Telco 2.0 event: Digital Town summary
Over the next week or so, we'll be reprising some of the key ideas and themes from the breakout sessions. First out of the gate is Digital Town, where we were looking at future funding models for access networks.
It's useful to be a utility
The day was opened by Jonathan Dann of investment bank Bear Stearns. He noted that the telecoms sector has recently rallied, and that is being driven by ring-fenced assets like BT's Openreach being given utility ratings (i.e. better than damaged telecom ratings). This should come as no surprise: the BT access network is being paid for by a collection of different business models of resellers and unbundlers. Together they will provide a less volatile return than a single integrated retail division.
Jonathan deeply hinted that the upcoming fibre deployment in the UK needs to learn something from this: Verizon FiOS-style approaches may not meet City approval. Our single one-size-fits-all IPTV service really is the best way to pay for this $bn access network... But will the investors keep buying that story?
Brian Condon of Close The Gap has been building a large community co-operative fibre project in the Netherlands. The striking thing is that "triple play" doesn't reflect the value people get out of the network. To them, the core things aren't necessarily fast Internet access, but rather the ability for elderly or infirm residents at home or in care to be able to watch and participate in a church service, or video conference with their doctor. As an Edinburgh resident, I can easily imagine a Festival TV being popular and profitable - but not until most homes and hotels are wired up for it.
Ricardo Krikke of the International Network of E-Communities (INEC) echoed this sentiment, saying:
- Triple play is a 'me too' strategy and doesn't deliver the full benefits of broadband
- The involvement of the public sector in access network deployment is inevitable
- Government's job is to stimulate aggregation of public services.
Overall, it couldn't be clearer that investors and users aren't looking for fibre to repeat the 3G experience: over-priced, under-utilised, with a wrong guess at what applications the users really want.
Some audience feedback using the Mindshare technology:
"Why do we need open networks to enable public services? Can these services not be provided on top of existing networks?"
"Why no similar projects in UK - is it a peculiarity of Dutch society?"
"What is the legitimate role of the public sector, is it to work within the market forces or bypass override them?"
"Is there not a risk on a 20 year view of some increasing proportion of users having their needs addressed entirely by mobile + DTT / satellite and therefore not needing fixed at all, thus reducing revenues for this "utility" -- so there is a risk...?"
Monopoly, meet monopsony
Ed Brown gave a UK perspective on how £250m of public sector buying power was being aggregated into a regional network supply contact in Yorkshire. The critical barrier is overcoming the EU's rules on public subsidy or market distortion. In the Q&A one perceptive audience member asked about what happens at the end of such contracts: aren't you hostage to the now monopoly supplier? This seems to have been taken into account, with contract extensions and asset buy-outs written in.
This model of public sector purchasing power being aggregated appears to be a likely major growth area that will have a ripple impact on operators and suppliers everywhere.
The message of "business as usual will not be tolerated" was reiterated by Oliver Breidt of Network Economy. He observed that integrated operators are creating weak revenue growth and shareholder returns compared to the companies that focus on the individual parts of the service delivery puzzle. The future lies in "white label" operators who are comfortable with extensive (or even exclusive) wholesale operations.
"In vertically integrated telcos delivering end-to-end service quality is possible. But how do you ensure fulfillment, assurance and billing end-to-end in a disintegrated, broken-up world? End-to-end service assurance will stil be expected by customers, won't it?"
"I like the open access model...however when I look around the world the only market based economy with significant fibre deployment does not sign up to the open model."
Three for the price of two
I asked our ever-insightful analyst-in-residence, Keith McMahon, to give a 2-slide 2-minute presentation on "Can Joost take off?". Joost is the PC-based broadband TV product of the folk who brought you KaZaA file sharing and Skype. Since most of the access network deployments are based on the premise of selling bonded (overpriced?) video entertainment, it's a critical question. What if IPTV gets Skyped?
Keith outlined a four-stage evolution of the peer-to-peer technology: pirate's friend; content-provider friendly P2P that adds in legitimate licensing deals and DRM (but remains uneconomic); network-friendly P2P that works with the operator's network topology and caches, rather than backhauling every bit across the world; and finally advertiser-friendly P2P that personalises the experience. So the overall message is that we're only at stage 2, and Joost won't make any material difference - yet.
Don't just sit there, do something
Our next session took some lessons from those who are actually building networks rather than buying them or advising about it.
Steve Hurdle manages the Wireless Cities programme for BT. This is a rather cunning initiative that partners with cities to deliver outdoors wireless access (e.g. for parking meter wardens). BT get access to lots of street furniture and fixment sites for their equipment, and use unlicensed spectrum. With their forthcoming wave of convergence devices, many of those minutes in densely populated regions may traverse the BT infrastructure. You can see this might have a real effect on how large their wholesale minute bill is to Vodafone, on whom they have built their MVNO. Vodafone end up with all the cost of build-out to meet their license commitments, whilst BT cream off the most profitable traffic. (Note that none of this is what Steve actually said aloud, just our reading between the lines...)
Again, a take-away is that the era of top-down national infrastructure deployments is ending. In its place you have many local initiatives, and local knowledge and personal relationships matter as much as technology and funding.
Rami Houbby from the Fibre to the Home Council reminded us of some basic truths: historical bandwidth trends indicate that the limits of copper technology are likely to be breached around 2010. The growth appears to be coming from open access networks in northern Europe, with some major new projects such as in Vienna. Municipalities can access low-cost finance, and passive infrastructure is an appropriate investment opportunity for them. His key advice?
- Co-ordinate with all key areas of the Municipality, e.g. Local utilities, Municipal housing, Schools and internal administration
- Get the residents involved: Find out what they really value, Provide simple and realistic information about build and service plans
I was rather taken by the tool for laying fibre in cracks in the pavement. I'd have to be careful my 18 month old daughter doesn't pick out telecoms infrastructure with the collection of stones and leaves she normally finds so fascinating every 20 paces.
"WiFi - has the industry missed an opportunity with bad / expensive roaming / interoperability?"
"Why is Europe slower than the US in building out fibre?"
"When will FTTH deliver beer - that's the killer app!"
So, where's the value?
We concluded by comparing and contrasting three different outlooks: a national operator with a national viewpoint; local community networking; and bottom-up user-built networks.
Baldewijn Westerbeek of KPN shared some of the challenges and opportunities in the Dutch market. KPN has restructured a little like BT, with a fenced-off wholesale and infrastructure division. They are making a number of strategic shifts, the first three of which he listed as:
- Traditional phone company to Multimedia company
- Copper to Fiber
- Technology driven to Market & marketing driven
But can they do it all?
To KPN, "Telco 2.0" means evolving the vertically integrated operator in each layer, not separating the layers. We're an innovative Internet technology company! We're an infrastructure builder! We're a customer intimacy specialist! It remains to be seen how long KPN remains in all these businesses. They may succeed and be rewarded copiously for it, or severly punished for their ambition. BT is also executing every Telco 2.0 strategy at once: diversifying, doing product innovation, opening up the platform, and building a wholesale pipe business. As a KPN investor, I'd be asking: just what is KPN going to do that offers unique synergy or outstanding excellence? Are they focused enough, or is their energy too dispersed?
Next was Malcolm Matson, who recounted the basics of the OPLAN (Open Public Local Access Network) movement. He sees a future where local access networks are privately financed with long-term debt attractive to pension funds etc. The network assets held in special purpose entities that are structured to encourage a monopoly supplier, but without monopoly rent or the possibility of favouring particular services players.
The challenge of Malcolm's model is the opposite of KPN's. KPN can offer a nationwide delivery platform for a content partner. Every town having its own network may mean excessive fragmentation in the wholesale market. There's no easy answer: you can't expect local control to result in homogenous networks. However, a specialist OPLAN constructor could achieve scale and commonality efficiencies.
No doubt we'll look at OPLANs in more depth in a future blog post.
Finally, Robert Lang from FON gave the contrasting viewpoint of bottom-up network construction. We think there's a cautionary tale here for both fixed and mobile operators. Firstly, what's the point in bringing fibre to every building in the city if the only one you can access is in your own home? Walk down the street, and you'll be bathed in inaccessible WiFi to cheap, fast backhaul. The value isn't in the pipe, it's in making the pipes accessible!
Mobile operators should also pause for thought. As we move towards widespread picocell and femtocell deployment, the standard operator build-out approach may fail. Expensive software is normally used to mix demographic and RF data to plan cell sites. But as you get down to ever-smaller scales of in-fill of coverage, the operator no longer has best knowledge of where the gaps in coverage are (no measurement trucks visited my basement) or which are the most important to users. Maybe the business model needs to evolve, so venue operators (bars, nightclubs, stadia) can help build the access infrastructure, share the risk and the rewards?
"Understand the motivation for the OPLAN model but it risks fragmentation, lack of interoperability and serious casualties."
"Do investors see the world like KPN or like Malcolm?"
"If OPLAN networks are privately funded and owned, what is to stop market forces leading to the network falling into less public spirited hands."
We'd like to thank all the speakers and participants for making this such a stimulating and interactive day.