Telco 2.0: how to accelerate the implementation of new business models

Summary: Opportunities exist for operators to support third-party businesses in Customer Profiling, Marketing offers, ID & Authentication, Network QoS, and Billing, Payments & Collection. However, our in-depth research among senior execs in ‘upstream’ industries (e.g. retail, media, IT, etc.) and telcos shows that poor communication of the telecoms value proposition and slow implementation by operators is frustrating upstream customers and operators alike. Our new analysis identifies strategic customer segments for telcos building new ‘Telco 2.0’ business models, key obstacles to overcome, six real-world implementation strategy scenarios, and strategic recommendations for telcos. (March 2012, Executive Briefing Service, Transformation Stream.) Google's Advertising Revenues Cascade

 

  • Below is an extract from this 29 page report, kindly commissioned and sponsored by Openet and independently produced by Telco 2.0. Openet developed the initial research concept and scope. The research, analysis and the writing of the report itself was carried out independently by STL Partners.
  • Members of the Telco 2.0 Executive Briefing service can download this report in full in PDF format here.
  • Alternatively, to download this report for free, join our Foundation 2.0 service (details here) by using the promotional code FOUNDATION2 in the box at the bottom of the sign-up page here. Once registered, you will be able to download the report here.
  • We’ll also be discussing our findings at the EMEA Executive Brainstorm in London (12-13 June, 2012).
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Preface

This research has been designed to explore how valuable new telecoms solutions could be for third-party companies (a key part of Telco 2.0), as well as to evaluate the barriers to effective implementation. Third-parties (upstream customers) and operators were interviewed to explore their thoughts in this key strategic area for the telecommunications industry.

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Executive Summary

Headline Conclusions

  • Opportunities exist for operators to support third-party businesses in Customer Profiling, Marketing offers, ID & Authentication, Network QoS, and Billing, Payments & Collection.
  • Poor communication of the telecoms value proposition and slow implementation by operators is frustrating upstream customers and managers within operators themselves.
  • There are four upstream customer segments. Two of these are particularly important for the operators to address when developing go-to-market approaches:
  • Enthusiasts who need full-service Telco 2.0 solutions now;
  • Non-believers who need to be educated on the value of telecoms enabling services and convinced of operators’ ability to implement.
  • There are few material barriers to developing solutions except operators’ inability to implement effectively:
  • Although lack of cross-operator solutions and regulatory impediments are considered significant in Europe and the US.
  • There are four key reasons for the slow implementation by operators:
  • Reason 1: Insufficient investment by operators in services and service enabler platforms.
  • Reason 2: Financial metrics which do not encourage investment in new business models.
  • Reason 3: Inability to pin down the optimal timing for investment in new business models.
  • Reason 4: A prisoners’ dilemma over whether to collaborate or compete with other operators and with upstream customers when implementing solutions.

For the complete recommendations, detailed conclusions and full analysis, please download the report by following the instructions at the top of this page.

 

Introduction, Objectives and Methodology

The research consisted of interviews with 26 major corporations that use telecoms networks to deliver services to consumers including players from advertising, media, financial services and retail (upstream customers or ‘third-party’ companies). Interviewees where senior managers who were responsible for the provision of services via digital channels and thus were familiar with the challenges and opportunities they faced in this developing market segment. Additionally, STL Partners interviewed senior managers from 16 major mobile and converged communications service providers (see Figure 1 below for more details on participants).

The objectives of the research were to determine:

  • What Telco 2.0 (enabling) services would upstream customers like to see from communications service providers?
  • What are the most common use cases and attractive commercial models for such services?
  • What are the current barriers to realising the Telco 2.0 opportunity and what needs to be done to overcome these barriers?

Figure 1: Interviews conducted with players from telecoms and adjacent industries

Companies interviewed for this report

Source: STL Partners

Interviews were 30-60 minutes in length and largely qualitative in nature. Some quantitative questions were asked so that the relative attractiveness of Telco 2.0 solution areas and the size of implementation barriers could be evaluated. The interviews were also designed to uncover differences in perspective between:

  • Operators and upstream customers;
  • Upstream customers from different industry groups – Advertising, Media, Financial services and IT;
  • Operators from different geographic regions – Europe, North America, Middle East and North Africa (MENA) and Asia Pacific (APAC).

Interviews were conducted with senior decision-makers and influencers and, to ensure discussions were full and frank, the content of interviews has not been attributed to individual companies.

Report Contents

 
  • Introduction
  • Real potential value in Telco assets but implementation proving difficult
  • Defining the opportunity areas
  • Strong overall alignment across all eight areas between operators and upstream customers
  • Averages hide variations in upstream customer responses
  • Operators consistent about opportunities apart from Identity & Authentication solutions
  • Telco ability to implement is seen by all as the key barrier…
  • …although operators in Europe and US also see lack of cross-operator solutions and regulation as key barriers
  • Four upstream customer segments require different solutions from operators
  • Operator segment mix looks very different to upstream
  • Why are operators finding implementing Telco 2.0 so hard?
  • Reason1: Insufficient investment by operators in services and service enabler platforms
  • Reason 2: Financial metrics which do not encourage investment in new business models
  • Reason 3: Inability to pin down the optimal timing for investment in new business models
  • Reason 4: A prisoners’ dilemma over whether to collaborate or compete with other operators and with upstream customers when implementing solutions
  • Conclusions and recommendations

Report Figures

 
  • Figure 1: Interviews conducted with players from telecoms and adjacent industries
  • Figure 2: Broad alignment on opportunity areas from operators & upstream customers
  • Figure 3: Upstream customers – variation even within industry sectors for specific Telco 2.0 solution areas
  • Figure 4: Perceived lack of telco interest in developing new solutions for upstream customers
  • Figure 5: Regional differences in operator opportunity sizing for Identity & Authentication solutions
  • Figure 6: Telco operational and organisation limitations seen as the biggest barrier to success
  • Figure 7: Regional differences in perception of key barriers to Telco 2.0 implementation
  • Figure 8: Upstream customer segments
  • Figure 9: Telco go-to-market approaches for upstream customer segments
  • Figure 10: Telco segments – Telco 2.0 could be valuable but can it be realised?
  • Figure 11: An historical lack of investment in services by operators threatens voice, messaging and newer Telco 2.0 solutions
  • Figure 12: Current operator metrics discourage investment in new business models
  • Figure 13: New business model investment timing dilemma
  • Figure 14: The prisoners’ dilemma
  • Figure 15: Six Telco 2.0 implementation strategies
  • Figure 16: Value-creating and value-destroying approaches
  • Figure 17: Geography determines the most important Telco 2.0 implementation strategies

To access this report:

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About Openet

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Openet is a leading provider of Service Optimization Software (SOS) tailored to meet the evolving needs of communications service providers, or CSPs, including wireless, wireline and cable network operators. Openet’s integrated, high-performance software solutions provide real-time policy management, rating, charging and subscriber data management solutions to enable real-time, contextual network resource allocation and monetization decisions based on information about the end user and the service being used. CSPs use Openet’s SOS solutions to enhance quality of service, create a more personalized end user experience, develop new business models and dynamically control network resources. Openet’s SOS solutions are used by more than 80 customers in 28 countries. For more information, please visit www.openet.com.

Organisations interviewed for the report: Televisa, BBC, Intuit, Google, Tesco, MTV, Intel, TiVo, Sling, Ogilvy, Fox, Omnicom, Microsoft, Visa, Barclaycard, Ultraviolet,  PRS, American Express, MasterCard, CitiGroup, On Live, Warner Bros, MEF, Gap, Salesforce, AT&T, Verizon, Sprint,  Deutsche Telekom, Du, Teliasonera, Orange, Everything Everywhere, Turkcell, Qtel, Etisalat, Singtel, Axiata, Telekom Indonesia, TIM, Tele2.

CDNs 2.0: should telcos compete with Akamai?

Content Delivery Networks (CDNs) such as Akamai’s are used to improve the quality and reduce costs of delivering digital content at volume. What role should telcos now play in CDNs? (September 2011, Executive Briefing Service, Future of the Networks Stream).

Should telcos compete with Akamai?

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Introduction

We’ve written about Akamai’s technology strategy for global CDN before as a fine example of the best practice in online video distribution and a case study in two-sided business models, to say nothing of being a company that knows how to work with the grain of the Internet. Recently, Akamai published a paper which gives an overview of its network and how it works. It’s a great paper, if something of a serious read. Having ourselves read, enjoyed and digested it, we’ve distilled the main elements in the following analysis, and used that as a basis to look at telcos’ opportunities in the CDN market.

Related Telco 2.0 Research

In the strategy report Mobile, Fixed and Wholesale Broadband Business Models – Best Practice Innovation, ‘Telco 2.0′ Opportunities, Forecasts and Future Scenarios we examined a number of different options for telcos to reduce costs and improve the quality of content delivery, including Content Delivery Networks (CDNs).

This followed on from Future Broadband Business Models – Beyond Bundling: winning the new $250Bn delivery game in which we looked at long term trends in network architectures, including the continuing move of intelligence and storage towards the edge of the network. Most recently, in Broadband 2.0: Delivering Video and Mobile CDNs we looked at whether there is now a compelling need for Mobile CDNs, and if so, should operators partner with existing players or build / buy their own?

We’ll also be looking in depth at the opportunities in mobile CDNs at the EMEA Executive Brainstorm in London on 9-10th November 2011.

Why have a CDN anyway?

The basic CDN concept is simple. Rather than sending one copy of a video stream, software update or JavaScript library over the Internet to each user who wants it, the content is stored inside their service provider’s network, typically at the POP level in a fixed ISP.

That way, there are savings on interconnect traffic (whether in terms of paid-for transit, capex, or stress on peering relationships), and by locating the servers strategically, savings are also possible on internal backhaul traffic. Users and content providers benefit from lower latency, and therefore faster download times, snappier user interface response, and also from higher reliability because the content servers are no longer a single point of failure.

What can be done with content can also be done with code. As well as simple file servers and media streaming servers, applications servers can be deployed in a CDN in order to bring the same benefits to Web applications. Because the content providers are customers of the CDN, it is possible to also apply content optimisation with their agreement at the time it is uploaded to the CDN. This makes it possible to save further traffic, and to avoid nasty accidents like this one.

Once the CDN servers are deployed, to make the network efficient, they need to be filled up with content and located so they are used effectively – so they need to be located in the right places. An important point of a CDN, and one that may play to telcos’ strengths, is that location is important.

Figure 1: With higher speeds, geography starts to dominate download times

CDN Akamai table distance throughput time Oct 2011 Telco 2.0

Source: Akamai

CDN Player Strategies

Market Overview

CDNs are a diverse group of businesses, with several major players, notably Akamai, the market leader, EdgeCast, and Limelight Networks, all of which are pure-play CDNs, and also a number of players that are part of either carriers or Web 2.0 majors. Level(3), which is widely expected to acquire the LimeLight CDN, is better known as a massive Internet backbone operator. BT Group and Telefonica both have CDN products. On the other hand, Google, Amazon, and Microsoft operate their own, very substantial CDNs in support of their own businesses. Amazon also provides a basic CDN service to third parties. Beyond these, there are a substantial number of small players.

Akamai is by far the biggest; Arbor Networks estimated that it might account for as much as 15% of Internet traffic once the actual CDN traffic was counted in, while the top five CDNs accounted for 10% of inter-domain traffic. The distinction is itself a testament to the effectiveness of CDN as a methodology.

The impact of CDN

As an example of the benefits of their CDN, above and beyond ‘a better viewing experience’, Akamai claim that they can demonstrate a 15% increase in completed transactions on an e-commerce site by using their application acceleration product. This doesn’t seem out of court, as Amazon.com has cited similar numbers in the past, in their case by reducing the volume of data needed to deliver a given web page rather than by accelerating its delivery.

As a consequence of these benefits, and the predicted growth in internet traffic, Akamai expect traffic on their platform to reach levels equivalent to the throughput of a US national broadcast TV station within 2-5 years. In the fixed world, Akamai claims offload rates of as much as 90%. The Jetstream CDN  blog points out that mobile operators might be able to offload as much as 65% of their traffic into the CDN. These numbers refer only to traffic sources that are customers of the CDN, but it ought to be obvious that offloading 90% of the YouTube or BBC iPlayer traffic is worth having.

In Broadband 2.0: Mobile CDNs and video distribution we looked at the early prospects for Mobile CDN, and indeed, Akamai’s own move into the mobile industry is only beginning. However, Telefonica recently announced that its internal, group-wide CDN has reached an initial capability, with service available in Europe and in Argentina. They intend to expand across their entire footprint. We are aware of at least one other mobile operator which is actively investing in CDN capabilities. The degree to which CDN capabilities can be integrated into mobile networks is dependent on the operator’s choice of network architecture, which we discuss later in this note.

It’s also worth noting that one of Akamai’s unique selling points is that it is very much a global operator. As usual, there’s a problem for operators, especially mobile operators, in that the big Internet platforms are global and operators are regional. Content owners can deal with one CDN for their services all around the world – they can’t deal with one telco. Also, big video sources like national TV broadcasters can usually deal with one ex-incumbent fixed operator and cover much of the market, but must deal with several mobile operators.

Application Delivery: the frontier of CDN

Akamai is already doing a lot of what we call “ADN” (Application-Delivery Networking) by analogy to CDN. In a CDN, content is served up near the network edge. In an ADN, applications are hosted in the same way in order to deliver them faster and more reliably. (Of course, the media server in a CDN node is itself a software application.) And the numbers we cited above regarding improved transaction completion rates are compelling.

However, we were a little under-whelmed by the details given of their Edge Computing product. It is restricted to J2EE and XSLT applications, and it seems quite limited in the power and flexibility it offers compared to the state of the art in cloud computing. Google App Engine and Amazon EC2 look far more interesting from a developer point of view. Obviously, they’re going for a different market. But we heartily agree with Dan Rayburn that the future of CDN is applications acceleration, and that this goes double for mobile with its relatively higher background levels of latency.

Interestingly, some of Akamai’s ADN customers aren’t actually distributing their code out to the ADN servers, but only making use of Akamai’s overlay network to route their traffic. Relatively small optimisations to the transport network can have significant benefits in business terms even before app servers are physically forward-deployed.

Other industry developments to watch

There are some shifts underway in the CDN landscape. Notably, as we mentioned earlier, there are rumours that Limelight Networks wants to exit the packet-pushing element of it in favour of the media services side – ingestion, transcoding, reporting and analytics. The most likely route is probably a sale or joint venture with Level(3). Their massive network footprint gives them both the opportunity to do global CDNing, and also very good reasons to do so internally. Being a late entrant, they have been very aggressive on price in building up a customer base (you may remember their role in the great Comcast peering war). They will be a formidable competitor and will probably want to move from macro-CDN to a more Akamai-like forward deployed model.

To read the note in full, including the following additional analysis…

  • Akamai’s technology strategy for a global CDN
  • Can Telcos compete with CDN Players?
  • Potential Telco Leverage Points
  • Global vs. local CDN strategies
  • The ‘fat head’ of content is local
  • The challenges of scale and experience
  • Strategic Options for Telcos
  • Cooperating with Akamai
  • Partnering with a Vendor Network
  • Part of the global IT operation?
  • National-TV-centred CDNs
  • A specialist, wholesale CDN role for challengers?
  • Federated CDN
  • Conclusion

…and the following charts…

  • Figure 1: With higher speeds, geography starts to dominate download times
  • Figure 2: Akamai’s network architecture
  • Figure 3: Architectural options for CDN in 3GPP networks
  • Figure 4: Mapping CDN strategic options

Members of the Telco 2.0 Executive Briefing Subscription Service and Future Networks Stream can download the full 19 page report in PDF format here. Non-Members, please subscribe here, buy a Single User license for this report online here for £795 (+VAT), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Organisations, people and products referenced: 3UK, Akamai, Alcatel-Lucent, Amazon, Arbor Networks, BBC, BBC iPlayer, BitTorrent, BT, Cisco, Dan Rayburn, EC2, EdgeCast, Ericsson, Google, GSM, Internet HSPA, Jetstream, Level(3), Limelight Networks, MBNL, Microsoft, Motorola, MOVE, Nokia Siemens Networks, Orange, TalkTalk, Telefonica, T-Mobile, Velocix, YouTube.

Technologies and industry terms referenced: 3GPP, ADSL, App Engine, backhaul, Carrier-Ethernet, Content Delivery Networks (CDNs), DNS, DOCSIS 3, edge computing, FTTx, GGSN, Gi interface, HFC, HSPA+, interconnect, IT, JavaScript, latency, LTE, Mobile CDNs, online, peering, POPs (Points of Presence), RNC, SQL, UMTS, VPN, WLAN.

Connected TV: Forecasts and Winners/Losers (UK Case Study)

Summary: our in-depth look at the UK’s highly competitive digital TV market which reflects many global trends, such as competition between different types of content distributor (LoveFilm, YouTube, Virgin Media, BBC, BSkyB, BT, etc.), channel proliferation, new devices used for viewing,  and the increasing prevalence of connected TVs. What are the key trends and who will be the winners and losers? (August 2011, Executive Briefing Service)

Chart from Connected TV Figure 2 telco 2.0

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Below is an extract from this 23 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service here. Non-members can buy a Single User license for this report online here for £595 (+VAT) or subscribe here. For multiple user licenses, or to book a place at our Digital Entertainment 2.0 workshop on New Business Models for the Home Video Entertainment market in Europe – Lessons from America at our London Executive Brainstorm on 8th November, please email contact@telco2.net or call +44 (0) 207 247 5003.

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Introduction and Background

With every wave of innovation, there are always winners and losers. In this note we examine who are likely to be the winners and losers in the UK as increasingly, TVs become connected to the internet.

While it is difficult to generalise with TV markets across the globe as the markets are fundamentally different in structure, especially with key variables such as PayTV penetration, state broadcaster involvement and fast broadband penetration varying widely, the comprehensive range of players and highly competitive nature of the UK market makes it a useful benchmark for many key global trends.

The UK TV Market

According to OFCOM’s latest research, there are 26.6m TV households in the UK with 60m TV sets or an average of 2.25 TV sets per household.

TV Viewing

Figure 1 – Average UK TV Viewing Per Day

Chart of average UK TV viewing to 2010 Fig 1 Connected TV Article Telco 2.0

Source: BARB.

TV viewing over the last few years has been remarkably resilient despite the internet and other platforms competing hard for attention. Where the TV market differs is that average consumption is very strongly proportional to age. In typical technology adoption cycles, adoption is indirectly proportional to age. This presents a real challenge to the connected TV market: the main TV consumers are more than likely to be adverse to technological change.

TV Device Manufacturers

Figure 2 – Annual UK TV Set Sales by Type 2002-2010

Chart of annual UK TV Set Sales to 2010 Fig 2 Connected TV Telco 2.0

The long term volume trend for TV manufacturers has been healthy. This has mainly been due to the innovation in device form and screen quality, with flat screen and HD features becoming the norm. TV manufacturers are now hoping that internet connected TV’s will generate another spurt in growth. Samsung and Sony are the UK market leaders.

But the challenge is the replacement cycles. With a 60m installed base of TV’s in the UK, and assuming that all the 9.5m TV’s sold in 2010 are replacements and not simply increasing the number of sets per household, the implication is that the replacement cycle is currently roughly every six years at a minimum. This is relatively slow when compared to two years for mobile phones and three years for laptops, and this in turn suggests that the adoption rate for standalone connected TVs will be much slower than the technology cycles for these devices.

While we expect internet connectivity to become a pretty standard feature with TV over the next couple of years we are sceptical about their active use for viewing video. The content offering is currently too limited. We would be surprised if within a couple of years, there are more than 1m homes regularly using TVs to watch video over the internet.

Set Top Boxes

The Set Top Box market in the UK falls into two categories: a subsidised segment which the consumer generally gets either for free or heavily discounted by their PayTV provider; and a retail segment where the consumer generally pays a full price and gives the consumer access to a limited set of free to air (FTA) channels and quite often DVR features.

In the subsidised segment, the market leader is Sky which currently manufacturers its own boxes. All the current models contain internet connectivity but require a subscription to Sky Broadband service to access Sky’s closed pull VOD service, Sky Anytime+. Sky has seeded the market for quite a few years with its Sky+ HD boxes which are currently in a minimum of 3,822k UK homes. We say a minimum because the figure is for homes with a HD subscription and Sky also installs a HD box for homes who do not subscribe to HD. This market seeding strategy accounts for the high initial take-up of the Sky Anytime+ service of 800k in the first quarter of launch. Since the service is effectively free, or rather bundled into the Sky TV and Broadband prices, we expect a rapid take up and within a couple of years Sky will have over 4m homes with their main TV connected to the internet.

Virgin Media has chosen TiVo as its exclusive connected set top box provider. The TiVo box is more open than the Sky box with the future promise of allowing independent Flash developers to deploy applications. TiVo is off to a steady start with around 50k homes in the first quarter of 2011. We expect TiVo adoption to be slower than Sky because the need for a new box which is priced at £50 with an ongoing service fee of £3/month. We expect these prices to reduce over time, but still can envisage an uptake of over 2m homes within two to three years assuming effective promotion by Virgin Media.

Another interesting opportunity is the launch of YouView. YouView is expected to come in two flavours, subsidised by CSPs and retail. BT and TalkTalk are shareholders, and are committed to launching YouView boxes by Pace and Huawei respectively in time for the London Olympics in 2012. Humax is committed to launching retail boxes. It is too early to properly forecast demand for YouView as neither the pricing or applications have yet been revealed. However, we struggle to see an installed base of over 1m homes even with the large base of broadband connections that BT and TalkTalk can market the product to.
All the original BT Vision set top boxes were manufactured by Pace (through their purchase of Philips) and need to be connected to BT broadband and therefore the whole of 575k subscribers count as connected TVs. We expect over time for BT to replace these BT Vision boxes with YouView boxes.

The major problem for YouView is that it is a proprietary UK standard whereas other European countries are committing to the hbbTV standard. This places other set top box makers in something of a quandary – will the UK market be large enough to support product development costs? Sony, Technicolour and Cisco have already publically stated that they have no current plans to develop a YouView box.

Other commentators express confidence in the Bluray players to provide the TV connectivity. We are bears of Bluray players and think the market will be niche at best.

Games Consoles

Figure 3 – Gaming Console Household Penetration

Chart of Gaming Consoles per UK Household Fig 3 Telco 2.0

Source: Ofcom residential tracker, w1 2011. Base: All adults 16+ (3,474)

Around half of UK homes contain a games console. The market is dominated by Microsoft, Sony and Nintendo and a growing number of consoles are connected to the internet. Primarily, for online gaming, but also for watching video content either via the internet or through playback of physical media such as DVD or Bluray.

Figure 4 – What UK Consumers use games consoles for

Chart of uses of gaming consoles 2010 Fig 4 Telco 2.0

Source: Ofcom residential tracker, w1 2011. Base: all adults 16+ with access to a games console at home (1,793).

We expect Gaming Consoles to become the most important method for secondary TV sets to connect to the internet, especially in children’s bedrooms. As more and more gaming moves online, we can easily see 75% of gaming consoles regularly connecting to the internet (c. 10m). However, the proportion using the console for regularly viewing video will remain small, perhaps as low as 20%. This will mean that although important Gaming Consoles will be secondary to STB’s for watching video over the internet.

To read the note in full, including additional analysis on…

  • Communications Service Providers (CSPs)
  • BT
  • Sky
  • Virgin Media
  • TalkTalk
  • Others
  • ‘Mainstream’ TV Channels
  • The BBC
  • New Entrants and Online Players
  • LoveFilm
  • Google – YouTube
  • Apple
  • Conclusions

…and the following charts…

  • Figure 1 – Average UK TV Viewing Per Day
  • Figure 2 – Annual UK TV Set Sales by Type 2002-2010
  • Figure 3 – Gaming Console Household Penetration
  • Figure 4 – What UK Consumers use games consoles for
  • Figure 5 – Main UK CSPs – Broadband and TV reach
  • Figure 6 – Take-up of multichannel TV on main sets
  • Figure 7 – Video on demand use in Virgin Media Homes
  • Figure 8 – Total UK TV Revenue by Sector
  • Figure 9 – UK TV Channel shares in all homes 1983-2010
  • Figure 10 – UK Online TV revenues by type of service
  • Figure 11 – Unique audiences to selected online film and TV sites
  • Figure 12 – Unique audiences to selected video-sharing sites
  • Figure 13 – Forecast of Connected TV market by device in 2013
  • Figure 14 – Table summarising strategy and winners/losers by type 19

Members of the Telco 2.0 Executive Briefing Subscription Service can download the full 23 page report in PDF format here. Non-Members, please see here for how to subscribe, here to buy a single user license for £595 (+VAT), or for multi-user licenses and any other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Organisations and products referenced: Amazon, Apple, AppleTV, BBC, BSkyB, BT, BT Vision, Cisco, Flash, Google, Huawei, Humax, ITV, LoveFilm, Microsoft, Motorola, Nintendo, O2, OFCOM, Orange, Pace, Philips, Samsung, Sky, Sky Anytime+, Sky Go, Sony, TalkTalk, Technicolour, TiVo, TV manufacturers, Virgin Media, YouTube, YouView .

Technologies and industry terms referenced: Bluray, catch-up TV, Connected TV, Digital Terrestrial, DVD, DVR, flat screen, free to air, Games Consoles, hbbTV, HD, IPTV, online, PayTV, regulatory relief, replacement cycles, Set Top Box, Tablets, Video, Video on demand (VOD).

Full Article: iFlood – How better mobile user interfaces demand Layer Zero openness

Networks guru Andrew Odlyzko recently estimated that a typical mobile user consumes 20MB of data a month for voice service, but that T-Mobile Netherlands reports their iPhone users consuming 640MB of data a month; so upgrading everyone to the Jesus Phone would increase the demand for IP bandwidth on cellular networks by a factor of 30.

It had in the past been estimated that major European cellular operators might be able to provide 500MB/user/month without another wave of network upgrades; if this calculation is at all typical, it looks like there is a substantial risk of an ”iPlayer event” hitting cellular in the near future. Recap: when the BBC placed vast amounts of its content on the Internet through its iPlayer service, DSL traffic in the UK spiked; or rather, it didn’t spike, the trend shifted permanently upwards.

That, of course, is much more worrying; because the marginal costs are set by the capacity needed to handle the peaks, a rise in average traffic means a boost to costs multiplied by the peak/mean ratio. An aggravating factor is the pricing structure for BT Wholesale backhaul service – the commits are 155Mbits/s, so if the new peak demand just exceeded your existing commit, you needed to buy a whole 155Mbits/s pipe. The impact on the UK unbundling/bitstream ISPs has been serious and the sector remains in a critical condition.

Traditionally, a mobile base station was provisioned with 2 E-1 leased lines, 2×2 Mbit/s capacity. Multiplied by 4, that’s 9,676,800 Mbits in a month. Divide by 8 to convert to MB, 1,181GB/1.15TB a month. Which means that a typical cell site could support at the most 1,832 users’ activity, or quite a lot less when you consider the peak/mean issue – typical values are 4:1 for GSM voice (458 users), but as high as 50:1 for IP (36!). Clearly, those operators who have had the foresight to pull fibre to the base stations and, especially, to acquire their own infrastructure will be at a major advantage.

The elements of traffic generation

The iPlayer event was an example of content push – what changed was the availability of a huge quantity of compelling content, which was also free. If Samsung’s recently announced video store takes off, that would be another example of content push. But this is far from the only driver of traffic generation, though. It is important to realise that the Internet video market is a tightly-coupled system. The total user experience is made up of content, of the user interface, of feedback and discovery mechanisms, of delivery over the network, and of the business model. All of them are very closely related – if the product is heavily DRM-restricted, prettying up the front end doesn’t help.

It is characteristic of a coupled system that the slowest-changing factor is the main constraint, but the fastest-changing factor is the driver of change. In this case, the slowest-changing factor is the infrastructure, and within that, the digs and poles of layer zero. Even the copper changes faster than that. The fastest-changing factor is the user interface, which can be changed at will. Sociability, discovery and the like, which require serious software development, are in the middle, with issues like BT Wholesale pricing some way below.

There was not much special about the iPhone technically; the first ones were 2G devices in a 3G world, and good luck to you trying to pull 640MB a month on GPRS alone. Is that even possible? Its integration with iTunes gave it access to content, but the cost issue meant that the bulk of the music on iPhones was probably downloaded over WLANs or sideloaded from a PC. But one thing that it did do very well was the user interface; Apple exploited its historic speciality in industrial design and GUI design to the limit. Typically, a lot of geeks and engineers scoffed at the gadget as an overdesigned bauble for big-kid hipsters; fools that we were.

But the core insight of the iPhone designers was to design for the Web and for rich media, probably helped by not having a telephony background. Therefore, they chose to cover as much of the form factor with a high quality screen as possible, and worked from there. They also made some advances in the GUI (zooming, gesture recognition), but the much talked about browser was less sensational. (Like all versions of Safari, it is based on the open-source WebKit engine that also makes the Nokia browser and Konqueror work.)

So we’re now beginning to see that changing the user interface can radically impact the engineering and economics of the network; and because it is a fast-changing element, it can do so faster than the network layer can react.

From receiving to sending

The Internet is a copying machine, they say; more to the point, it is usually a one-to-many medium that is experienced as a many-to-one medium. I draw content from many different sources according to the stuff I like; but each source is broadcasting itself to many readers. As a rule, people read more than they write, even if P2P distribution blurs this. One criticism of the iPhone is that it’s optimised for passive consumption of content; some users report their uplink/downlink ratio changing dramatically on changing to the iPhone.

Looking at another online-video sensation which hammers the ISP economy, YouTube, it’s quite clear that another driver of traffic is improved content ingestion. As whatever you place on the Web will be written relatively few times and read many times, there is a multiplier effect to anything that makes it easier to create or at least to distribute content.

YouTube’s innovation was three-fold; it made it dramatically simpler to upload video to the Internet, and it made it dramatically simpler to popularise it once it was there, through the embedding process and through its social functions. This latter feature meant there was much more of an incentive to upload stuff in the first place, because it was more likely to get viewed.

Better user interfaces and social mechanisms for content creation, then, are potentially major drivers of change in your cost model. They can change very quickly; and their impact is multiplied. Already, I can uplink photos to Flickr faster from my Nokia E71 than from my DSL link; granted, this is because of the UK’s lamentable infrastructure, but it shows some idea of the possibilities. Perhaps that Samsung device with the mini-decks might be less silly than we thought?

Faster adaptation: considered helpful

As we were wondering what would happen to the cellular networks’ backhaul bills, and contemplating the wreck of the DSL unbundler/bitstream business model, we looked enviously across the Channel to Telco 2.0’s favourite ISP, Iliad. They have just announced another set of fantastic figures; their margins are 70%-80% where they have deployed fibre, and their agility in launching new services doesn’t need to be rehearsed again. They even built their own content-creation service, after all; no fear of the future there.

What makes the difference? Iliad has always been committed to investing in engineering and infrastructure, giving it the agility to match the speed of change the application layer can achieve. It’s been determined to realise the OPEX and unbundling/wholesale savings from fibre deployment; and Iliad’s results have demonstrated that they are real and they are enough to fund deployment.

There is a crucial element, however, in their success; in France, access to duct and pole infrastructure is a regulated product, and major cities are more than keen on selling access to their own physical infrastructures – the sewers of Paris are the classic example. If you want to fix the ISP business model, fixing layer zero is the place to start, before the next fast-changing application knocks us back into the ditch.

Conclusions

  1. The ISP/telco market is a closely coupled system: An analysis in terms of differential rates of change shows that rapidly changing applications and user interfaces can have seismic impact on slowly changing network operator business models
  2. The benefits of fibre are real: Iliad is showing that fibre deployment isn’t just nice to have, it’s saving the ISP business model
  3. Open access to infrastructure is vital: There is no contradiction between applications/VAS and layer zero – instead they go together. If you want fantastic new apps, pick up a shovel.