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August 27, 2009

Fergal Sharkey to stimulate Telco 2.0 event

We’re delighted that Fergal Sharkey, CEO ofUK Music, (the collection society for UK musicians), will be joining an important session at the 7th Telco 2.0 Executive Brainstorm on ‘Media 2.0 - Digital Distribution in a ‘Pirate World’.

Teenage dreams. So hard to beat

He’ll be providing stimulus for a debate on “New Business Models for Licensing content on broadband networks” and will be joined on a panel by senior representatives from Universal Music, Virgin Media, GroupM and others. (NB: Early bird discount rates finish in a few days. Apply to participate here.

Some of you may remember Fergal from his days with the Undertones:

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August 24, 2009

Ring! Ring! Hot News, 24th August 2009

Top stories:

FCC prepares for mobile competition hearings, and wades into Google/Apple/AT&T

China Mobile app store launch

N97 disappoints - Nokia links up with Microsoft

Telco data “can tell better than you who your friends are”

African Internet traffic surges as East African cables light up

In other news: Verified online dating; “dynamic green routing” to save power in the cloud; Google seeks smart grid interoperability; cable cuts cause Chinese chaos, but not as much as in 2006; routing diversity scores on the doors from Renesys; BGP fatfinger strikes again; SingTel profits up on big Bharti contribution; giant credit-card hack; AT&T, T-Mobile robbed by ex-employees; Australian police too clever for their own good; Hacking at Random builds its own GSM network; Patricia Russo’s six weeks at SpinVox; 4th French 3G licence coming; O2 Germany OK with mobile VoIP; BT outsources everything, closes grad recruitment; Yorkshire lifeboat crew builds their own FTTH; slow progress on fibre in Spain; Budde, Conroy speak on open fibre networks; USDA report out on rural broadband; teledensity passes 100% in Venezuela; Orange, Vodafone looking for a social network; INQ-Spotify hookup; RIM “fastest growing company”; cops desert Airwave for RIM; John Todd speaks about Asterisk, communities, etc

The FCC is considering whether it should launch a full-dress inquiry into competition in the US mobile business. As the new FCC staff have begun to bed in, the agency has been increasingly activist, and this hearing is intended to look at the complex topic of intercarrier pricing, the US equivalent of termination in Europe. Could this be the beginning of a Viviane Reding-like telco-bashing rampage?

There’s a heavy agenda at the FCC right now; they’re taking submissions on the question of how to define “broadband”, or to put it another way, what the minimum standards for the US’s telecoms infrastructure should be, and they’re wading into the Google Voice/Apple/AT&T row as well. It all suggests that more regulatory pressure can be expected on the Telco 1.0 business’s margins going forward, to say nothing of more competition.

Here’s your latest app store story: China Mobile launched its Mobile Market with some 4,000 apps available on day one. Nobody could quibble with their scale, after all. Strangely, no mention of the Joint Innovation Lab, which could let the same apps work for Vodafone and Softbank users as well.

In more immediately lucrative news from China, ZTE saw its profits rise 41% while elsewhere, Nortel’s losses doubled and most of the board quit.

Nokia’s smartphone shipments haven’t been great - so far, they’ve shipped about half as many N97s as Apple did iPhone 3GS gadgets on day one. Not surprisingly, this has led to a volley of announcements from the Espoo Vatican; and you can tell they’re serious as hell, because they don’t include a new services strategy…

Most importantly, there’s a deal with Microsoft to develop handsets and software for the enterprise, running on the Symbian OS. Both parties agree to set up dedicated development teams, and MS will integrate the mobile software with various Office products, SharePoint, and MS Live Messenger, as well as reading and editing MS Office documents on mobile devices.

Olli-Pekka Kallasvuo further promised to defeat the Apple menace, and said that a Linux-based phone would be coming soon. He also claimed that Nokia would succeed with its services strategy. Oh well.

Nokia R&D, however, is doing some interesting stuff; Nathan Eagle has just published five years’ worth of research on mining GSM data in order to analyse social networks. Sinisterly, the CDR pile was better at predicting who was friends with who than the actual people. The paper, in the Proceedings of the National Academy of Sciences, is here.

Meanwhile, CheckedProfile offers to verify that your online dating picture is really you, for a price. Is anyone else faintly reminded of the Arthur C. Clarke story about a telephone exchange that becomes self-aware and starts quietly manipulating the human beings around it by interfering with their calls?

The New York Times has a good article on the landing of the SEACOM and TEAMS cables in East Africa; perhaps more to the point, contributors to NANOG from Kenya have described a dramatic surge in Internet traffic since the first cable was lit up on the 23rd of July. It’s due to a combination of the default TCP window scaling behaviour, which detects that more capacity is available and attempts to maximise its throughput, and user behaviour.

Given that it may be possible to save 40% of a cloud computing installation’s power usage by dynamically routing computing tasks to wherever the power is cheaper, or perhaps even where the data centre is cooler, who knows what we might see? Giant server farms by the Kariba Dam?

Google, meanwhile, is working on interoperability standards for smart grid kit.

You can’t do dynamic green routing, or indeed anything much, if someone cuts the cables. Last week also saw significant disruption to telecoms services in Asia after a submarine landslide damaged major cable networks. However, as CommsDay reports, even though there is still a long queue for cable ships, the Internet and the cable world coped much better with the outage than last time, after the Taiwan Straits earthquake. Renesys has a interesting piece on measuring the diversity of Internet access; Amazon (unsurprisingly) comes out as being very close to perfection (there’s an AWS prefix in Hong Kong that isn’t quite right), Vietnam Posts & Telecoms is one of very few carrier-sized networks to score a perfect 100, and the US Social Security Administration is entirely reliant on one path. No pressure, then.

It can’t have helped that, while the cables were all in twirls, another of those deadly BGP announcements escaped from a small Japanese ISP and began spreading across the Internet, rebooting routers as it went.

Despite, or perhaps because of, all the panic, SingTel announced profits up 7.7%, mostly driven by its investments in Telkomsel and Bharti-Airtel, although being able to route both ways around the world must have helped. Question: how does this affect the MTN-Bharti saga?

This week also saw the discovery of a giant hacker attack on a US credit card processing company, which resulted in the theft of 130 million credit cards using an SQL injection exploit. It turned out that the same people were responsible for ripping off $750,000 from cashpoints earlier this year, exploiting a similar bug. And that one of them had been a police informer all along - whoops! all round, really. If you aspire to handling huge amounts of sensitive subscriber data - especially in the light of the Nokia paper above - you better make sure this doesn’t happen. It turns out, however, that the telcos are far from immune - a group of ex-resellers were able to get access to databases at AT&T and T-Mobile USA and steal $22m worth of phones and airtime.

You can’t trust the police, either; Australian policemen attempted to catch a group of hackers by setting up a honeypot Web site…but forgot to set a password to restrict access to the database underlying it. Fun and games ensued.

But you can roll your own GSM network. The Hacking At Random camp in Holland, like last year’s Burning Man, had its very own homemade cellular network based on the OpenBTS and OpenBSC software projects and whatever hardware they could find, lashed to trees with gaffer tape.

And it seems that SpinVox appointed Patricia Russo as a director on the 2nd of June, and she quit on the 10th of August. Perhaps that weird and sinister stand at MWC should have told us more than it did at the time? It was completely covered in little plastic men…

ARCEP has announced that the fourth French 3G licence will be sold for €240m, about a third of the price the original three operators paid. It’s less spectrum (10MHz), but then, the original three are also being asked to share some of their cherished 900MHz GSM holdings with a new entrant. No surprise that Orange is suing, which ought to hold up the prospect of Iliad Mobile a while longer.

O2 Germany, meanwhile, has thrown open the doors to mobile VoIP users, while T-Mobile at first refused to accept iPhone voice apps and then reversed course and demanded a special supplement.

In the UK, BT announced the outsourcing of maintenance on the local loop to a consortium between Carillion (a construction firm) and Telent (the rump of Marconi, which continues to supply BT with legacy parts). They also closed their graduate trainee scheme.

So, if you’re British and you need fibre, you might have to dig yourself; which is what a lifeboat station in Yorkshire actually did. Hull-based community broadband activists Fibrestream are behind it, but the lifeboatsmen pulled the last mile of fibre optic cable to hook up their 100/100Mbits Ethernet themselves. Carlos Bock, meanwhile, reports on the status of FTTH in Spain and finds that it’s making slow progress, but there are two open public-sector networks.

There’s an interesting interview with Paul Budde about open networks here; as if on cue, Australian minister for broadband Stephen Conroy gives a speech on the importance of trans-sector integration for the deployment of fibre, specifically in the health sector. And the US Department of Agriculture has a report out on the benefits of broadband for the rural economy.

It must benefit someone, even if a recent report described 80% of Twitter traffic as “pointless”; Venezuela has just become the latest member of the 100% penetration club. Speaking of Twitter, Orange and Vodafone are both threatening to launch a social network product. The original and best in these things is 3’s INQ, which took the sensible decision of facilitating usage of the existing ones rather than trying to build Telco Facebook, and it emerged this week that the heavily hyped music service Spotify may soon join the line up of applications on the INQ.

Corroborating evidence includes the fact 3 (and therefore INQ) owner Li Ka-Shing turns out to be an investor in Spotify.

The other triumph in mobile social networking is, of course, BlackBerry e-mail for suits. And despite the downturn and the existence of so many other mobile e-mail solutions and the continent-wide outages, RIM is supposedly one of the fastest growing companies in the world. Which may not be surprising; just a couple of years after the British emergency services got a spanking new dedicated TETRA radio network (Airwave), some of them are investing in a RIM-based solution for recording arrests and consulting the police national database on the streets.

And there’s an interview with John Todd of Asterisk fame here.

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August 20, 2009

Mobile Advertising: 100 times more customers - Blyk’s Wholesale Strategy

What is happening with Blyk? There has always been a slight whiff of cordite around the ad-boosted, two-sided MVNO, with mutterings aplenty around the viability of their retail business. We’ve been long time admirers of elements of their business model, even if we have admittedly sat on the fence about their prospects.

Now, Blyk is apparently preparing to hand its customers over to Orange UK; some people are describing this as Blyk “giving up”, or as signs of serious problems there. We disagree, and we would like to point to the simultaneous deal they signed with Vodafone in the Netherlands as evidence.

Why shift from a Retail to a Wholesale Business Model?

The original special sauce in Blyk’s business model was that it could offer advertisers a highly targeted audience and a dramatically higher response rate than almost any other medium, because it was both hyper-targeting the ads and, more importantly, rewarding its subscribers for opening them with free airtime, a currency it had in abundance because of the low marginal cost of SMS or voice traffic.

However, even bearing this in mind, it’s worth remembering that even if a response rate of 29 per cent is maintained, Blyk has yet to become a really big ad property. 29% of 200,000 subscribers sounds good, but what are the ‘responders’ actually doing? They aren’t all buying or providing an actionable lead at this moment, and even if there are further transaction opportunities (e.g. the equivalent of your brand appearing on a customer’s Google search list) the relative volume of customers reached is small and the value of the interaction is hard to assess compared to many forms of media.

Traditional media buyers prefer media with reach so that they can tell their advertising clients that their campaign will definitely hit lots of their target customers, and like it even better if they can prove the end result. Advertising clients also like certainty, and are often slow to adopt new media because they aren’t sure they really work, Moreover, Blyk’s retail proposition only targets the youth segment, not the famed ABC1 Adults or any other demographic, so their addressable market of advertising is considerably limited.

All of these considerations mitigate against the long-term viability of the retail version of Blyk which was focused on the youth segment - albeit a good place to prove a concept of this sort. Quantity, as Lenin said, has a quality all of its own.

Even if the retail version of Blyk did eventually become a decent retail business - and our sources reckon they had at least £50m in funding available at the turn of the year - the scale issue is going to remain a drag on the attractiveness of the operator to advertisers and on the rates it can charge them. That, in turn, has an impact on just how good it can make the end-user proposition after it’s covered its operational and subscriber acquisition costs.

These may have been critical elements in the decision. Subscriber acquisition and support costs are hard to control and are essentially unavoidable - if you want to scale up, you’ve got to burn the money acquiring subscribers, and however many subs you have, some percentage of them will generate support calls. However, it is true that it’s easier to spread the support and acquisition costs in a bigger pool of subscribers.

Also, why invest in all this tricky operational stuff when lots of players do it at a scale that Blyk is unlikely ever to be able to match? It therefore makes a lot of sense for Blyk to partner and focus on its source of advantage - the knowledge of how to interact successfully with customers like this, manage the metadata etc. - and let the operators do the operational customer management.

Our sources suggest that Orange is planning to market Blyk services across the entirety of their pre-paid subscriber base, whether under that name or under their own brand; there are also rumours that more deals with carriers are coming soon.

A reasonable theory: now make it work

So while being a niche MVNO can get you 200,000 subscribers; selling a white-label service to a carrier could get you access to 20 million subscribers, and with considerably more security with regard to things like wholesale airtime and pricing. This should in theory create a much more attractive media channel, a more effective and economic operational platform, provide added-value to the operator and ultimately a better commercial proposition overall for Blyk’s owners. The practice will depend, as ever, on the go-to-market strategy and implementation.

In theory too, the ad rate for a 29% response rate over 20 million subscribers should be good relative to many other forms of media - although an interesting question remains over the exact contractual terms between Orange and Blyk. Will Blyk manage the business relationship with the advertisers and take a share of the revenue from them? We imagine that a success-based deal of this sort would make sense for all parties. It will certainly benefit Blyk if it can share some of the uplift in ad rates as well as the boost in scale from the deal.

It will also be interesting to see how the technical model will work. Blyk had its own complete core network, making it one of the most elaborate MVNOs, but we haven’t yet seen them launch any developer APIs or new voice & messaging features although we always wondered when they might be coming. Presumably, Orange at least must be confident that the interfaces will work so that they can integrate with all the operator systems and processes.

So at the moment, it looks like Blyk is becoming a wholesale service provider to the telcos, for whom advertising will be another comms-enabled business process. We will continue to track their progress with interest.

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August 10, 2009

Ring! Ring! Hot News, 10th August

Top stories:

Bharti-Airtel & MTN: new $1bn cash hike

Mobile in brief: US price war, Orange UK’s pirate special, Sprint’s WLAN plan

Facebook: 83 top advertisers on board, and Google falls out of love with Apple; all the theories

Infrastructure: Microsoft data centre move threat, AT&T and Level 3 big in CDNs

In other news: Spinvox, Symbian S60, BT FTTC/VDSL, Spotify, 35 varieties of Asterisk - free!

The Bharti-Airtel & MTN merger grinds on. Last week they were promising that the merger made so much sense they would have to keep running the two companies independently; this week they resorted to a more reliable form of persuasion - cash. Bharti is hiking the cash element of the deal by $1bn, reducing the volume of new shares that will be issued and also fudging the question of who controls the company. Not only do the South Africans see MTN as a strategic national asset, but there are more than 20 regulators to satisfy across the combined empire. It sounds almost as fun as that proposed FTel/TeliaSonera tie up…

In other operator news, the price war rages. Leap Wireless announced unlimited US-wide voice service for $40 a month prepaid and kicked in unlimited data traffic as well; MetroPCS had already done that; so you wonder why anyone would take this deal, which offers the same price on voice and SMS but only 20MB of data.

The core voice revenue stream is being challenged, and the same dynamic is at work on data. Orange UK is offering a range of cheap dongle tariffs, including 500MB download for £5 a month, or alternatively, between 1 and 10GB depending on tariff plus unlimited service between midnight and 9 am - you could call it the pirate special, frankly, as this sounds directly aimed at people who leave their BitTorrent clients running all night.

Perhaps the continuing problems at O2 UK have something to do with all this data, especially with all those iPhones? For the third time in two weeks, they had a major outage, although their Twitter users continued to receive up to 600 SMS a month free. (That’s a data rate of 93KB/month - surely someone can think of a useful application?)

Of course, one use of mobile data is to make your own WLAN hotspot. It looks like this will be the first use for Sprint’s WiMAX network, as two such devices land. We recently saw someone asking why anyone would convert cellular connectivity to WLAN rather than replacing cellular with WLAN and broadband whereever possible; the answer is simple, which is that the world is full of wireless hotspots that don’t work, require exorbitant payments, have a login/payment page that can’t handle the traffic, etc etc etc. Bringing your own makes perfect sense, not least because it lets you use a sensible authentication/billing mechanism - the SIM card.

Twitter, Facebook, and Google were all subject to significant DDOS activity this week, supposedly driven by Russian hackers targeting blogs in Georgia on the anniversary of last year’s war. As is increasingly common, much of the actual disruption was caused by duelling security measures. An unexpected consequence of the attack was this fascinating blog post on Twitter’s network architecture; did you know status.twitter.com shares a server with f*ckyeahboobies.com? You do now; count us unimpressed and longing for the reliability of SS7…

Meanwhile, Facebook claimed that 83 of the top 100 US advertisers were buying space on the site.

Google’s Eric Schmidt quit the Apple board of directors last week; theories vary as to why. Was it the row about Apple’s late decision to bar the Google Voice application from the iPhone? Something to do with the App Store and Android Market, where the two are directly competing? Or perhaps it was connected with iPhone distribution agreements with AT&T and friends? It seems that the US Federal Trade Commission was not happy about an agreement the two firms had to refrain from poaching each other’s employees; perhaps Schmidt had to leave in order to prevent the regulators wrecking their sickmaking Californian love-in still further?

And in fact, the FCC won’t let them be; they are demanding explanations from both parties about the Voice affair, presumably on the grounds that once you involve yourself with telephony, a whole lot of extra regulations kick in. Spare a thought for the developer of the unofficial GV application, who is currently barred from supporting it and is faced with a volley of demands for refunds.

Meanwhile, advertisers all know they want an iPhone app, but none of them know why. And Palm has taken its row with Apple to the USB standards body; it seems they think using the vendor ID field in the protocol to bar some devices breaks the standard, and therefore they’ve decided to forge it and pretend to be an iPod.

The Spinvox fiasco goes on; they’ve prepared a dossier (a word that has acquired a bad significance) and are talking about “smear campaigns”, while former employees have put together their own dossier. Oh dear; it does look a little desperate.

A new version of Symbian S60 is coming; and it’s going to be based on the open source GUI toolkit Qt, which Nokia bought with Trolltech a while back. This is probably good news for anyone who wants funky grafix, but will almost certainly involve completely rebuilding existing applications.

Microsoft desperately wants iPhone developers; they’ve published a guide on how to port your existing applications to work with Windows Mobile 6.5, but as far as we know, they still want to charge you to sign up. More interestingly, their giant Columbia River-powered data centre is in trouble, as the state of Washington has imposed a tax on data centres. MS is threatening to move its Azure project from there to another DC, although they will still be hosting other projects there. If that’s so, what’s the difference, and how would you tell?

Speaking of big infrastructure, AT&T and Level(3) are now the fourth and fifth biggest CDNs, chasing Akamai, Limelight, and EdgeCast. Not surprisingly, then, Alcatel-Lucent is interested in selling telcos the bits they need to build CDN capability. They just acquired Velocix, ex-CacheLogic, which gives them both in-house CDN expertise and products and also the ability to cache and serve up P2P content as well.

BT, meanwhile, finally started its FTTC/VDSL rollout, and promptly crashed head-on into the pushy middle class. Residents of leafy Muswell Hill are furious that the street cabinets are 1.8 metres tall and generally rather big. This one is going to run and run…as Martha Lane-Fox sensibly said, it’s going to be difficult to be a fully engaged citizen without Internet access, and that very much includes upstream as well as downstream.

In really unsurprising news, Spotify turns out to be backed by the record industry.

And our readers are strongly advised to check out this list of 35 free Asterisk applications; just look at all that creativity with voice and messaging, and weep.

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August 6, 2009

LTE: Late, Tempting, and Elusive

AreteThis is a Guest Briefing from Arete Research, a Telco 2.0™ partner specialising in investment analysis.

The views in this article are not intended to constitute investment advice from Telco 2.0™ or STL Partners. We are reprinting Arete’s Analysis to give our customers some additional insight into how some Investors see the Telecoms Market.

Wireless Infrastructure


LTE: Late, Tempting, and ElusiveLTE is the new HSPA is the new WCDMA: another wave of new air interfaces, network architectures, and enabled services to add mobile data capacity. From 3G to 3.5G to 4G, vendors are pushing technology into a few “pioneer” operators, hoping to boost sales. Yet, like previous “G’s,” LTE will see minimal near-term sales, requires $1bn+ of R&D per vendor, and promises uncertain returns. The LTE hype is adding costs for vendors that saw margins fall for two years.

Despite large projects in China and India, we see wireless infrastructure sales down 5% in ‘09, after 10% growth in ‘08. As major 2G rollouts near an end, emerging markets 3G pricing should take to new lows. Some 75% of sales are with four vendors (Ericsson, NSN-Nortel, Huawei, and Alcatel-Lucent), but margins have been falling: we do not see consolidation (like the recent NSN-Nortel deal) structurally improving margins. LTE is another chapter in the story of a fundamentally deflationary market, with each successive generation having a shorter lifecycle and yielding lower sales. We expect a period of heightened (and politicised) competition for a few “strategic accounts,” and fresh attempts to “buy” share (as in NSN-Nortel, or by ZTE).

Late Is Great. We think LTE will roll out later, and in a more limited form than is even now being proposed (after delays at Verizon and others). There is little business case for aggressive deployment, even at CDMA operators whose roadmaps are reaching dead ends. HSPA+ further confuses the picture.

Temptations Galore. Like WCDMA, every vendor thinks it can take market share in LTE. And like WCDMA, we think share shifts will prove limited, and the ensuing fight for deals will leave few winners.

Elusive Economics. LTE demands $1bn in R&D spend over three to five years; with extensive testing and sharing of technical data among leading operators, there is little scope to cut corners (or costs).  LTE rollouts will not improve poor industry margins, and at 2.6GHz, may force network sharing.

Reaching for the Grapes

Table 1 shows aggregate sales, EBITDA, and capex for the top global and emerging markets operators. It reflects a minefield of M&A, currencies, private equity deals, and changes in reporting structure. Getting more complete data is nearly impossible: GSA says there are 284 GSM/WCMDA operators, and CDG claims another 280 in CDMA. We have long found only limited correlation between aggregate capex numbers and OEM sales (which often lag shipments due to revenue recognition). Despite rising data traffic volumes and emerging markets capex, we think equipment vendor sales will fall 5%+ in US$. We think LTE adds risk by bringing forward R&D spend to lock down key customers, but committing OEMs to roll out immature technology with uncertain commercial demand.

Table 1: Sales and Capex Growth, ‘05-‘09E

 ‘05‘06‘07‘08‘09E
Top 20 Global Operators     
Sales Growth13%16%15%10%5%
EBITDA Growth13%15%14%10%8%
Capex Growth10%10%5%9%-1%
Top 25 Emerging Market Operators     
Sales Growth35%38%29%20%11%
EBITDA Growth33%46%30%18%8%
Capex Growth38%29%38%25%-12%
Global Capex Total16%18%13%14%-5%

Source: Arete Research

LaTE for Operators

LTE was pushed by the GSM community in a global standards war against CDMA and WiMAX. Since LTE involves new core and radio networks, and raises the prospect of managing three networks (GSM, WCMDA/HSPA, and LTE), it is a major roadmap decision for conservative operators. Added to this are questions about spectrum, IPR, devices, and business cases. These many issues render moot near-term speculation about timing of LTE rollouts.

Verizon and DoCoMo aside, few operators profess an appetite for LTE’s new radio access products, air interfaces, or early-stage handsets and single-mode datacards. We expect plans for “commercial service” in ‘10 will be “soft” launches. Reasons for launching early tend to be qualitative: gaining experience with new technology, or a perception of technical superiority. A look at leading operators shows only a few have clear LTE commitments.

  • Verizon already pushed back its Phase I (fixed access in 20-30 markets) to 2H10, with “rapid deployment” in ‘11-‘12 at 700MHz, 850MHz, and 1.9GHz bands, and national coverage by ‘15, easily met by rolling out at 700Mhz. Arguably, Verizon is driven more by concerns over the end of the CDMA roadmap, and management said it would “start out slow and see what we need to do.”
  • TeliaSonera targets a 2010 data-only launch in two cities (Stockholm and Oslo), a high-profile test between Huawei and Ericsson.
  • Vodafone’s MetroZone concept uses low-cost femto- or micro-cells for urban areas; it has no firm commitment on launching LTE.
  • 3 is focussing on HSPA+, with HSPA datacards in the UK offering 15GB traffic for £15, on one-month rolling contracts.
  • TelefónicaO2 is awaiting spectrum auctions in key markets (Germany, UK) before deciding on LTE; it is sceptical about getting datacards for lower frequencies.
  •  Orange says it is investing in backhaul while it “considers LTE network architectures.”
  • T-Mobile is the most aggressive, aiming for an ‘11 LTE rollout to make up for its late start in 3G, and seeks to build an eco-system around VoLGA (Voice over LTE via Generic Access).
  • China Mobile is backing a China-specific version (TD-LTE), which limits the role for Western vendors until any harmonising of standards.
  • DoCoMo plans to launch LTE “sometime” in ‘10, but was burnt before in launching WCDMA early. LTE business plans submitted to the Japanese regulator expect $11bn of spend in five years, some at unique frequency bands (e.g., 1.5GHz and 1.7GHz).

LTE’s “commercial availability” marks the start of addressing the issue of handling voice, either via fallback to circuit switched networks, or with VoIP over wireless. The lack of LTE voice means operators have to support three networks, or shut down GSM (better coverage than WCDMA) or WCDMA (better data rates than GSM).  This is a major roadblock to mass market adoption: Operators are unlikely to roll out LTE based on data-only business models. The other hope is that LTE sparks fresh investment in core networks: radio is just 35-40% of Vodafone’s capex and 30% of Orange’s. The rest goes to core, transmission, IT, and other platforms. Yet large OEMs may not benefit from backhaul spend, with cheap wireline bandwidth and acceptance for point-to-multipoint microwave.

HSPA+ is a viable medium-term alternative to LTE, offering similar technical performance and spectral efficiency. (LTE needs, 20MHz vs. 10Mhz for HSPA+.)  There have been four “commercial” HSPA+ launches at 21Mbps peak downlink speeds, and 20+ others are pending. Canadian CDMA operators Telus and Bell (like the Koreans) adopted HSPA only recently. HSPA+ is favoured by existing vendors: it lacks enough new hardware to be an entry point for the industry’s second-tier (Motorola, NEC, and to a lesser extent Alcatel-Lucent), but HSPA+ will also require new devices. There are also further proposed extensions of GSM, quadrupling capacity (VAMOS, introducing MIMO antennas, and MUROS for multiplexing re-use); these too need new handsets.

Vendors say successive 3G and 4G variants require “just a software upgrade.”  This is largely a myth.  With both HSPA+ or LTE, the use of 64QAM brings significant throughput degradation with distance, sharply reducing the cell area that can get 21Mbps service to 15%. MIMO antennas and/or multi-carrier solutions with additional power amplifiers are needed to correct this. While products shipping from ‘07 onwards can theoretically be upgraded to 21Mbps downlink, both capacity (i.e., extra carriers) and output power (to 60W+) requirements demand extra hardware (and new handsets). Vendors are only now starting to ship newer multi-mode (GSM, WCDMA, and LTE) platforms (e.g., Ericsson’s RBS6000 or Huawei’s Uni-BTS). Reducing the number of sites to run 2G, 3G, and 4G will dampen overall equipment sales.

Tempting for Vendors

There are three reasons LTE holds such irresistible charm for vendors. First, OEMs want to shift otherwise largely stagnant market shares. Second, vendor marketing does not allow for “fast followers” on technology roadmaps. Leading vendors readily admit claims of 100-150Mpbs throughput are “theoretical” but cannot resist the tendency to technical one-upmanship. Third, we think there will be fewer LTE networks built than in WCDMA, especially at 2.6GHz, as network-sharing concepts take root and operators are capital-constrained. Can the US afford to build 4+ nationwide LTE networks? This scarcity makes it even more crucial for vendors to win deals.

Every vendor expected to gain share in WCDMA. NSN briefly did, but Huawei is surging ahead, while ALU struggled to digest Nortel’s WCDMA unit and Motorola lost ground. Figure 1 shows leading radio vendors’ market share. In ‘07, Ericsson and Huawei gained share.  In ‘08, we again saw Huawei gain, as did ALU (+1ppt), whereas Ericsson was stable and Motorola and NSN lost ground.

Figure 1: Wireless Infrastructure Market Share, ‘07E-‘09E

Figure 1: Wireless Infrastructure Market Share. Source: Arete Research

Source: Arete Research; others incl. ZTE, Fujitsu, LG, Samsung, and direct sub-systems vendor sales (Powerwave, CommScope, Kathrein, etc.);
excludes data and transmission sales from Cisco, Juniper, Harris, Tellabs, and others.

While the industry evolved into an oligopoly structure where four vendors control 75% of sales, this has not eased pricing pressure or boosted margins. Ericsson remains the industry no. 1, but its margins are half ‘07 levels; meanwhile, NSN is losing money and seeking further scale buying Nortel’s CDMA and LTE assets. Huawei’s long-standing aggressiveness is being matched by ZTE (now with 1,000 staff in EU), and both hired senior former EU execs from vendors such as Nortel and Motorola. Alcatel-Lucent and Motorola are battling to sustain critical mass, with a mix of technologies for each, within ~$5bn revenue business units.

We had forecast Nortel’s 5% share would dwindle to 3% in ‘09 (despite part purchase by NSN) and Motorola seems unlikely to get LTE wins it badly needs, after abandoning direct 3G sales. ALU won a slice of Verizon’s LTE rollout (though it may be struggling with its EPC core product), and hopes for a role in China Mobile’s TD-LTE rollouts, but lacks WCDMA accounts to migrate. Huawei’s market share gains came from radio access more than core networks, but we hear it recently won Telefónica for LTE. NSN was late on its HSPA roadmap (to 7.2Mpbs and 14.4Mbps), and lacks traction in packet core. It won new customers in Canada and seeks a role in AT&T’s LTE rollout, but is likely to lose share in ‘09. Buying Nortel is a final (further) bid for scale, but invites risks around retaining customers and integrating LTE product lines. Finally, Ericsson’s no. 1 market share looks stable, but it has been forced to respond to fresh lows in pricing from its Asian rivals, now equally adept at producing leading-edge technology, even if their delivery capability is still lagging.

Elusive Economics

The same issues that plagued WCDMA also make LTE elusive: coverage, network performance, terminals, and volume production of standard equipment. Operators have given vendors a list of issues to resolve in networks (esp. around EPC) and terminals. Verizon has its own technical specs relating to transmit output power and receive sensitivity, and requires tri-band support. We think commercialising LTE will require vendors to commit $1bn+ in R&D over three to five years, based on teams of 2-3,000 engineers. LTE comes at a time when every major OEM is seeking €1bn cost savings via restructuring, but must match plunging price levels.

To read the rest of the article, including:

  • Coping with Traffic
  • Is There a Role for WiMax?
  • Will Anyone Get the Grapes?

…Members of the Telco 2.0™ Executive Briefing Service can read on here. Non-Members please see here to subscribe.


AreteThis is a Guest Briefing from Arete Research, a Telco 2.0™ partner specialising in investment analysis.

The views in this article are not intended to constitute investment advice from Telco 2.0™ or STL Partners. We are reprinting Arete’s Analysis to give our customers some additional insight into how some Investors see the Telecoms Market.

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August 3, 2009

Ring! Ring! Hot News, 3rd August 2009

In Today’s Issue: Strategy: Sprint’s WiMAX plans leak; Sprint loses contract customers; buys and closes Virgin Mobile; BT cleans up after Satyam SatScam; BT, FTel, Telefonica, Motorola shares up on non-awful results; ALU wants to sell more assets; Telefonica saved by Latin American businesses; 900MHz refarming is go!; what a mess at Nitel; Bharti Airtel/MTN - support the merger, we promise we won’t really merge; Core Services: Secret of the iPhone - telephony; AT&T accused of Telco 2.0 in reverse; Blyk swaps 200,000 MVNO subs for 12 million as a managed service; B2B Platform: TWC squeezed between Web video and IPTV; Google uses SMS for verification; BREW, RIM integrated with VZW app store; Enablers and APIs: Qualcomm, VZW plan to “explode” M2M applications; new Nokbrowser out; Technology and Devices: 1.5% of Indian Symbian devices virus-ridden; hackers explode iPhone with special SMS; spying on Amazon EC2; no MSFT phone; Intel gives “MIDs” the humane killer; upgrading your hacked TiVo; HOWTO stage the jewel heist of the century; the best papers on internetworking, ever

Strategy

A Sprint document leaked, giving details of their next wave of WiMAX deployments. Interestingly, they aren’t in the places you might expect; perhaps they are doing the easiest radio plans first? It would hardly be surprising, seeing as they made a large loss, as valuable contract customers left the building and they also decided to buy out Virgin Mobile USA for $420 million. The plan is to fold the Virgin customers into Sprint mainline; so what did happen to the wholesale strategy?

An interesting wholesale play at BT; they are assisting in the clean-up at Tech Mahindra after the spectacular fraud that brought down Indian outsourcing giant Satyam, providing advice on corporate governance. Perhaps it could become a regular line of business? “Post-Fraud Consulting”? The markets seemed to like it, though; BT shares were up sharply, although it probably had more to do with reasonable first quarter results.

Similarly, France Telecom’s numbers weren’t fantastic, but were far from awful in the context of a horrible economy, and the markets reacted with a certain degree of enthusiasm. Apparently the project of buying part of Zain is still on the cards, as well.

Similar news at Alcatel-Lucent; they made an operating loss in this quarter, but expect to break even for the year, and the shares went crazy. Ben Verwaayen put the business on notice that he plans to sell more divisions and enter into more partnerships like the one with HP to sell their telecoms products. And Telefonica saw earnings down 6.5% in Spain, as the recession bit hard, but a game-saving performance from their Latin American businesses put them just into positive territory.

There’s some major news for European operators: the EU has given the go-ahead for 900MHz spectrum refarming. Expect more trouble between the British operators as the spectrum/consolidation game starts for real.

Even Motorola had results that weren’t entirely terrifying this week - shipments actually rose for the first time in too long…

The Nigerian Comms Commission says sorry; this comes after a ship (probably) cut the SAT-3 cable’s Benin branch and Nitel failed to pay its dues to the cable consortium for the use of the Nigerian branch. Which is especially embarrassing as Nitel is a part-owner of the cable.

And Bharti Airtel and MTN are so convinced of the underlying industrial logic of their merger that they are promising the shareholders that the two companies will be managed entirely separately. Does this really make sense?

Core Services

The purpose of a telephone is to make telephone calls; so could this story be an important part of the iPhone’s success? A comparative test of a range of smartphones showed that the current iPhone was easily the best for voice performance; the Nokia E71 came out worst.

As if to pass an ironic comment on this, Apple made a last-minute decision to drop Google Voice from the app store, after they had originally welcomed it; rumour suggests AT&T was behind the decision to zap it, which would suggest the opposite of a Telco 2.0 strategy. Rather than trying to facilitate new forms of voice and messaging, and come up with a strategy to make money from that, they’ve made them verboten. And this after they bought into the biggest developer community in mobile…

Perhaps it’s wiser than it looks, though; Google has started asking new Gmail users for their mobile phones, supposedly so they can use them for two-factor verification in order to stop the spambots getting in. Paranoid response: they’re harvesting phone numbers for Google Voice! Less paranoid: don’t you wish you’d started offering Mobile Signature before this happened?

Meanwhile, Blyk wants to stop being an MVNO and start white-labelling its service to whole carrier subscriber bases.

B2B Platform

Time Warner Cable is complaining that competition from Web-video and from telcos offering IPTV is squeezing its margins on two fronts.

Qualcomm is working hard to escape its past as a CDMA specialist and to build a developer community. Verizon Wireless this week announced that it was going to integrate Qualcomm’s BREW platform in its new app store. Aye, one of them. VZW announced this week that its V CAST appstore would offer a 70% revenue share and guarantee a 14 day turnaround through the testing process, which would be free. An early partner is RIM, whose co-CEO Jim Basillie said:
“Does the world need another app store? Absolutely.”

Enablers and APIs

There’s also been some news about VZW’s partnership with Qualcomm on machine-to-machine applications, which will be a 50:50 JV. Said Tony Lewis, head of VZW Open Development:
“The opportunity here for Verizon Wireless is to explode its open development business”
You are sure you want it to explode?

The latest version of the Nokia browser is out.

Technology and Devices:

It emerged that 1.5% of a sample of Symbian devices in India were infected with malware, on the same day as it turned out that hackers had discovered how to crash iPhones (and many others) remotely with a specially crafted SMS message. And, as if to fuel the paranoia, attendees at the Black Hat convention discovered how to create an Amazon EC2 virtual machine that spies on other people’s EC2 virtual machines.

Microsoft, meanwhile, announced that no, there will be no Zune phone; they intend to stick to a software-only strategy, which is fair enough coming from a software company. The real question is whether their doomed quest for cool will continue, or whether the fact that they specialise not just in software, but in software called “Office”, will bite and induce them to concentrate on enterprises.

Intel, however, looks like it’s going to let the Moorestown chips, developed for “mobile Internet devices”, go quietly; the problem being that both smartphones, and the netbooks that mostly use Intel processors, do all the mobile Internet you might need. Come to think of it, MIDs were never really a sector to begin with - perhaps it would be honest to accept that they were something of an Intel marketing concept all along.

Jamie Zawinski talks about the problems of replacing the hard disk in a TiVo when you’ve been applying your own unauthorised innovations to it. There’s also a lot of interesting advice about how to download dodgy TV really fast and organise it really well in the comments. In other video delivery news, there’s yet another smart set-top box coming, this time from Metrological, Miniweb, and Intel - this one includes the management server as well.

And hackers demonstrated at DefCon how you can break into a video surveillance or teleconference system, capture video from it, then play it back in to the system in a loop, so that the CCTV picture keeps showing perfect normality while you steal the jewels.

Via David Isenberg, here’s a suggested list of the most important scientific papers on the Internet.

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