Full Article: Where to Co-operate, Where to Compete

You can download the full 25 page Briefing in PDF format here. The Executive Summary and Table of Contents are reproduced below.

Summary: An in-depth analysis of Google’s strategy and objectives overall and in particular in relation to the Telecoms industry, with recommendations of where to compete and where to cooperate.

Executive Summary

Google is not just a search engine, nor is it just a media or a software company. It is, first and foremost, a massive advertising brokerage, which uses two-sided business models to maximise both the creation of ad inventory and the accuracy with which it matches targeted ads to content. 

A major driver of Google’s success is its investment in infrastructure – it spends almost twice as much CAPEX as its closest competitor, Yahoo! The combination of two-sidedness and infrastructure has led to the creation of a business with immense market share, stable and sizeable margins, and strong cash flow.

Like many successful ‘two-sided’ business models, Google employs two out of three generic approaches to charging described further in the report – charging merchants for transactions and services. Its success is enhanced by synergies with its free enabling services for merchants such as Google Adwords and Google Analytics, and by the growing end-user market reach of new and acquired applications such as Google Maps, Google Voice, Gmail, YouTube and the Chrome browser.

The frequent criticism that Google is unfocused is dismissed. Instead, we argue, Google’s investments reflect:

  • Google’s aims to increase the share of time that people spend on its sites, and the total time people spend on the Internet overall (at the expense of other media)
  • a conscious strategy of experimentation
  • a policy of creating capabilities for future development as a deterrent to competitors from entering businesses vital to Google’s success. We characterise these deterrents as ”submarines”.

We see two major areas of conflict between Telcos and Google: communication services and advertising. In particular, Google is probably the largest single strategic threat to operator voice and messaging businesses. Its ability to reinvent its own versions of operators’ supposedly “unique” capabilities should not be underestimated. Right now, Telcos’ have unrivalled raw data on consumer behaviour, but Google is seeking to build its own direct relationship with consumers as it makes a play for the mobile advertising brokerage business.

Even so, Google is the Telcos’ friend in the sense that its portfolio of user-friendly services is driving mobile Internet usage and new sales of mobile data tariffs.  We conclude that Telcos should adopt a policy of ‘co-opetition’, fighting fiercely in some areas and partnering in others.

We recommend that Telcos should co-operate with Google in these areas:

  • Adopt, but customise, Android. Android is essentially an aircraft carrier for Google’s communications services, but Telcos can neutralise the short-to-medium term threat by customising this highly open platform. Android smartphones will also drive sales of mobile data tariffs and act as a counterweight to Apple and Nokia. But Telcos should be alert to any moves by Google to exert tighter control over Android.
  • Telcos should work with Google to combine the impressive and hard to replicate Google Maps and Street View apps with Telcos’ location data and Call Detail Records (CDR) to produce compelling, personalised services. 
  • As its revenue growth slows, Google may start trying to sell more services to consumers, which would help the whole Internet ecosystem move to a more sustainable business model. Telcos should encourage such a move, perhaps by providing white-label authentication and billing systems.

We recommend that Telcos should compete with Google in these areas:

  • Telcos’ voice and messaging services need to at least match the ease-of-use and rich functionality of Google Voice.
  • Telcos are well positioned to claim a major share of the mobile advertising brokerage business, but Google is unlikely to let that happen without a fight, so Telcos may be forced into head-on competition.
  • Unless Telcos can provide faster and more accurate location information than Google, much of the value could be sucked out of the promising market for location-based services.
  • Telcos need to ensure their networks and billing systems, rather than the Internet or a Google platform, underpin the nascent mobile payments and mobile banking markets.
  • Telcos’ ‘Golden Asset’ underpinning many of the potential future business models is the wealth of customer data available through their Call Detail Records (CDR) and billing systems. Understanding consumers’ behaviour will be the key to victory in the voice, messaging and advertising brokerage markets. It is vital that Telcos recognise and value this data, and do not inadvertently permit Google to accumulate it.
  • Neither should Google be allowed to attract a disproportionate share of the time and attention of mobile apps developers and thereby dominate the mobile apps market in the way that Microsoft came to win the PC software market.

Table of Contents

Understanding Google’s business

  Google – the infrastructure company

  Google: A Classic Two-Sided Business Model

Strategies for Two-Sided Markets

  Approach One: making money out of transactions

  Approach Two: sell services to the crowd

  Approach Three: charge for access

  The power of combinations

Criticisms of Google’s Strategy

  Social Networking: Has Google missed the boat?

  What about the dark fibre, Google Checkout, radio spectrum bids?

  Google Changes Sides?

Google versus Telcos: SWOT Analysis

  Who Knows What About Consumers

  Location: Searching for an Edge

  Google’s Communication Services

  Google Talk: Softly, Softly

  Google Voice of Doom?

  Wave goodbye to push email?

  Android: An Aircraft Carrier for Google Services

  More of a threat than an opportunity

  Google – The Extraterrestrial

  The Advertising War of 2011

Recommendations for Action

  Ignore, Fight, Partner?

  Conclusion: Co-Optition is the way forward

Full Article: Mobile Payments: Lessons from the world’s leading exponents

Payments technology and how telcos can profit from it is a favourite topic for study by the Telco 2.0 initiative. Fundamentally payment systems are two-sided markets – payers and payees interact not directly, but through a platform to conclude transactions. Pricing, and which side pays, is crucial to maximize participation, volume and liquidity on the platform. Interconnection strategies with other payment platforms also play a vital role, not only in increasing convenience but in determining share of the value chain.

In this article, we examine in depth two African mobile payments solutions that we consider to be the leading examples of mobile payment, M-PESA and Wizzit. These payment solutions take very different approaches – M-PESA is very much a classic Telco 2.0 style platform business, and Wizzit is designed as an extension to traditional banking. We consider lessons learnt from both for operators worldwide.

M-PESA in Kenya – a star following the ‘Golden Rules’ of platform businesses

There is no doubt that M-Pesa is the star of the current mobile payments landscape, however, one seldom quoted fact is that the platform is not yet profitable more than two years after launch. This was revealed by the CEO of Safaricom, Michael Joseph, in the recent results conference call. This is perhaps the first golden rule of platform business – it requires patience and takes time to build both critical mass and profitability.

The next golden rule of the platform business is that pricing is crucial, especially when deciding which side pays the fees.


The first and perhaps the most important pricing point about M-PESA is that it is free to join – there are currently no membership fees or recurring charges, everything is transacted on a pay-as-you-go basis. While this may seem obvious, it is not always the case with all payments platforms, especially some high-end credit cards. Such is the success of the M-PESA registration scheme that as at end of March-09, M-PESA had 6.175m users which is 46% of the Safaricom base. There was an average of 11k registrations per day during March. To further encourage registrations, there is differential pricing between off-net and on-net pricing: M-PESA users can send money to non-registered users, but it is much more expensive.

The second most important pricing point about M-Pesa is that there are no associated carriage costs (e.g. SMS cost) in using the system – the price of the mobile network usage is bundled in with the transaction costs. Similarly, to deposit money is free – the cost of the “cash-in” process is paid for by the transactions that the cash generates. Also, using cash to buy airtime (either for yourself or someone else) is free – this is paid for by normal voice & text usage charges. The M-PESA system is designed so that the “cash-out” transactions subsidise both the registration and cash-in processes.

The next pricing feature of the M-PESA system is that it is “receiver-pays”, the sender pays a nominal charge but the receiver pays the majority of the transaction cost. This is very similar to how most credit and debit cards operate, but completely different to how voice calls are charged in “calling-party-pays” environments.

Used for paying bills, at ATMs, paying wages, and person to person

M-PESA originally started as a person-to-person money transfer system, but the PayBill features indicates how the capabilities of the platform are growing over time. M-PESA currently has 51 PayBill partners and users can pay a variety of bills from utilities, transport to even school fees through the platform. M-PESA has added these capabilities as the registered users have grown and the payment platform was proven in an adjacent field. Safaricom is in a much stronger position to negotiate the rates now the platform has achieved critical mass – and enforce the “receiver-pays” design of the transaction fee.

Originally the “cash-out” process could only be undertaken at M-PESA authorized agents. Again, now the platform has reached critical mass, an ATM operator, PesaPoint, signed a deal with Safaricom in Sept 2008 to allow cash withdrawals at their ATMs. Again, Safaricom is a strong negotiating position understanding fully the cost of their current “cash-out” process

Even more interesting is that M-PESA is now being used to pay wages, especially of casual workers. The pricing here is not declared, but I’m sure it is not “receiver-pays”. An innovative use of the platform was that Safaricom used it themselves to pay their maiden dividend below KES 35,000 to its 830k shareholders. Safaricom estimated the saving by using M-PESA as KES73m (USD940k) compared to traditional payment mechanisms. A very effective case study of using M-PESA for micropayments.

Key Challenges for M-PESA

The development of M-PESA has been achieved without Safaricom holding a banking licence. The money being circulated is deposited in a physical bank account at the Commercial Bank of Africa, which supervises the daily transactions of M-PESA. Users make their transactions using virtual information.

This is the challenge for M-PESA going forward – ensuring that they get the right support from the banking regulators. The potential problem is that banking regulation could both add additional cost to the platform and hamper innovation going forward. In addition, the traditional telco regulators will probably want to examine at some time in the future if the M-PESA platform is supporting the dominant position of Safaricom in the mobile world – Safaricom themselves estimate they have 85% share of mobile revenues. Also, future interconnection into the existing banking infrastructure needs to be achieved at a rate which does not increase the transaction costs of the platform.

Wizzit in South Africa – a mobile extension of traditional banking

Wizzit is another transformational banking service launched in 2005 aimed at serving both the unbanked and underbanked which are estimated to be in excess of 14m people in South Africa alone. Wizzit positions itself as a virtual bank and has no branches of its own. Wizzit uses a combination of mobile and traditional payments technology. On mobile, each user interacts with an USSD-based application for person to person transfers, person to business transactions, pre-paid purchases, any other internet-enabled banking processes, and to let it act as a point of sale device in the informal sector, rather like Oi Paggo. The application works on all mobile phones on all mobile networks. Wizzit also issues a Maestro branded debit card for transactions in the formal sector and ATM cash withdrawals. Wizzit has a banking license through an arrangement with the South African Bank of Athens. Therefore, Wizzit cannot be viewed as pure mobile banking application, but instead as an extension of traditional banking infrastructure. Wizzit has attracted venture capital from the International Finance Corporation.

Building a new route to market

Safaricom in Kenya already had a distribution network of entrepreneurs selling handsets and airtime and a brand well-known for handling balances; Wizzit’s first hurdle to overcome as a start-up was to build this trusted brand, which is essential in banking, and build a sales force. (We discussed the vital importance of this element here after Zain’s ZAP launched as a competitor to M-PESA.)


Wizzit’s innovative solution was to recruit the jobless, who have an intimate knowledge of the potential customers, and today Wizzit has a direct salesforce in excess of 3,000. The Wizzit Kids are paid a commission based upon both registrations and transactions. Registration is not free and costs ZAR50 (USD6). Although cheaper than opening an account at a major South African bank and a much simpler process, the registration fee represents a significant barrier to entry for the platform.

The transaction fees also appear to be not as favourable to a two-sided business model compared to M-PESA. Rather than a “receiver-pays” type of model, every individual transaction is charged. One of the key lessons from two-sided business model theory is that the ultimate beneficiary of any transaction should be the one who pays. However, the relative cost of banking is much cheaper than traditional banking accounts and the fees are geared to the cost of using the traditional clearing system.


Wizzit had competition almost from day one with MobileMoney, a rival service with a very similar cost structure. MobileMoney is, a joint venture between MTN, the second largest mobile operator, and Standard Bank launching a rival service with a very similar cost structure. MobileMoney uses a SIM toolkit approach, rather than the more lightweight USSD service.

Wizzit does not advertise its customer base or operating metrics, but a recent article in the Financial Times puts its user base at 250,000. Wizzit has plans to break-even in 2010 and is currently loss-making. The key challenge for Wizzit going forward is not competition from the traditional banking sector, but what happens if a competitor emerges, targeting their demographic with a M-PESA type charging model.

Vodacom, South Africa’s leading mobile operator, is part of the same group that launched M-PESA in Kenya. Vodacom have launched the M-PESA service in Tanzania and it is probably only a matter of time before the service arrives in South Africa.

Lessons from the leaders

Mobile banking solutions will always be a creature of the environment they operate in. Two similar services targeting a similar demographic (the unbanked) have ended up with radically different designs especially in terms of cost and different take-ups. However the trend is clear – mobile payments in emerging markets, of whatever nature, offer a real solution to a real problem with potential for mass market take-up.

For Western operators, like Zoompass, the task is much more complex with most of the population already having existing banking facilities with often multiple providers – operators are not trying to best the deficiencies of cash transactions, but the efficiency of plastic transactions. Western operators also suffer from not having the same low cost, entrepreneurial distribution networks. Most “cash-in” transactions for prepaid mobile users are already served electronically from banking accounts; and even where cash is used, the points-of-sale for electronic top-ups already have a multitude of devices for accepting plastic and have limited loyalty to the mobile operators.

Payment platforms win or lose on four key features: security, availability, simplicity and cost. Mobile payments have a high hurdle to overcome with security and availability, but simplicity and cost is definitely an potential area to innovate in going forward. And crucially, it is vital to design payments platforms on 2-sided business model principles and avoid duplicating pricing models from the banking world.

Full Article: Use Cases for Telco 2.0 – making it tangible

Telco 2.0 Use Case Project – Draft Approach, Oct 2008

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

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

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

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

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

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

Use Case Project plan

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Full Article: Google vs Telcos, Tale of the Tape

Our research report, The Two-Sided Telecoms Market Opportunity outlines in detail how operators can achieve growth by adopting a two-sided business model. We’ve invested a huge amount of time and effort in sizing the opportunity for operators a.) by capability (Identity, Authentication, Security + Advertisng, Marketing, Business Services + E-Commerce + Off-line Order Fulfilment + On-line Order Fulfilment (content delivery) + Billing & Payments + Customer Care) and b.) by vertical industry. This helps us not only show how and why operators should tackle this opportunity (the usual strategic focus of our research), but also demonstrate the potential size of the pot.


We discuss the different functions of 2-sided platforms in the report and then look at Google, Amazon, Monster, iTunes, Betfair and AP Moller-Maersk in detail, pulling out appropriate lessons for telco operators. In this article we explore Google and, in boxing parlance, who measures up better in the ‘tale of the tape’…

Many people feel that Google will merrily extend its dominance of web search into voice and messaging and mobile advertising. However, new analysis suggests that telcos have some clear advantages for building competitive platforms…if they can exploit them.

Google is interesting because many people feel that it is ‘game-over’ for the operators and Google will merrily extend its dominance of web search into other areas, including voice and messaging and mobile advertising. In the report, we take a fresh look at Google:

  • What it has achieved and why
  • Its skills and assets
  • Its current strategy

Operators and Google both make noises about being cosy partners. But we all recognise that they will also compete in a big way going forward.

Those interested in boxing may notice that the pictures above are of Mike Tyson (Google) and the unfancied British heavyweight Danny Williams (Telco operators). They are taken from a world heavyweight contest in 2004 in Louisville. The assumption of most people at the time was that even a Tyson in decline would brush Williams aside. Instead, Tyson was knocked out in the 4th round. Now, we are not suggesting that the same will happen in the battle between Google and and the operators but we do feel that the operators have plenty of weaponry IF they can use it. And Google thinks this too. This is from the IPO prospectus in 2004 and still holds true today:

We face competition from other Internet companies, including web search providers, Internet advertising companies and destination web sites that may also bundle their services with Internet access.
In addition to Microsoft and Yahoo, we face competition from other web search providers, including companies that are not yet known to us. We compete with Internet advertising companies, particularly in the areas of pay-for-performance and keyword-targeted Internet advertising. Also, we may compete with companies that sell products and services online because these companies, like us, are trying to attract users to their web sites to search for information about products and services.

We also compete with destination web sites that seek to increase their search-related traffic. These destination web sites may include those operated by Internet access providers, such as cable and DSL service providers. Because our users need to access our services through Internet access providers, they have direct relationships with these providers. If an access provider or a computer or computing device manufacturer offers online services that compete with ours, the user may find it more convenient to use the services of the access provider or manufacturer. In addition, the access provider or manufacturer may make it hard to access our services by not listing them in the access provider’s or manufacturer’s own menu of offerings. Also, because the access provider gathers information from the user in connection with the establishment of a billing relationship, the access provider may be more effective than we are in tailoring services and advertisements to the specific tastes of the user. (Our bolding). See the full prospectus here.

Rather than walk you through the case study on Google, we have uploaded in slide format:

Full Article: Telco 2.0 Business Model Map: Links & Q&As

At the February 2007 Telco 2.0 event we presented our Business Model Map. Links and Q&As are reproduced here to help clarify the map and its implications.

You can read the background to our Telco 2.0 Business Model Map in the following four-part article series: Introduction, The axes of the map, The business models, and The consequences.

In a nutshell:

  • Network operators are delivery/distribution businesses: they deliver valuable bits from A to B.
  • There are many ways of delivering those bits. For example, a video could be sent on a DVD, via IPTV, a peer-to-peer download, streamed from a content delivery cache, etc.
  • The map documents these distribution channels for valuable bits. Which ones are you as a telco going to invest in?
  • Each one is assessed on two criteria: does payment automatically flow between connectivity and the content/service (“commercial integration), and is the delivery network hard-wired to that particular media delivery, or general purpose (“technical integration).

Can you clarify the Embedded Business Model?

It’s the reverse of the handset subsidy model. You buy a device which comes with connectivity embedded – a bit like those self-adjusting clocks. As we in-fill the device market between mobile handsets and PCs, we’ll see a huge range of appliances, many with relatively short lifespans (under 2 years). Embedded a fixed period of connectivity into the device eliminates a huge amount of billing and revenue management cost.

In other words, as we have more tailored devices deployed, we’ll see many variants on how the money flows between the hardware, service and network. In this case, it’s the hardware sale that funds the rest.

Is it fair to read the matrix and bubbles in the following way: no single new business model, nor a combination, will compensate for cash flow lost on traditional business (bubbles are revenue right?)

That depends on how optimistic you are that operators can grow the “new opportunity” bubbles. In the chart their sizes all add up to the same amount in every scenario, so I’m just showing relative (not absolute) changes.

We do not understand the “protection��? zone

You try to protect the existing revenue model of vertically integrated telephony and messaging. Do this by gentle feature innovation, extending the commercial footprint (e.g. non-geographic numbers, short codes) and resisting competition.

We deliberately don’t call it “product innovation” because it’s not about seeking new online services products (best left to Internet players) but extending the lifespan and economic model of the ones you’ve got.

Q&A: Tiered access and QoS

How do we deal with the situation on Tiered service (Paris Metro model) where disputes arise – proof of QOS etc.?

The point of systems like Paris Metro Pricing is that they retain the cost structure and efficiency of best-effort delivery. If you don’t make a promise of guaranteed delivery/capacity (just better statistical odds of delivery), there’s no dispute possible or proof needed compared to the “reserved capacity” model of QoS.
You can read more at here.

Can you detail the Tiered commercial model?

Think “multiple virtual dumb pipes”. Today my computer talks to the Internet on device eth0 or wlan0. What if there were five “virtual” interfaces (“vnet0″ etc.), and I could choose any one of them, but some had higher cost/lower contention? And I could dynamically switch between them? Think of it as like TCP/IP’s back-off mechanism, but you step up and down priority levels as well as transmission rate.

A lot of the complexity is going to be hidden from the user. Say Skype get together with a bunch of carriers to offer Mobile Skype. Rather than re-write Skype to fit into IMS (no chance), they use a high-priority virtual pipe for the VoIP part, and a low priority one for the IM/file transfer.

One day, you might have hundred or even millions of “virtual Internets” (“VWANs”, to mirror Virtual LANs). A bunch of Xbox gaming devices might talk to each other on a virtual network, safe from denial-of-service attacked from the general Internet, and with the priority and latency they desire.

Does traffic prioritisation have some value as a business model at least in the short term?

Short term, yes. Enterprises, absolutely. And there will always be some friction in the system between different generations of technology that some network smarts will be needed to smooth over.

The comment was made that it was desirable to move away from deep packet inspection – what model would be better?

DPI isn’t all bad. For example, I’d retain it as a means of identifying “bad” packets like DDoS attacks, spam, fraud management. However, as a means of value-based pricing, it’s kaput. Even from a physics standpoint, it’s a non-starter: move all the bits from the optical transmission domain to the expensive and slow electronic processing domain. I’m sure Cisco would like you to do it, but it doesn’t mean it’s a good idea. You’re just in an arms race with your own customers to cloak the traffic. A better model is either (i) spend the money on more capacity and stick to all-you-can-eat broadband, (ii) go to the Paris Metro Pricing style of tiered dumb pipes plus offload the heavyweight traffic to CDNs, (iii) lock down the edge devices to eliminate the problem at source.

Was the Paris Metro Pricing a way of Bell Labs ingratiating themselves with the new French owners

Bien sur! Err, no. The research was done back in the days of Bell Labs, before croissants came on the cafeteria menu.

Q&A: Low vs high integration models

Is the future in the radical advances of end-user devices (high memory, CPU power, client-based apps)? Does this accelerate the ‘dumb pipe’ scenario for infrastructure?

Yes – ever more applications become possible to deliver over a general-purpose network with a general-purpose handheld computing device.

How do you move from a world of one size fits all broadband into a slicing and dicing world? If broadband is unlimited, who would want to bundle it into a device? Will users be willing to move off their unlimited plans to tiered plans?

As “legitimate” P2P and video download traffic moves onto content delivery networks and separately packaged offerings (that avoid peak hour, keeping capex down) the price of “unlimited” broadband will probably rise. For the average email/web/Youtube user, they won’t notice a thing. But the broadband “hogs” most certainly will. We’ve already seen the first steps in the UK with BT wholesale going from an unmetered to a metered product. (I’d expect a congestion-based pricing scheme to be next.)

Do consumers really dislike vertically integrated offers? It is the cost and service that matters. Given cheap offering with good service, one probably will buy everything from one place.

They love them! However, technical vertical integration makes for incredibly slow progress (e.g. voice telephony network) compared to “dumb pipe” applications (e.g. social networking). The trick is to preserve some of the commercial integration of service and delivery without the technical integration.

Can you really integrate commercially without any technical integration/leverage? Explain…

Sure – you’re just accounting for the packets differently based on their origin and destination. There’s no magic – as long as there’s some compensation that flows between the device, content or service and the underlying connectivity provision, then you have some form of commercial integration.

Packaging service/devices etc with connectivity is a good answer, but the worry is that the examples James gave are actually about startups that help users unbundle.

These two trends are not mutually exclusive. Artificial bundles will be torn apart, but where they create convenience to users then they’ll buy up packaged offerings.

What are the fundamental technical drivers of business model & structural change? For example, does Moore’s Law and smarter end-devices MANDATE that a dumb pipe model will evolve?

Blame Claude Shannon, the father of information theory. The information carried by a signal is independent of how it was delivered. Dumb pipes are less complex than smart ones, all other things being equal. So if you can get the application to work over the cheap pipe, why pay more for a specialised one?

Q&A: Telco culture and organisation

How bad does the crisis have to get internally/externally at the telcos before they actually embrace change? Do we need to go through a real period of agony before the willingness to change becomes real?

We’re already there. The ISP industry is already a world of hurt except for some niche players, with exits and M&A on the up. The crisis is as much for the users as for the operators, who can simply delay investment. The users miss out of the experience they require, and the economy never gets to grow new industries.

What is the future for incumbents

In the short-medium term, they’re OK as there are such large barriers to entry and a regulatory tar-pit to negotiate. In the longer term most will disappear (consolidated into a few mega-operators with the necessary scale). Many will exit the application services space or become effectively different businesses (e.g. BT’s global services, where the network is just an enabler, not the product). Probably a similar story to what’s already happened in other utility and media industries. British Gas used to retail cookers – but no longer.

What should telcos do today? What’s the first big tipping point?

Decide which core Telco 2.0 strategy you want to follow: diversification, protection, platform or pipe. Then exit the non-core stuff (but preserve the revenue streams via partnerships). “Tipping points” are a bit of a semantic illusion, it’s a continuous process of evolution.

In terms of broadband and mobile who owns the customer today?

The customer owns the customer. At best, you own some expensive glass and electronic boxes, plus some databases of variable quality. If “2.0″ is about anything, it’s the users being in control of their destiny.

What might the cultural changes be for Telcos to become more innovative?

Innovation does not equal invention. Innovation is simply applying inventive ideas to bring those things to reality. Telcos are plenty innovative enough, just not in end-user services. Most of the innovation is in deployment and operational management of networks, which you never get to see. The evidence is in how well they’ve adapted to extremely rapid technological change. I don’t think it’s possible to create an innovation or invention culture in a mature organisation which doesn’t have one.

What’s the underlying structure out of your perspective which makes change so difficult? No moralistic judgement — a structural explanation

I don’t think change is difficult. The telecoms industry has undergone incredible change in the past 25 years (mobile, broadband, optical transmission, regulatory) – as much if not more than most other industries. How much has Google really changed? You underestimate telcos.

Why are Telcos so low in R&D spend?

Shareholders have done really well out of gatekeeping other people’s innovations being distributed over their pipes. Maybe telcos are like travel agents: high turnover as you act as a handling agent for 3rd party products, but that artificially inflates your revenue and expectations for research spending. Given the efforts of the Internet companies and telco equipment vendors, overall there’s no lack of R&D in communications.

How do telco’s strike a balance between commercial innovation and innovation in technology which is often their bargaining card/source of competitive advantage?

Easy – exit the services innovation space and partner. Focus on integration and overall user experience across multiple services and payment/delivery methods.

Q&A: Peer-to-peer & video distribution

Can you expand on the telcos’ exploitation of peer to peer and content delivery networks?

“If you can’t beat them, join them.” Telco IPTV isn’t going to deliver the Lithuanian shows I want my kids to watch; or give my brother his dose of British TV out in California. There are going to be many different aggregators, editors and recommendation engines. Operators need to make it easy and advantageous for those video distribution networks to minimise backhaul costs and contention. Today there’s no incentive to make your P2P application operator network friendly.

Since P2P is so successful, can Martin and James suggest ways for Telcos to monetise it?

Just deliver the damn bits! Someone else made them valuable, so don’t expect the extract the premium for content creation. Build content delivery networks that are cheap to run and flexible to support many different aggregation and delivery models. Work to lower capex by creating incentives to avoid transfers during peak network activity.

What should the service providers do about the cost to them of “Over the Top��? content traversing their networks? Deep Packet Inspection does control this and requires intelligence in the network.

Throttling users in arbitrary ways is just going to lead to network neutrality legislation and consumer backlash. Find ways and incentives to get those P2P apps to deliver their content in cheaper and more efficient ways. Stick 100Tb of BitTorrent cache in every central office!

Operators need to block P2P traffic! The people that pay the bills for broadband won’t care! I would happily pay for fast content delivery…but you need to free up the network first.

This just isn’t feasible in the long run. Users don’t know or care what the delivery technology is, and if you give them a bad experience (or bill shock) then you lose too.

How do we reconcile the cost of carrying bits with flat-rate in a video dominated traffic model?

You can’t which is why the current Internet model will fragment and video distribution will be done via cheaper methods. Just like you send most parcels by parcel post or UPS ground service and not next-day 1st class mail.

Q&A Wholesale

Moving complexity from retail models to wholesale is far from simple. Peering agreements are complex – how can this be driven?

I think this is an unsolved problem, and the industry is going to have to work out new structures for aggregating wholesale connectivity of varying quantities and qualities and packaging it together. (Telecom probably ends up looking more like the mortgage re-sale market – build a network, and then leave the problem of filling the pipes to someone else.)

Please explain further the shift of complexity to wholesale from retail – give a practical example?

Easy – look at the Blackberry or Three’s X-series. You don’t need to sign up to a data plan, read the terms and conditions to see if you can do the things you want, and watch the megabyte meter all the time.

Is there an advantage for network operators to break themselves up (like BT)? Is there more shareholder value if operators split into retail and wholesale?

Yes…. But. In the case of BT, despite the Chinese walls, the CEO and board can effectively synchronise investment across the two halves of the business. BT has a good balance between the discipline of separation (wholesale can’t rely on one captive customer, retail can’t rely on a distribution monopoly) and the need for services and capacity to be deployed in sync. If there was no such synergy, we’d probably have seen a break-up already. We heard some evidence at the event that the City rather likes the structural separation model, as utilities have higher multiples than volatile telco services.

Regarding shifting of complexity from retail to wholesale: why should it be done, and how can it be done? Isn’t it just about shifting the risk? The risk is still there!

The WHY is because you want to manage the capex cost associated with the delivery of low-value (and often pirated!) video content. This is generally time-insensitive and needs to be shifted out of peak hour (or where economically unsustainable, eliminated via raising metered broadband prices at higher usage levels). The HOW is documented in the business model map – go read on the Telco 2.0 blog my 4 articles on it. You’re mitigating risk by taking some control over it, and aggregating risk to smooth it out. For example, with the BT Openreach structure, they make money no matter which one of Sky, Virgin Media, BT Retail, Carphone Warehouse, or anyone else turns out to be the winner.

Q&A Customer data and relationship

What about the future of data ownership and control? Isn’t this the future cash cow that perhaps telcos, if they can become platform players, can excel in?

Yes, in principle. Just as Google extracted the latent value from the collective effort of hyperlinking, telcos could feed social network applications with the squeezed juice of CDRs. Whether they can finesse all he legal, branding and cultural issues is another thing.

Google has been successful by storing, analyzing and monetizing what users are actually doing. Telcos have/own lots of data, what are the challenges in building business models around this data versus charging for access?

Privacy, regulatory, brand, encryption technology, user experience,…

It’s going to be tough.

How to provide user-centric solutions when telco model still largely views the household, not the individual, as the customer

That’s both a problem and an opportunity. Yahoo! don’t have a clue who I am at all, so the telcos should see their glass as half full here.

Q&A Partners, portals and services

When will web services stop being free? What will be the catalyst

They’re not free already: you have to buy an expensive PC and broadband connection, and then watch a bunch of ads (or give away valuable private data to enable those ads). We’re just moving to a world of many different business models linking the devices, services and connectivity.

Should telcos partner with Google, MSN, Yahoo on Consumer apps and focus on Enterprise / Business opportunities?

Depends on each telco. These aren’t mutually exclusive.

How can the telco better leverage the customer’s various contact directories?

Sync with network, offer an API, enable 3rd parties to access it, take out the barriers to usability!

How about this as a business strategy: rather than development & investment in new services, adopt a simpler strategy of “seed and buy” successful small competitors and using the telco capital for acquisitions?

Yes, telcos could become like Cisco and vacuum up the good services ideas. However, what’s the point if they are then limited to one operator’s distribution network? It’s like building supermarkets for Toyota car owners. Totally unnatural. Although maybe Cyworld and SK Telecom is the exception that proves the rule.

Partnering is obviously a critical success factor in the new world – how should this be embraced?

Big question. The first step of anyone embarking on a “platform” route is probably to separate partner management into its own exec position independent of BizDev.

Q&A Service innovation

Isn’t innovation with big Telcos more like “we are because we are expected to” Is it still a “show business” or real one? Why are there no ground breaking innovative products, if the above case is not true?

It’s been very comfortable selling vanilla voice and messaging. The risk/reward for telco managers doesn’t make it worth trying to jump that shark.

Where is the innovation coming from? Generate it from the inside or stimulate external creation? How to drive, channel and capture innovation?

All the above – depends on each operator’s situation and what opportunities present themselves.

My hypothesis: the endgame will be: there will be money in Access, in Devices, but not in the three C: Communication, Communities, or Content. These will be free, paid by ads or thrown in for free by the telcos.

I think all five of them will be fine businesses. Content will become more personalised and interactive, meaning much of the copyright crisis will naturally subside. Is World of Warcraft content?

Q&A …and the rest

What value or cost are users attributing to access the internet to make use of all these services?

They don’t care about the Internet per se. Campaigns to “save the Internet” have zero resonance with the public.

How quickly will regulatory bodies and policy makers react to this change?

About five years too late, if history is any guide.

To what extent can the overall telecoms spend purse be grown? How many other purses can telecoms raid?

Banking is ripe for disruption, and DoCoMo are probably the ones to watch.

What of the telecoms vendors? Especially the big complex integrated ones?

I think I’ll need consulting dollars to answer that one.

It’s going to be a whole lot smaller as an industry. Again, other industries have led the way, e.g. GE into “power by the hour” rather than turbine sales and blending services with hardware.

What are we going to do with all the copper?

Put Chilean copper miners out of business by flooding the scrap market…. There’s almost 70m tons of it in the legacy access networks.

What are the payment models for future fragmented services?

Equally fragmented, which will probably drive a user experience crisis in the medium term as the user switches between metered, free, ad-funded and “bundled” service connectivity.

What tech features telcos need to have on client platforms (PCs) to enable Telco 2.0 services?

The Virtual SIM that Intel described would be a great start, so we could provision applications with network access, rather than whole devices.