Telco 2.0

BBC iPlayer Bandwidth Wars

JoshG1 — Mon, 25 Aug 2008 13:42:00 GMT

It’s August; not much going on in the telcosphere. But the summer calm was shattered this week by some news — and, despite what you’d read elsewhere, it wasn’t the Ericsson/STMicro merger. We documented, with a little help from Plusnet and their happy ~~wurlitzer~~ Ellacoyas, just how heavily the BBC’s iPlayer TV streaming service hit British ISPs. We also noted that even if the Beeb is sucking up a lot of bandwidth, it’s still not as big a deal as YouTube.

Now, it looks like a second wave of iPlayer-related disruption is heading for the British DSL providers’ bottom line. And the pattern is likely to repeat itself all over the world, since you have a misalignment of interests between media players (who want free or cheap online distribution), and ISPs (who want to sell ‘unlimited’ plans to users in the hope they never use any of the capacity sold). The answer will inevitably be a new more dynamic market for bandwidth and content delivery. In the meantime, we can watch the old industry structures strain and buckle. So what drives the economics of online video delivery? [Ed - We will be launching a major new research report into online video delivery this autumn, more details to follow.]

As so often, economic change on the Internet is manifesting itself as a peering war, or something like one. Peered networks mean no money changes hands between telcos; otherwise you have to pay or receive money for transit. Since receiving money is good, and paying out isn’t, this is core to the business model. Ma Bell grew up on the back of AT&T’s leverage over smaller local telcos when it came to interconnect with the long distance network.

The BBC has been criticised on this blog for an attitude to the ISP business model crisis you could characterise as neo-brutalist: we’re here with our vast video stockpile, like a massive concrete tower, and you’ll just have to deal with it. But compared to what is now being suggested, the BBC’s Internetworking policy under Ashley Highfield was relatively friendly.

First of all, the BBC made extensive use of content delivery networks (CDNs) to soften the blow, by caching the data nearer to users. Specifically, they contracted with Akamai Networks to outload their video content from their servers in ISP network operations centres. Secondly, the BBC encouraged direct peering between its own content network and UK eyeball ISPs, which like all peering tended to replace OPEX with CAPEX amortisation. If you’re connecting up with the BBC at LINX, for example, you’re almost certainly using your own equipment, so although it still costs you money, the connectivity is provided at cost. Further, once you’ve spent the money to run the cables, install the gear, and turn on the Ethernet port on the IX switch, you can be certain of the costs over the time it takes you to amortise them.

Here’s a RIPE BGPlay visualisation of the BBC’s routing table just before the Olympic games. Note how the BBC has lots of direct connections (peers), rather than going via a few intermediaries.

However, tucked away in the announcement that the BBC is going to start streaming H.264 video as well as On2 VP6, it looks like there is a major change afoot. This means a leap in the bitrate from 300Kbps to 800Kbps, and the H.264 videos are not going to be served up from Akamai, but from Level(3)’s internal CDN. This instantly raises a major issue for other ISPs. Akamai peers at all its locations — it is, after all, the company’s raison d’etre. But Level(3), in its role as a tier-one backbone operator, gets all its own reachability through peering and charges lesser beings for transit over its wires. ISPs may be faced with a whopping transit bill to reach BBC CDN servers on Level(3).

But this is only part of the change; it’s also being rumoured that the BBC is itself going to terminate direct peering with downstream networks, or perhaps that it already has done “for the Olympics”, so everyone will have to go via Level(3), and drop the Akamai service for non-H.264 content as well. This may mean a major disruption of the UK ISP economy. No wonder nobody wants to buy Tiscali. The only ISP which won’t be affected is BT, being a global carrier that almost certainly peers with Level(3), and possibly Orange if their UK DSL infrastructure is integrated in France Telecom’s global IP activities, as Opentransit (France Telecom’s worldwide Internet backbone, AS5511) is in a similar position. This raises an interesting question.

Peering is negotiated at the level of networks, not companies — the unit of interest is a BGP session. Are the various small ISPs that became Orange (i.e. France Telecom), O2 (i.e. Telefonica), and BT divisions in a position to benefit from Daddy’s peering relationships? It would seem to be a big competitive advantage, especially if the BBC is indeed hopping into bed with Level(3), but then, British ISPs aren’t an obvious example of how to integrate acquisitions. As it happens, we checked, and all the national Oranges (subsidiaries of France Telecom) are downstream peers of AS5511, which is France Telecom’s global IP backbone. Telefonica’s Be isn’t obviously integrated in AS12956 (Telefonica Wholesale) although some small UK ISPs are. (However, they do peer with Level(3) in their own right.) It does increasingly look like you need a global telecom giant as a parent to be a viable ISP.

You have to wonder what the terms of the BBC-Level(3) contract are; in a sense, the BBC has entered into a Faustian bargain, because signing up with a tier-one network implies that its own peering activities are now in competition with theirs. Level(3) would obviously prefer more transit traffic from ISPs that it can bill for, and this new arrangement means more ISPs will have to buy transit from them to reach BBC content. Did they demand an end to direct peering with the BBC, or offer a discount in exchange for it?

But rather than just wondering, we looked up the route (132.185.0.0/16) which contains most of BBC Internet Services on RIPE BGPlay. Despite everything, there were practically no significant changes over the start of the Olympics, and the BBC was still only using Level(3) for some international transit networks. Whatever the politics, it looks like the rumours are just that. Rumours. As far as we can see, the BBC is still peering with all and sundry.

Here’s another BGPlay visualisation, today. Note that there has been no wave of BBC routes announced from Level(3) (AS3356), so not much has really changed yet..

The pressure on the ISP cost base is only going to get worse. Not only will user numbers and usage keep going up, but higher video quality will multiply the total usage. And you can’t expect cooperative policies from major content networks, either. In moving the H.264 video to Level(3), the BBC has stepped some of its distribution costs off to the general UK Internet community. Whether or not they intend to change their peering policies, the existence of such fears should tell you all you need to know about the possible consequences.

This Blog is republished from www.Telco2.net/blog. The Telco 2.0 Initiative is a new industry program focused on helping with this thorny question: "How do we (telcos, handset manufacturers, Media companies, IT players, NEPs, etc) make money in an IP-based world?"

Ring! Ring! Hot News, 18th August 2008

JoshG1 — Mon, 18 Aug 2008 17:53:00 GMT

In Today’s Issue: 3G iPhones don’t work; developers think Google is being evil; Sun open-sources more stuff; China Unicom inflates the Chinese 3G bubble; UK MNOs not so good at ISPing; public doesn’t want Be CCTV after all; Orange UK gives away Asus EEEs, makes money; UK 2.5GHz is with the lawyers; Sprint’s new apps; Yahoo! FireEagle - your telco should do this; East Africa gets fibre

Oh dear. The iPhone iHype is followed by a wave of customer dissatisfaction, with hordes of iPhone buyers complaining that the device’s performance on UMTS is poor, and worse, that it struggles with connectivity in areas where other 3G devices find no problem at all - which points the blame straight at Apple rather than AT&T. It’s a serious problem. After all, if (as rumoured) the issue is somewhere in the signal path between the antenna and the RF amp, there’s no alternative to a hardware fix, which means recalling the Jesus Phones. As we periodically have to point out, radio is hard. There’s a suggestion here that the device doesn’t comply with ETSI’s specifications for UMTS terminals. Hmmm, let’s think… Moto are good at wrapping radios in boxes, but struggle at software. Maybe there’s a CEO phone call to be made…

Meanwhile, all is not well with Google Android, for political rather than technical reasons; developers are angry at the decision to release the SDK to winners of a competition, and the fact there’s still no date for a general release. Sun, meanwhile, open-sourced its mobile GUI kit. Who would bet against a company that specialises in open source and community development, like Sun, winning this race?

It’s almost as if this was the week where boring, traditional values had the upper hand in telecoms. The Jesus Phone doesn’t work, Google is being evil; and the world’s mobile network vendors are hunting for their share of a huge greenfield roll-out. How 90s. China Unicom just announced that it’s planning to spend $14.5bn in CAPEX in order to build a spanking new 3G network, now that the Ministry of the Information Industry has made up its mind. It’s going to be one of the last great vendor gold rushes; if Unicom needs fifteen billion dollars’ worth of kit, China Mobile and China Telecom must both need something similar. Presumably, the government-mandated TDSCDMA deployment at China Mobile will mostly be sourced from Chinese vendors - nobody else cares - but the other two are very much up for grabs. Unicom is forklift upgrading every damn thing, too - it used to be a fixedline operator with a CDMA WLL network, on which the limits on mobility that kept it from legally being a CDMA mobile network somehow didn’t work, but now it’s slated to deploy UMTS.

In the UK, it looks like the trend for mobile operators to resell DSL has reached a natural limit. Which makes sense, really; mobile operators don’t have any advantages in the fixed market, which is itself under heavy pressure with the triple assault from cable, BT Retail, and BT Wholesale and Openreach. It doesn’t help that as Tom Alexander of Orange UK confesses, their customer service has been indifferent at best. So, they are increasingly concentrating on their fast-growing mobile-broadband business, where there’s probably some net additional spending up for grabs.

Meanwhile, out of the DSL operators, Sky (Easynet as was) is doing best, competing Carphone Warehouse’s customer base away. CPW’s glory days of last autumn begin to feel distant; you’ve got problems if you’re losing customers despite giving away computers, and they’ve also had significant execution problems including trouble with BT Openreach and with their own customer-service workflow. Sky, meanwhile, is benefiting from integrating DSL with its TV content offering. O2’s DSL operation, Be, has just closed its home-security CCTV service; apparently there aren’t enough tyrannical Home Office suits and imperial-minded property sharks in the UK to make mass-market video surveillance profitable.

Orange UK, meanwhile, shows that you can apply the same approach to the mobile-broadband market as CPW did to DSL. But perhaps better. Yes, they’re giving away Asus EEE mini PCs with HSDPA dongles, on condition you sign a 2 year contract at £25 a month, for 3GB a month’s data transfer. If you reckon they’re getting the Eees at a 20% discount, that’s £450 in revenue after the giveaway or £6.25 a GB a month. Seeing as 3UK will sell you 15GB for £15 a month, on condition you sign for 18 months and pay £49.99 for a dongle, there’s obviously quite a lot of pricing power left in mobile data.

T-Mobile UK and O2 would like to keep it that way, too: they’re suing to prevent the UK’s 2.5GHz reauction going ahead. No WiMAX for you… Elsewhere in the industry’s eternal drive for popularity, BT has decided to end its Digital Vault service, and existing users will lose their stuff unless they pay up. Nice. Except didn’t we say that telcos should be positioning their brands as trustmarks, not trashing your family photos?

Sprint is updating its Instinct iPhone clone with a volley of applications. Navigation, visual voicemail, all very impressive. But perhaps what you need is a better way to be followed around? Yahoo! has one, with the launch of FireEagle. It’s actually not that bad, being a user-defined opt-in service. What it actually does is to act as something similar to OpenID for location updates, aggregating the flow of location data from many users so applications developers only need to hook into one API. This is what your mobile operator should be doing, you realise?

East Africa will finally get its submarine cable later this year; watch out for a surge of call centre and back-office development. That’s if they don’t need to go somewhere cooler (literally).

Telco 2.0 Event, 4-5 Nov - Speaker Update

JoshG1 — Fri, 15 Aug 2008 17:52:00 GMT

The next Telco 2.0 event (4-5 November, London) is looking extremely strong. A big thank you to the sponsors and partners, and to the senior industry speakers (presenters and panellists) who are participating. The latter includes:

Werner Vogels, CTO, Amazon.com; Matt Bross, Group CTO, BT; Will Hodgman, EVP, ComScore; MungKi Woo, VP Payments and Contactless, France Telecom; Timo Soiminem, CEO, Habbo Hotel; Ben McOwen Wilson, COO, ITV ; Jonathan Dann, Executive Director, JP Morgan; Steve Zimba, Managing Director Global Telecoms Business, Microsoft; Will Page, Chief Economist, MCPS-PRS Alliance; Joachim Horn, CTO, T-Mobile International ; Helmut Leopold, Managing Director Platforms, Telekom Austria ; Andrew Bud, Chairman, Mobile Entertainment Forum ; Thomas Howe, CEO, Thomas Howe Company; Cenk Serdar, Chief VAS Officer, Turkcell ; Pieter Knook, Director of Internet Services, Vodafone Group .

We are finalising involvement of a number of other important people from across the value chain too. Watch this space (and the event site) for updates…

Our analysts will also be presenting summaries of research into new business model opportunities in the following areas to help stimulate the debates: Online Video Distribution, Mobile Internet, Comms-Enabled Business Processes, Digital Kids, Leveraging Telco Customer Data. Again, watch this space…

NB: 20% discount on places at the event for those who book before end of August. Registration here

Ring! Ring! Hot News, 11th August 2008

JoshG1 — Mon, 11 Aug 2008 15:10:00 GMT

In Today’s Issue: Emergency! Emergency! Paging Dr. Q!; Sprint reduces Nextel value to zero, then hopes to sell it for nonzero price; Sprint exec’s unusual $1m bonus; DTAG’s minor success; Moto reacts, joins a wave of LiMo gadget innovation; Apple zaps subversives; TD-SCDMA still doesn’t work, Huawei doesn’t want it; Chinese export industries perhaps not all they’re cracked up to be; re-re-wind to the first iPhone; Stingy download caps; AOL doom; new Nokia e-mail clients

We told you Qualcomm was responding skilfully to the end of its patent monopoly years. Here’s your evidence, if ever there was. They’re planning an MVNO dedicated to medicine, it turns out according to Wireless Week. Apparently they’ve been working on it for some time, but have only now named a CEO and got ready to give some details. The project’s applications will aim at helping to manage chronic conditions. We liked this quote a lot:

One hint that LifeComm seeks a broad audience is that the initial handsets at least will not require a physician’s prescription.

So you can get LifeComm over the counter, and not have to resort to handing over used banknotes in dark alleys.

Speaking of which, Sprint used about the same number of banknotes to buy Nextel that it then lost in a string of monster writeoffs; by early this year, they’d got to the point where they’d lost the whole value of Nextel and then some. So, we were hardly surprised to see the obvious next step: sell Nextel all over again. Seriously.

The iDEN net that made Nextel a success with a variety of interesting voice and messaging products is on the market, with the (huge) caveats that it’s now dependent on Sprint’s back-office IT for the BSS-OSS and that nobody made the investment it needed to get a meaningful data capability. But if Sprint is willing to offer wholesale access to the back end on sensible terms — and for that matter, wholesale data on CDMA or WiMAX — there could be some interesting opportunities here, in the light of Nextel’s public-security and enterprise specialities. We note that a Sprint exec has been offered a $1m bonus to get rid of it.

Deutsche Telekom is the other example of a Telco 1.0 business model unravelling; this week, however, they had some not entirely dire results for the first half of 2008. However, most of the improvement appears to be accounted for by various exchange rate and other accounting effects.

Open source software on mobile handsets continues to catch our interest, as it’s one place where the tectonic plates between operators, Internet giants and hardware companies collide — a slowly unfolding and somewhat hidden story of considerable importance. The LiMo Foundation announced a wave of new mobile Linux gadgets, of which six are from Motorola. They are also rapidly boosting the shinyosity of their products in general — while the OpenMoko FreeRunner is still without EDGE, they’re on HSPA, even if a lot of them look a lot like Nokia N93s. Interestingly, Moto is pushing its proprietary voice-clarity tech into the gadgets. It’s called “telephony” for a reason.

However, a large chunk of LiMo still isn’t really open source, depending on your interpretation of ‘open’. Moto and friends are clinging to the drivers for the radio and voice gear, which retains a modicum of control over the handset ecosystem. These things are relative, anyway: Trolltech, makers of Qt and now a Nokia division, are very clear that they are committed to Windows as well as Linux. Just for added confusion, the KDE open-source desktop community, also based on Qt, is keen to start work on mobile, too; and they run on Linux, MacOS and Windows as well. Everyone is afraid of someone else’s software platform becoming a bottleneck in the value chain, just as with PCs.

A running paradox of the geek life is why people think of Apple as an open-minded hackerish outfit, despite all evidence to the contrary. Now, they want to actually kill applications they don’t like running on your iPhone. The fiends.

If you don’t like it, move to China…wait a second. In fact, it seems that Huawei is responding very badly to the MII obsession with TD-SCDMA (“Yesterday’s network - next year!”) and isn’t going to supply much of the new and entirely state-mandated deployment. Good for them — after all, however patriotic the ministry feels about it, it’s a Siemens-developed idea which is dependent on Analog Devices Inc. silicon. And they have every reason to feel confident in their future without it, as their sales of GSM and UMTS kit just doubled.

But then, what to make of this? The cracking Felix Salmon points to a paper on the iPod, which tells us that the Chinese manufacturer accounts for about $4 of $150 added value in a video iPod. We’re not surprised, since if you look back to iSuppli’s first teardown of an iPhone, you may remember that as well as Apple making a 50% margin on the thing, the most valuable component was the touchscreen (from Balda AG in Germany), followed by the radio chips (from Cambridge Silicon Radio plc in the UK)…

Perhaps US local carrier Frontier might get closer to those margins by capping their customers at 5GB a month? Or maybe not. That’s worse than at least one UK mobile operator, that has to contend with shared medium, changing trees, humidity, and strange emanations from bits of government they’re not allowed to talk about. Although, BT has apparently decided that anything that isn’t port 80, used for Web traffic, is the Bandwidth Enemy. This is despite their subsidiary Plusnet’s super-detailed measurement through their fearsome park of Ellacoya traffic monitors. Well, we’ll wait until they throttle CEO Ian Livingstone’s e-mail when he’s at home because it comes on the wrong port on his VPN…

Who needs an integrated Internet/search/ads business? Seriously? You remember what happened to those silly Google boys, right? Not AOL Time-Warner, which is breaking up the AOL and Time-Warner bits of the company organisationally. You ask Google what a good idea this is.

Nokia, meanwhile, turned some of its horde of engineers on the question of better messaging. It’s the next battleground — getting the core voice and messaging products to move beyond the 1990s technology they still rest on.

Ring! Ring! Hot News, 4th August 2008

JoshG1 — Mon, 04 Aug 2008 20:04:00 GMT

In Today’s Issue: Moto splits again, makes actual money; CDMA - the edge of darkness; Nortel loses customer, 15% off shares, gains WiMAX obsession, 13% back on shares; most pointless network tech announcement?; the LTE voice problem; FCC KOs TCP RST DPI; good news shock at FT, NTT; Indian WiMAX speccy shocker; IKEA is a mobile operator; BT shareholders panic; free N810s

We’ve been following the crisis at Motorola for some time. The latest reorganisation is here. As well as selling off the failing handset division, they’re now planning to split up the rump of the firm into several chunks. The set-top box and related business goes in one, the cellular business in another, and the WiMAX operation in yet a third. (Motorola’s declared tech strategy assumes that WLAN, UMTS, and WiMAX are the default radio network technologies, and these roughly map on to this structure.)

To general surprise, Moto squeaked into profit in the second quarter, by a massive $4m; don’t be too cheerful, though, as revenue fell 7.4 per cent. As usual, the networks operation, the set-top boxes, and the cashcow government/security radio operation contributed and the mobile handsets operation lost money.

In other North American vendor news, Nortel Networks saw a frantic see-saw as first of all, it announced that a major CDMA customer had essentially stopped capital investment altogether. Everyone assumes this is a reference to Sprint Nextel, but one can’t rule out Verizon entirely, as they have committed to LTE. The CDMA business is about to get very uncomfortable indeed; Nortel shares fell 15 per cent. Then, as Nortel announced it was concentrating on WiMAX and signing a deal to work with Alvarion, back up they went, rising by 13 per cent. (But why does Nortel need Alvarion? Nortel has been pushing WiMAX products since 2005.)

It makes you wonder why Alcatel-Lucent and Airvana bothered to develop a CDMA EV-DO femtocell that claims to be integrated with IMS. It’s a BOGOF — two zombie technologies for the price of one!

Douglas Adams (of Hitchhikers Guide to the Galaxy fame) had a journalist character who remarked that “Continued Dolphin Absence” wasn’t
much of a headline, but the continuing absence of IMS deployments or applications inspires Martin’s Mobile Blog to ask what LTE engineers are going to do about voice. The standardisers have so far assumed that IMS would provide the voice switching element of an LTE network, with circuit switching being abolished. But nobody’s installing IMS, and as he points out, there are some problems with pure OTT SIP. Dean Bubley goes through some answers; none of which are entirely satisfactory. It may turn out that the answer is to backport SS7 voice into the NGN environment — as long as they remember the APIs. Meanwhile, we’re fully in agreement with his suggestion that the operators should let as many VoIP implementations as possible try different solutions to this problem.

One major possible application for IMS - using it to annoy your subscribers, because you’re the Big Expensive Phone Company — has been ruled out by the FCC, or at least the specific practice of forging TCP RST packets has. Interestingly, despite their beating by the FCC, Comcast actually managed to increase their revenue from Internet services.

Having stepped away from the ticking merger-bomb, France Telecom announced profits up 3.9 per cent and promised to pay out some capital to shareholders. That’s sense, as they say. Meanwhile, NTT DoCoMo saw a surprising jump in operating profit after they succeeded in not paying quite so much cash out in handset subsidies.

In India, the Government is under fire for bringing 2.5GHz spectrum back into the main 3G auction, after it was originally allocated to smaller players with a view to WiMAX. Details of the national 3G auction are in the FT.

Ikea, meanwhile, becomes the UK’s latest mobile operator; it’s a discount/flatrate PAYG offering. No word on whether you have to install your own base station starting with a flat pack, though.

No matter what we say, they still sold BT stock after a dip in margins at Global Services. Going by our estimates of how much they might save through fibre deployment, that’s probably an even better giveaway than free Nokia N810s.

BT fibre roll-out: Do the numbers add up?

JoshG1 — Mon, 04 Aug 2008 13:43:00 GMT

BT is at last moving on fibre. This is of interest because BT don’t own a cellular network, and their current residential copper access network is functionally separated — a very ‘Telco 2.0’ horizontal model. Is it possible to make money on new network builds without complete vertical integration and a monopoly on services?

We dig into the numbers, and work out whether BT’s shareholders should be concerned, or delighted.

The details are more than a little sketchy at the moment, but we can be fairly certain of some points:

Both FTTC and FTTH are in prospect.
Speeds are to be “up to 100MBits/s” for the FTTH element, 40-60Mbits/s for the FTTC element.
The service will be available wholesale.
The project is costed at £1.5bn over five years.

BT Ends the Expectations Management

Perhaps the most striking feature is the last; when we went to the Broadband Stakeholder Group conference, estimates of the cost ranged between £5bn and £20bn, with the lower number specifically described as being for a FTTC roll-out. Clearly, whatever BT is planning, it isn’t going to be that dramatic. BT’s own statement makes clear that the FTTH (or FTTP for premises as BT puts it) will be confined to new developments, where the civil works can be shared with all other services for an estimated 70% cost saving. It’s interesting, however, that BT is promising full blast 100Mbits/s in the FTTH networks. Not so long ago, they were doing some heavy expectations management with regard to their first FTTH deployment in Ebbsfleet New Town, suggesting that it might not get over 20Mbits/s (so less than ADSL2+!) with higher burst speeds. Does this imply an internal row between fibre proponents and sceptics, which has now been resolved?

Technology Is Legislation

Interestingly, BT’s quarterly results announcement mentions the first deployment of “Generic Ethernet Access” to a “pilot site in Kent”. That sounds a lot like Ebbsfleet, which suggests BT is thinking in terms of using Ethernet in the access loop; this in turn offers a number of benefits, including cost savings from using commodity IT hardware and the ability to provide wholesale VLANs so multiple service providers can compete in the access network.

This latter issue is of course critical because the business model is partly dictated by what the underlying technology can support. For instance, telcos have been criticised for deploying GPON networks, rather than point-to-point fibre, because it makes unbundling hard (or impossible). VLANs would open up some very interesting new wholesale possibilities. Rather than being tied to one ISP, for instance, your employer might provide you with work-related access in a way that was completely independent of your domestic ISP.

The Horse’s Mouth

Here are some quotes from the BT announcement that give us the most public detail available to date:

Will BT exclude other companies in the way companies have in other countries? No. BT is totally committed to a wholesale market and so will make its services available on an equivalent basis to all communications providers.

Does BT believe that other next generation networks should also be open?
Yes. BT’s firm belief is that all next generation networks in the UK should be open as this approach will boost competition and consumers and businesses will benefit.

Here’s BT CEO Ian Livingstone:

A supportive and enduring regulatory environment is essential if this investment is to take place. Given this, BT will be discussing with Ofcom the conditions that would be necessary to enable this programme to progress. These include removing current barriers to investment and making sure that anyone who chooses to invest in fibre can earn a fair rate of return for their shareholders.

Fibre will be available wholesale, but the terms will be BT’s, it seems. Note that BT appears to be using this as a gambit to press for cable rival Virgin Media to start wholesaling, too. This would place them under greater competition and also greater regulatory scrutiny. There’s a clear asymmetry here: Virgin Media would be in a position to compete with BT Retail for business using Openreach’s putative fibre network, whether as a wholesale customer for FTTH/FTTC or by using the FTTC fibre to backhaul its own coax loops, but BT Retail doesn’t get to do the reverse.

The same conflict arose over BT’s IPStream service, which is a wholesale product that enables resellers to offer residential DSL. In fact, Virgin still has 280,000 subscribers on DSL using IPStream. But BT never got anywhere trying to use this to get reciprocity.

Who gets the fibre?

There’s also the question of who gets FTTH and who only gets FTTC. The first group will clearly include any easy cases that may be available, i.e. developments that are still work in progress, early enough that the street services have yet to be installed, and that are sufficiently big to make it worth BT’s while. BT mentions the Olympic Village and Ebbsfleet. These are prestige projects, but you have to wonder what else is likely to get built on this scale in the next few years in view of the world property crash and the credit drought.

BT’s financial forecasts are interesting on this score. BT intends to spend an additional £100m in each of the first two years; the remaining £800m to be “spread over the remaining three years”. Assuming that’s spread evenly, the last three years would have an annual access fibre budget of £266m. (Which is confusing — note that only £1bn of the new money is “incremental to BT’s existing plans for fibre expansion” — although we weren’t aware they had any…) The incomparable Dave Burstein dropped some numbers from the Verizon FiOS build in comments, so let’s begin. He reckons it cost Verizon around $1500 to pass one home at the beginning of the project, falling to $1000 in three years. That’s £750 and £500 respectively at today’s exchange rate; which means that BT’s investment plan buys them 133,333 passes a year for the first two years; 354,666 in year 3; and 532,000 a year subsequently, for a grand total of 1,685,332 homes.

In fact, Verizon did rather better:

Revising the figures, that would be £510 in years 1 and 2 and thereafter £425, which gives us 196,000 in each of the first two years and thereafter 625,882 a year, for a total of 2,269,647 homes. But BT is promising to provide “access to fibre” to 10 million homes by 2012, which implies that they estimate a cost to pass one property with fibre of exactly £100. It strikes us as unlikely that digging holes in the UK costs between one-seventh and one-quarter what it does in the US, especially, as Dave Burnstein points out, when it will take until 2012 for the price of the optical Ethernet gear and actual cable to do one house to fall to $100. The solution of this paradox is almost certainly that most of the planned roll-out is FTTC and all homes attached to a fibred-up cabinet are counted! I wouldn’t get too impatient for my FTTH on these numbers.

Little Boxes, On The Kerbside

If, as the numbers suggest, it’s almost all going to be fibre to the cabinet, what happens when a pioneer local authority, community initiative, developer, or whatever wants to go further? The question of unbundling the cabinets is immediately relevant — there physically isn’t space in the cabinets for lots of wiring and electronics from competing providers. It’s also possible that BT may want to do more in this line, perhaps moving 21CN network elements into street infrastructure and reducing still further the number of local exchanges, as KPN has been doing in the Netherlands. At the BSG, you may recall, BT executive Emma Gilthorpe evoked the possibility of such a move. If BT go for it, expect trouble around the cabinet unbundling issue.

There’s an interesting intersection with 21CN, BT’s NGN, here. LLUers are likely to connect to 21CN at the level of the Multi-Service Access Node (the network entity which aggregates traffic on subscriber lines in DSL, Ethernet, analogue voice, and TV formats into the Metro Ethernet backhaul). So the question arises whether or not it would be possible for third party fibre builders to link up to the street cabinet. Ofcom was reported to be studying the question of whether BT might be made to locate its 21CN MSANs further forward, in cabinets, rather than in the local exchanges. This is crucial for the prospects of pioneer fibre builds.

What’s In It For Them?

As the quotes above strongly suggest, regulatory questions in general are going to be a flashpoint. BT is sounding very tough regarding getting value in terms of ROI from this investment; and perhaps with good reason. In the year to March, 2008, we estimate that BT Retail and Openreach had operating costs (excluding leavers and the BITDA in EBITDA) of about £10.29bn, spread across some 28 million lines; that’s annual OPEX of £361 per line. Verizon saved about 70% of OPEX on each FiOS line. Dave Burstein says BT estimated the saving at 80%. Going with the conservative number, that gives us a saving per line of £252 × 10m = £2.5bn. Even if we assume that all the work is FTTC and that the saving is reduced by a factor of 10, £250m a year is far from nothing in a margin-challenged ISP market.

All these numbers are affected by significant uncertainty. In their Q2 earnings call, Verizon claimed their cost per connection was now down to $700. If BT could match that, this would roughly double the number of homes covered and double the OPEX saving. On the other hand, Verizon now has priceless experience that BT will need to build, however much they can observe Verizon’s rollout. Further, one of Verizon’s biggest fibre markets is New York City, and apartment blocks are almost proverbially the ideal candidates for fibre. That applies to two-thirds of Verizon’s NYC subscribers. The UK is closer to other parts of the US in terms of sprawl and hence trench mileage, although not as extreme as it is out west.

On the other hand, yet again, BT may have a technological joker up its sleeve: Kabel-X’s makers claim they can pull the copper out of the cable in chunks of 400 metres and blow the fibre right back in. We haven’t even speculated how much money BT might realise from all that scrap copper, either. This also reacts back on the OPEX figures from another direction, namely the proportion of the network that is FTTH rather than FTTC is dependent on cost, and as we have seen, OPEX savings are affected quite strongly by the degree to which the copper is replaced completely. Cheaper deployment could have a multiplier effect on OPEX savings.

Conclusions

Although this is far from the most ambitious fibre build one’s heart could desire, and very much one driven by OPEX reduction and regulatory bargaining, there remains a significant opportunity for the kind of local solution we outlined in our BSG post. BT’s statement specifically leaves open the option of pioneers going further:

We will deliver both, [i.e. FTTH and FTTC] though the exact split will be driven by the interest shown by government and regional and local authorities.

If the question of access to the cabinets and MSANs can be resolved, this comparatively small investment might be a major encouragement for community fibre builders across the UK. Further, we can conclude that even with the limited available information, fibre makes sense in terms of cost saving, and the more you smoke, the more you save, as FTTH beats FTTC for OPEX savings.

There’s going to be a hell of a row about the regulated wholesale prices. It’s also worth pointing out that BT is also likely to open a second regulatory epic, this time with Sky TV and Virgin, on the question of what it can send down the fibres when they’re laid. For BT, it’s not just about broadband but also broadcasting.

Despite these caveats, though, it’s clear that it’s a good start; BT shareholders would seem well advised to put up with the reduction in the dividend as a down payment on the OPEX savings, subscribers should see fibre in the foreseeable future, and BT’s competitors would be wise to run, not walk, to OFCOM and DBERR and make their opinions felt.

How Billing can become a Revenue Generator

JoshG1 — Fri, 01 Aug 2008 17:35:00 GMT

Billing within Telcos is often seen as a necessary evil — an overhead which frequently puts a brake on marketing visions of grand new services. Whereas, billing within the Telco 2.0 world is a great asset offering the capability of pricing nearly any transaction on any number of variables in real time in huge volumes.

One approach to leveraging the telco billing asset is for the telco itself to provide billing services to an upstream partner, and quite often also to collect the money on their behalf. In our recent report on ‘Sizing the Two-Sided Telecoms Business Model’ we estimated that there could be over US$26bn in new revenue for Telcos offering billing and payments services to vertical industries by 2017 (mature markets alone). A good example today is the mobile content industry which has already evolved into a multi-billion dollar industry.

This approach is best suited to two situations:

when the telco network is being used to deliver the goods, or
when the telco network is being used as a channel for purchasing the goods and the buyer is a customer of the telco.

Billing is a key enabler for a telco wanting to pursue a two-sided business model, together with a collection of related services: identity, authentication, advertising, business intelligence, e-commerce sales, content delivery, and customer care.

The Telco 2.0 team was therefore delighted to be invited to participate in a recent industry roundtable, organised by Highdeal. (Highdeal provides real-time rating systems that scale to high volumes at low cost using a clever technological approach akin to a compiler for rate plans.) The workshop was entitled “Stop Reinventing the Wheel: Comparing Cross-industry Pricing & Billing Strategies”. Telcos can learn lessons from other industries, both good and bad. Here are just three examples from the Transport Industry:

Oyster Card

The Oyster card is an electronic ticketing system used by Transport for London (TfL). It can be used on various forms of transport including the Underground, Buses, Rail & Trams. The card itself is based upon a NXP MIFARE contactless smartcard.

Oyster has been very successful, and its share of TfL trips has grown steadily over the years. There are over 5.5m separate cards used each month, over 20,000 smartcard readers supporting around 36m journeys per week.

TfL outsources the operation of the Oystercard system to a company called TranSys which is a consortium including EDS & Cubic Transportation Systems. In a recent Financial Times article:

A TfL spokesman said last night that the 17-year contract, which pays TranSys £100m annually for supplying, running and marketing the swipecard ticket system, had a number of break clauses that allowed for early termination.

£100m/annual costs actually seems like a reasonable figure for billing & payment services especially when placed in the context of 36m journeys/week (around 5p/journey) and total gross revenues on the Tube and Bus of £2.4bn in 2006/7 (4% of total revenue excluding rail).

Unfortunately, the Oyster system has been in the press for all the wrong reasons recently: reliability and security.

The Oyster system has crashed a couple of times in a couple of weeks. The first caused 60,000 cards to be corrupted, and the second shutting down readers at 275 stations which meant Pay-As-You-Go customers were allowed free travel. Telcos know all about the importance of reliability in pre-paid systems and will probably sympathise with the Oyster problems.

The Security problems are potentially much more problematic with the encryption being cracked and the cards cloned. Even worse, the cracking was done by Dutch researchers who will publish the information in October. BT’s security guru Bruce Schneider explains that the fault is in the design of the chip.

The consequences of the cracking are hard to determine at this stage, but if mass cloning occurs then revenue leakage for TfL could be severe. It is not beyond the realms of possibility to force a replacement of both cards and readers. Even worse, it could undermine the public faith in the system and NFC cards in general.

Again, telcos know all about the importance of security in payment systems, having many years of experience with SIM cards, online authentication, and fraud management. The Oyster card may prove an important case study for when people complain about security costs and want cheaper options.

Oyster cards have been combined with credit cards, but not with mobile phones. The take-away for telcos is that they are the natural distributors for this payment capability, possibly embedded into SIM cards. They have all the assets needed to manage pre- and post-paid customers, send marketing messages to users, and help manage fraud and support. The revenue model is proven. You just have to enter the race if you want to win.

The London Congestion Charge

Vehicles which drive within a clearly defined zone of central London between the hours of 07:00 and 18:00, Monday to Friday, have to pay an £8 daily Congestion Charge. Payment of the charge allows complete access to the Charging Zone for the full day. The charge aims to reduce traffic congestion and improve journey times by encouraging people to choose other forms of transport if possible.

This is another transport system run by TfL, however the economics are radically different from the Oyster Card. The 2006/7 TfL annual report shows the scheme raised £252.4m, but cost a whopping £130.1m to collect, or 51% of revenues.

The root cause of these high costs is undoubtedly the technology used by the scheme. CCTV cameras record vehicles entering and exiting the zone. The number plates of the cars are recorded with 90% accuracy, the rest of checked by humans. The identified numbers are checked against a list of payees: those not paying are fined and chased.

The enforcement process is complicated and non-payers are high. Over 1m Penalty Charges were issued in 2006 and only around 75% are collected.

Enforcement costs are not the only problem. Payment collection also seems heavily labour intensive. It is amazing that the use of call centre agents has grown over that 3 years in a process that so obviously begs for automation. Fine-tuning revenue assurance and collection processes and systems are worth the effort. The Congestion Charging scheme shows that costs can easily run of control with poorly designed systems and business models.

Not all road-tolling and congestion charging schemes are as poorly designed as the London Congestion Charging scheme. Across Europe there are notable success stories.

Again, the opportunity for telcos is to use their assets to enter this business: massive existing investment in IT infrastructure, and near-universal coverage in areas where congestion is likely to occur, and relationships with nearly every car driving adult. The telco is in a position to take a great deal of cost out of this market, and therefore collectively telcos are able to take the model to cities and towns who otherwise could not afford it. This is a general pattern: telcos have scale at transaction processing nobody else can match. There are plenty of billable events left in the world to be metered and monetised beyond voice and SMS.

Yield Management in the Airline Industry

Yield Management techniques have been used in the airline Industry since the 1980s to optimise revenues. Airlines use software to monitor how many seats are being reserved on a particular flight and adjust pricing accordingly —for instance by offering discounts to particular customers through particular distribution channels, if it appears that seats will remain unsold. New online distributors such as lastminute.com have emerged to exploit the Yield Management techniques of the airline and hospitality Industries.

The capacity on any particular flight is fixed and determined by the number of seats on the plane. Any unsold seats on a particular flight carry very little incremental costs, and once the flight has departed they also carry zero value. Most importantly, different customers place different value on the seats. Some customers are willing to pay a premium to guarantee a seat on a particular route or flight, whereas others are prepared to wait for a bargain by holding out until the last minute for unsold inventory.

Although many airlines have claimed huge successes from yield management, it is controversial because it is a form of covert price discrimination, and risks customers ire. Therefore, customer segmentation is vital as well as the use of different wholesale partners to offer discounted products which don’t damage the premium brand.

Telco’s have a similar problem in that they have huge sunk costs in building networks and unsold capacity at a particular moment in time is in effect a lost revenue opportunity. However, the telco industry doesn’t have these “space-filling” services — the network equivalent of the £0.99 Ryanair flight.

The telco response should be to create the wholesale products to fill this gap. Partners might be offered off-peak data overnight to residences to pre-cache movies or TV shows on DVRs and PCs. The obvious issues is having a network that can account for who is paying for each packet, and apply suitable policies in real time. We’re sure Highdeal are therefore looking forward to your call!

[Ed: We have a major session on ‘Billing & Payments 2.0” at the November Telco 2.0 event in London. Highdeal will be demonstrating their tools in the Innovators Zone there.]

New Telco 2.0™ Manifesto - Second Edition Preview

JoshG1 — Thu, 31 Jul 2008 10:00:00 GMT

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

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

The Manifesto is relevant to:

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

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

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

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

Boom, bust and bundling

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

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

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

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

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

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

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

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

Triple play trouble

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

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

Voice: Slower growth precedes decline

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

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

Video: Hard to enter than expected

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

Data: Not a golden goose after all

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

New sources of value remain elusive

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

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

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

The trillion dollar re-think

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

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

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

Telco 2.0: A new vision

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

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

Defining the new business model

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

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

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

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

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

Each component of the ‘triple play’ is impacted:

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

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

Size of the opportunity

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

Size of the opportunity

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

Making the journey to Telco 2.0™

The seven key steps to approaching this challenge are:

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

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

Guest post: Why Ribbit is worth $105m to BT

JoshG1 — Thu, 31 Jul 2008 06:05:00 GMT

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

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

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

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

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

Close to Boiling Point: ISPs, Aggregators and Music Rights Holders

JoshG1 — Wed, 30 Jul 2008 18:08:00 GMT

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

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

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

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

The Legislative Pipeline

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

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

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

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

Enforcement won’t be cheap

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

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

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

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

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

Changing Behaviour

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

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

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

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

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

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

Simplifying Rights & Access to Catalogues

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

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

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

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

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

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

ISP incentives

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

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

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

Future Challenges

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

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

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

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