T, it seems, wants a single platform for smartphones, and rumour has it that it will be Symbian S60. Unfortunately, AT&T also wants to keep the iPhone, so “single” here actually means “two”. Things, meanwhile, are stirring beneath the surface of Sprint XOHM: it looks like the service is actually an MVNO and Clearwire is the wholesaler.

Meanwhile, Barack Obama announced a huge public works programme as treatment for the economic crisis. Some of it will apparently go into “broadband”, so this article on FTTH as an economic stimulant from the CTO of Renesys is unusually topical. That would, of course, be very good for makers of optical Ethernet kit and big routers — like Alcatel-Lucent, who are being advised to try doing less in 2009.

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December 5, 2008

What would Bank 2.0 look like? Lessons for Telco 2.0

Sometimes for inspiration in business model innovation you need to look outside your own industry. We’ve previously examined supermarkets and airlines. Once more we’ll turn to banks. Sometimes it’s easier to get the principles of a new business model when shorn of all the familiar ARPUs, churn rates and equipment subsidies.

Banks are very much in the news these days, although not always for good reasons. Return of capital has become as much an issue to depositors as returns to capital. Indeed, Willie Sutton’s famous quip would these days have to become “Why do Banks rob taxpayers? Because that’s where the money is”. Thankfully the telecoms industry lacks the solvency, honesty and transparency issues that banks face (although some might disagree strongly).

However, there are considerable structural similarities. Both are regulated capital-intensive networked industries, with mounds of under-exploited customer data. (If you want some inspiration on how banks are doing a better job of exploiting this, check out the Visa Extras program.) They are also wedded to vertically integrated models, where the end user experience is controlled and tied to the back office. “Banking mashups” don’t yet feature heavily in everyday vocabulary. They should.

What is a bank for?

My business bank (whom I sadly can’t commend to anyone) is fairly typical. I may only have ten or twenty transactions in a month. Many are fully automated, such as a direct debit for my mobile phone usage. A few are conducted via the web site.

My bank thinks of itself in terms of transactions, in the same way that a telco tends to think in terms of calls and messages. But that isn’t what I as a customer care about, per se. I want to manage my cashflow, ensure my bills are paid, and generally not have to think about my finances. So when one of my invoices is paid, I would ideally like to flag some of that cash as being reserved for the evil VAT man, some to pay the iniquitous corporation tax, some for the pernicious bills from my accountant, and the rest of lucre going to a worthy cause — i.e. me. My “account balance” doesn’t begin to tell me how much money I’ve really got.

“Get an accounting package!” you scream in response. Well, that just adds another layer of complexity and cost. The ones I tried out are all designed for accountants, with the comprehensibility of Linear B. I can import transactions into my accounts package, but I can’t transact from within it. Two inflexible silos, instead of one.

So a bank is a transaction platform tied into a particularly unattractive user interface. What if we could de-couple the two?

What’s the alternative?

What I’d much prefer is to allow an organisation such as the Professional Contractors Group to offer me a service targeted at my niche. Each bank would offer a basic API set, deal with authentication, but would let someone else deal with the user interface. It could be as simple as being able to annotate my statements to give them to my accountant. In my case, I’d like to be able to run a tally of VAT owed, and how much I need to set aside to pay my corporation tax. Overkill for an accounting package, but impossible to do by extending my banking application.

Where’s the value?

As Tim O’Reilly reminds us in the context of Web 2.0 darling Twitter, hard-to-replicate data (such as authentication credentials for a bank account) is the new ‘Intel Inside’ of 2.0 business models:

What’s different, of course, is that Twitter isn’t just a protocol. It’s also a database. And that’s the old secret of Web 2.0, Data is the Intel Inside. That means that they can let go of controlling the interface. The more other people build on Twitter, the better their position becomes.

Amazingly, each bank I deal with seems to only let me search a short window of transactions going back 6 months. When it comes to doing my annual accounts, I may be looking back 18 months, so I have to rely on paper statements. There’s a total mismatch between the bank’s view of a successful service, and mine.

What’s the revenue model?

How to banks make money (apart from bailouts)? They borrow short (creditor deposits) to lend long (loans and other debt). This may be a good or bad thing, and isn’t our concern as telcoheads. Also, as cash is shuffled around, a slice is creamed off each time. So for APIs to make an impact on profits you need:

  • More customers. If you don’t support third party user interfaces, and someone else does, I’ll move.
  • More deposits. I’d rather put my money somewhere that it is easily manageable.
  • More transactions. The third party user interfaces are effectively an extension of your retail distribution network.
  • More products. As with Amazon, you can use affiliate programs to reward sales of additional products like insurance.

This accellerates the existing business model. You don’t need to charge for APIs for them to be profit drivers.

We asked attendees at the third Telco 2.0 Executive Brainstorm last year to rate five different revenue models for APIs, picking their favourite. The results are below.

The clear favourite was to charge for APIs. It could be that banking and telecoms are completely different. Or it could be that the urge for more billable events is driving irrational behaviour in telcos.

What does this mean for me?

Every time you hear about ‘open’ business models, I substitute the word ‘clopen’. You need something that is closed and defensible, as well as allowing new value to be created on top via open interfaces. Banks, like telcos, have become over-reliant on an entirely closed product set. This encourages ‘over the top’ applications like Mint to scrape all that data up, without the bank getting involved, evolving its own business model, or gathering new and precious data on user behavior and needs.

Telcos likewise need to work out what is their true value — the ‘closed’ parts of the business model — and relinquish control over the rest. The core is likely to be directory data, linking identities of users, devices, services and locations.

Strangely, many telco API offerings let you place calls and send messages, but expect the rest of the customer experience to work in the way it always has. Does everyone need exactly the same call routing and voicemail experience? We thought not. Just that the absence of real choice has led us to believe that what the users are being given is what they actually want.

So in summary, get ready to let go of the end user experience, and allow third parties to fill in all the niche user needs. But keep a tight hold of the underlying data, since that is where the value lies.

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December 1, 2008

Ring! Ring! Hot News, 1st December 2008

In Today’s Issue: Silly iPhone app of the week - MMS; EU hammers data roaming prices; Web 2.0 payola at the iTunes App Store; iPhone for business, and really silly apps; Nokia turns into an MVNO; Japan, it’s the industry’s new Holland; MTN CEO bashes bears; HOWTO make a good MVNO; Gphone demand surges; OMA device management for S60, part 2; “Faster” Vodafone beaten to Turkish 3G speccy; BCE LBO KOd; analysts back Telco 2.0 video views; mobile controls for your TiVo; Fring goes to the IMS World Congress, almost certainly youngest participant; SME WiMAX comes to the UK; BT slashes Metro Ethernet pricing; spot the tree competition.

Just the thing we were missing: MMS for the iPhone! Someone’s developing it, with the hope of selling it to carriers; it’s just a pity that iPhone users already have so many better ways of sharing their moments. There’s (good) e-mail; there’s any number of clients to upload media to blogging tools, Flickr, YouTube and friends, and then all kinds of social network apps to tell all your friends about it. And for cheap, too: the spread between data pricing and MMS pricing is still significant, which is of course why the carriers would hypothetically be interested in putting MMS on the iPhone, and why nobody will use it.

Ah, data pricing; despite all the lobbying, the European Union’s top decision-making body, the council of ministers, has signed off price caps for data and SMS roaming. SMS will be subject to a €0.11 maximum price, while the intercarrier (GRX/IPX) market for generic IP will be subject to a maximum of €1 per MB — which frankly ought to be enough for anyone, as downloading a typical 650MB Linux liveCD would cost more than the computer you planned to install it on….

If you are an iPhone dev, you might be somewhat concerned by this report. Apparently, one developer has been paying people to post favourable reviews at the iTunes Store. They get five bucks a plug. But the killer detail is that they advertised the job through Amazon Mechanical Turk. Now there’s Web 2.0 for you. Perhaps they were hyping one of the incredibly useful business applications in this Forbes article?

Nuh. It’s an animated Santa for your iPhone. In related news, Chinese searchco Baidu is in trouble after it was caught accepting money for higher rankings. Alan Turing must be spinning in his grave at what these computing devices have spawned. One excellent reason for his rotation is the existence of Vertu mobile phones. This is a lineup of old Nokia stock covered in sparkly jewels, for rich people who don’t need to VPN into their business, get their e-mail or consult the Web. Yes, it’s a line of products marketed specifically at the idle rich — you can’t fault Nokia for market segmentation. Now, it seems, Nokia is going to create its very own MVNO for Vertu users.

We’re struggling a bit here — will the phones ring in a specially deferential manner? Will a voice on the line remind them how rich they are? But you have to say it’s an interesting departure for Nokia. After all, they already run networks for many smaller operators as a managed service, so why not do the same for their own account? It’s arguable that Nokia is edging into the platform here. Interestingly, the launch is going to be in Japan, just as Nokia stops developing Japan-only devices. For many years, Japan was the industry’s happy hunting ground. After all, people there used MMS! and funky gadgets! and i-mode! Unfortunately, essentially none of this stuff travelled well, and arguably the innovation is now in the emerging markets. Nokia’s move may mark the point where Japan becomes just another 100%+ penetrated mature market.

MTN is trying to push this, arguing that stock exchange fears about the multi-emerging market operators are overblown and that its ARPUs are holding up well.

Here’s how to make an MVNO: Surinam’s incumbent mobile operator is launching one of the things in Holland, where about 330,000 Surinamese expats live. There’s your highly differentiated market. Teleena is providing the IT, and probably Telfort is providing the wholesale connectivity.

Meanwhile, yer Googlephone is doing better than expected — HTC has roughly doubled its production run. Telephony Online reports from an open-source conference on how the very non-open iPhone is doing so well. (The secret: it’s doing everything on the open Web.) Real geeks, meanwhile, might want to check out the next instalment of Paul Todd’s Nokia OMA DM HOWTO.

Vodafone boss Vittorio Collao thinks the carrier needs to become “faster” in general — faster to respond to customer needs, competitor initiatives, and opportunities. Pity, that; they were beaten to the Turkish 3G spectrum by…Turkcell. In other operator news, the Bell Canada LBO has fallen through, and the FT thinks this is nothing but good news.

We’re very keen on integrated video distribution, and CPE as a competitive edge for fixed operators. (It’s not just those crazy Telco 2.0 guys, either.) Here’s some news which combines the two: TiVo users can now control the gadget from a mobile-optimised Web site. We’re also very keen on Voice & Messaging 2.0, but far from keen on IMS; so here’s a story with both. Mobile VoIP developers Fring will be speaking tomorrow at the IMS World Congress about their tie-up with Mobilkom Austria.

UK WiMAX is a-coming, it seems, with a focus on cheaper symmetrical connections for small businesses. It’ll have to do until the fibre shows up. Meanwhile in Australia, they’re getting ready to do the job. There is some good news for UK ISPs, however: BT is cutting its backhaul pricing sharply. Not so good if you’re a BT shareholder.

And finally: can you tell a Node-B from a real tree? We think it would have made better sport if some of the photos didn’t show the various green monster equipment boxes and fencing around them.

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

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