Full Article – Is Ribbit worth $105m to BT yet?

Summary: How is the strategic rationale for BT’s acquisition of Ribbit as their ‘Voice 2.0’ platform working out? We spoke with Crick Waters, Ribbit’s co-founder and EVP.

NB You can download a PDF copy of this Analyst Note here.

Overview

The main deployment of Ribbit in BT Business was all of two weeks old when we spoke to Crick Waters co-founder and EVP, Strategy and Business Development of Ribbit, so it is a little early to be definitive about the question of whether Ribbit has yet proved worth its $105 million cost to BT.

In this article, Crick says ‘Voice 2.0′ applications are critical for operators to remain relevant as providers of real-time communications in a multi-screen, multi-device environment, and argues that Ribbit’s core skills are “engagement, metrics, and monetisation”. We also highlight the learning that the benefits of business model innovation are not always just improved revenue growth, and in many cases include broader benefits to the overall business ecosystem.

Ribbit – Background

We’ve been following Ribbit and their efforts to create a platform for rapid development of voice & messaging applications for two-and-a-half years. The reasons why we were interested are articulated in this quote:

Further in the future, though, highly reconfigurable telephony is likely to lead to radically different product and business models for telcos. For example, civil engineers stamp out custom bridges off well-tested models based on span, load, and topography. Your telco consulting services arm will be building custom communications experiences, with the software equivalent of a flexible manufacturing system. Custom back-ends, process flows and user interfaces will be generated from tools and models. Each is created appropriate to the application and user context. Most devices will have a completely “soft” and re-configurable user interface.

When BT acquired Ribbit in the summer of 2008, Thomas Howe pointed out in a guest post that CEBP (Communications Enabled Business Processes) projects typically result in productivity gains of around 20%, and 20% uplift in productivity across the whole economy is a lot of money by anyone’s standards. We had a look at some different CEBP/Voice 2.0 business models in this analysts’ note, and discussed the technology strategy aspects here.

So, how’s the business coming on?

Many people felt BT had hugely overpaid for the company in laying out $105 million for “100 developers working on salesforce.com”, as one Oracle executive described it. As we pointed out here, though, it had within it the potential for a transformation of BT’s business – a strategy that would integrate developer APIs, open CRM systems, call centres, and broadband connectivity, across BT Retail, Wholesale, and Global Services.

That was the theory, but BT’s politics and economics didn’t quite work out like that. Ben Verwaayen’s departure from BT seemed, at least temporarily, to rob the initiative of top level support. The recession revealed the downside of BT Global Services’ (BT GS) rapid expansion, as the division turned out to be sitting on an impressive pile of bad contracts. The doomed NHS National Programme IT contracts were almost enough to add up to a major crisis in themselves, and the plummeting stock market caused BT’s pension fund to need a huge cash injection. BT shed some 35,000 jobs, and J. P. Rangaswami was transferred from BT Centre to take over Ribbit personally.

Despite all the drama at the corporate level, though, Ribbit has been quietly achieving. The launch of Ribbit Mobile, its first consumer (well, prosumer) product, got a lot of attention and favourable comparisons to Google Voice, like this CNET review, or this story on TechCrunch:

“Ribbit Mobile’s iPhone app is fine as far as it goes, but I kind of just want it to take over the entire phone function of the iPhone, which is the part of my iPhone I use the least anyway.”

Let’s repeat that: “I kind of just want it to take over the entire phone function of the iPhone…which is the part of my iPhone I use the least anyway“. One sentence sums up the potential of better voice and messaging, and the threat to the 66% of Vodafone’s revenues that consist of voice or SMS. Here’s an example: Caller ID 2.0, a feature for Ribbit Mobile that links your phone number, your address book, and LinkedIn’s API:

“Today, when a call comes in or when you make a call, Ribbit Mobile reaches into the social web and finds the recent LinkedIn updates, Facebook updates, Tweets, and Flickr photos of the person calling you. If more than one match is found, Ribbit Mobile will ask you to select the right person.”

Figure 1 – Ribbit Mobile Screenshot

Text and Image Source: http://blog.linkedin.com/2010/01/12/linkedin-ribbit/

Ribbit’s recent developer challenge shows some fascinating examples of the creativity open telephony enables – Sena Gbeckor-Kove integrated the open-source CRM system Sugar, the winner integrated telephony into an Augmented Reality application.

That’s all very well, but it’s admittedly a little shiny and tech-newsy. That said, it’s absolutely essential for a business like Ribbit that it gets attention – a developer platform without developers is fairly pointless, and Ribbit has so far signed up 22,000 developer accounts. The previous time we checked in (about a year ago) the count stood at 600.

What about the strategy? Is BT still aiming to fix Global Services with open-source software and developer APIs, as J. P. Rangaswami said when Telco 2.0 visited BT’s open-source development shop? We had a chat with Crick Waters, co-founder and EVP, Strategy and Business Development of Ribbit to find out. Here are some of the key points.

[NB. As background on BT’s organisation, BT Global Services deals in key accounts and giant contracts – multinationals, global carrier services operations, and government contracts. By contrast, BT’s small and medium-sized business products sit within BT Retail, in a division called BT Business, parallel to the traditional residential operation in Consumer.]

Ribbit’s biggest current customer is BT

It is useful to understand Ribbit in the context of BT’s strategic objectives. At their 2010 investor day, BT executives said that the key strategic priorities at BT were as follows:

executing on FTTX deployment;
re-launching BT Vision IPTV;
aggressively promoting networked IT products to SMBs;
providing integrated IT solutions for Global Services’ customers among multinational companies and government.

The last two of these are very much what Ribbit is aimed at – BT wants to defend its market share by introducing advanced features that rival operators don’t have, and to replace declining voice margins and volume by up-selling its existing small business voice and IP customers to richer networked-IT/cloud computing services. Ribbit is crucial to this strategy as its fundamentally network-resident nature means that BT can deliver better voice and messaging services to any business that takes its service. (NB. To illustrate the importance of bolstering voice revenues, Amdocs forecast an average 3% annual decline in voice revenues globally at their June 2010 InTouch event,)

BT Global Services is already making heavy use of the platform to build applications for its clients, which allows Ribbit to leverage the BT sales force and customer base, while the BT GS consultants and developers get another powerful tool to work in parallel with Salesforce.com, Sugar CRM, Avaya, Microsoft OCS, Asterisk, and friends. The very simplest demonstration of this is on the main BT website for business customers in the UK – ask them for Salesforce.com and they’ll offer you the Ribbit plug-in and Ribbit Mobile.

Providing CEBP for businesses ranging from sole traders to FTSE250 enterprises (BT’s definition of SMBs) is a significant operational challenge. There are obvious costs to delivering on-premises or even traditionally hosted Asterisk or similar products to hundreds of thousands of SMBs. If BT can provide a platform with comparable features as a cloud service, it can provision Ribbit accounts in the same way as it currently provisions telephony, ISP, or wholesale carrier-services products. This avoids the need to build a huge network of systems administrators and minimises the additional truck-rolls required. They may even be able to use their existing online provisioning workflow and CRM systems.

Rather as Telenor Objects does for Machine-to-Machine applications, Ribbit is a platform that provides horizontal CEBP and unified communications for Person-to-Organisation applications and delivers them from the cloud. As this slide from Marie Austenaa, Telenor’s VP in charge of Objects, shows, Telenor is trying to integrate an open platform business model and technology architecture with the traditional telco strengths of managed service delivery, distribution channels, and universally recognised brands.

Figure 2 – Telenor Objects Provides a Horizontal M2M Platform

Source: Telenor presentation to 9^th Telco 2.0 Brainstorm, April 2010

Last but not least, BT also uses Ribbit in its own internal voicemail systems to transcribe voicemails into emails and forward them to their intended recipients, speeding the process of message delivery and thereby ‘eating its own Ribbit food’.

Ribbit’s External Target Market

In terms of the space in the enterprise market that Ribbit is targeted at, we recently identified a gap between companies that are either large enough to pay for custom development and infrastructure, or tech-focused enough to have the skills in-house, and those ultra-simple businesses whose IT needs are met by Google Calendar and SMS. We think that Telcos’ ability to aggregate many small customers from their large customer bases, and to provide services in the cloud, may well fit them to compete in this zone of opportunity. The darker band on the chart below illustrates this opportunity zone.

Figure 3 – The Market Space for Voice 2.0 Applications Developers

Source: Telco 2.0

The concept of “barely repeatable processes” versus “easily repeatable processes” as introduced by Sigurd Rinde, CEO of Thingamy, is also relevant here, Easily repeatable processes are the roughly 30% of GDP that consists of industrialised processes, subject to automation and kaizen. Barely repeatable processes are the rest.

Customers in the gap usually have significant scale in one or more business processes that are currently “barely repeatable processes” with their level of technology. These processes typically rely on e-mail, telephone calls, and unstructured note taking or paper systems for workflow. The distinction between “barely repeatable processes” and “easily repeatable processes”, however, is defined by the available technology. If a service like Ribbit can make the kind of CEBP traditionally reserved for much bigger (or more tech-intensive) companies available to these smaller businesses, it can allow them to move more of their operations into the ERP sector and reap the productivity gains.

Since we spoke to Ribbit, BT has announced the full integration of Ribbit into its SMB VoIP product, One Voice – essentially, Ribbit is now BT’s premier offering to business in its home market. We also expect more announcements soon in this field. Arguably, transforming the supply of IT services to SMBs is the strategic goal for BT in acquiring and integrating Ribbit.

Staying Relevant: Injecting Innovation into the Core Network

It’s worth remembering that Ribbit’s assets weren’t limited to the code that implements the Flash API – it has a whole Class 5 softswitch underlying it all. Fascinatingly, BT is increasingly making use of Ribbit technology in its core network, as it begins to grapple with the question of what will replace the PSTN. According to Crick Waters, it’s a question of how operators remain relevant as providers of real-time communications in a multi-screen, multi-device environment, where “everything is a computer” and dial-tone is no longer enough.

For example, the increasing collective computing power of the devices at the edge of the network is rendering the network core less important. The recently announced edition of Skype for the iPhone, notably, is in fact a full Skype P2P node like the ones on PCs that make up the Skype cloud.

Apple’s attempted re-launch of video calling in iPhone 4 marks its own transition from being a device and software manufacturer to a provider of telecommunications services – powerful devices tend to bypass the network core, and Apple video calls will pass over Wi-Fi and directly between iPhones, not through the 3G video call channel.

He named convergence, multiple identities, single sign on, and switching between asychronous and synchronous modes of communication (for example, from e-mail or a ticketing application, to instant messaging, to voice, to video, collaborative editing, or telepresence, and back to update and file the ticket) as critical fields, where operators might be able to provide key enabling capabilities others could not

Ribbit co-founder Ted Griggs has been given the newly recreated title of CTO Voice in BT itself – readers with long memories may recall that BT once had a post of Head, Global Voice Technology, which was then abolished. Ribbit developers are working on BT-wide applications, and Griggs is apparently spending significant amounts of time on 21CN business – this would seem to show that there is again real commitment to better voice and messaging at BT

Click-to-Call, Better Signalling, Voice to Text

The biggest external Ribbit customers by sector are currently digital advertising agencies, heavy users of the click-to-call API, which lets them integrate real-time business processes with their ad campaigns and collect richer information about the potential customer and their interaction with the ad before the call begins, and then financial services companies. Financial Services firms are especially interested because of the Sarbanes-Oxley Act compliance requirements (which require accurate records of customer interactions to be kept), and also for productivity reasons – typically, in many parts of finance, much business is done on the phone in unstructured format.

Ribbit applications are useful in this context because they are used to capture calls, convert the voice stream to text, and archive it – this provides Sarbanes-Oxley compliance, and also a source of structured data about the business’s interactions with its customers. The key point here is that if you’ve got the metadata and you’ve got the conversation converted to text, not only can you pass more data about a call to the call taker, or the call originator, when it originates from a Web application, but you can also pass data about the call to an application for automated processing. Ribbit expects an arms race in voice-to-text applications.

Rolling Out with More Carriers

Ribbit is planning to expand rapidly by signing up more telcos to offer the service. Evidently, the signalling/control side of Ribbit is global – it’s a Web API. The voice side, however, isn’t. The answer is for new operator partners to hook up their networks to Ribbit’s through SIP peering – Ribbit calls this a “bring your own network” model. One advantage of the SIP interconnection model is that it permits very quick deployment.

They are also interested in integrating other Telco 2.0 capabilities such as location-based services and internal CDNs, so that developers working with Ribbit can get them through the Ribbit API. Location-based services has long since become a low value, “table stakes” business, but there is convenience value in being able to get all the dependencies for an application from the same API, without adding more potential points of failure and managing other passwords, keys, and the like.

More interestingly, operators may have a strategic advantage in their extensive property footprints, all of which are of course well networked. As applications become more video- and data-intensive, and more of them have real-time features highly sensitive to latency, the importance of CDNs and also what might be called “ADNs” for Applications Delivery Networks will only grow. Deploying applications to hosting close to users saves bandwidth, reduces latency, and also provides geographical distribution and therefore resilience; Amazon Web Services will let you choose where in the world your code runs, but only to within continental scale.

BT, for example, could provide a similar service but with city-level granularity and it could do so through the Ribbit API.

Crick Waters argues that Ribbit’s core skills are “engagement, metrics, and monetisation”, and that they are working with a number of operators on their API strategy. Smaller operators are the focus of their deployment push – these are unlikely to create their own voice applications platform, and stand to benefit from joining an alliance with global reach. There is an analogy with the roaming hubs and alliances that helped to achieve universal GSM roaming and interconnection in the 1990s and 2000s.

Some Further Thoughts on Ribbit and BT’s Innovation

It’s notable that, as well as cross-selling Ribbit into the UK business customer base, BT is also cross-selling BT Global Services products into the Ribbit customer base – for example, the Ribbit Web site is currently advertising hosted contact centre services, a key BTGS line of business. Overall, BT’s strategy will tend to spread the profits from better voice and messaging and their integration with Web applications across BTGS’s activities with contact centres, multinational companies, and government, and also across the BT Business element of the BT Retail division – Ribbit’s relationship with BT is in this context that of an internalised supplier of technology.

Successful execution of this strategy will be very important for BT in the future and for Voice 2.0 in general. BT is thinking about the future again, after the organisation went through a wave of introspection and loss of confidence; one sign of this is that they are considering what kind of customer premises equipment might be the future gateway for operators into the home. At the 2010 investor day, they demonstrated an iPad-like tablet device as a potential replacement for the fixed phone. Others might think a femtocell, a Google TV, or a media-server device providing content and home-automation interfaces to mobile devices around it a more plausible future. What matters is that BT is experimenting, rather than retreating into denial or getting stuck in option paralysis.

Long before that, they are clearly aiming to use Ribbit’s technology and developer community model to become the primary supplier of IT services for UK small businesses.

Conclusion – BT eats its own Ribbit food

The main deployment of Ribbit in BT Business was all of two weeks old when we spoke to Crick Waters, so it is a little early to be definitive about the question of whether Ribbit has yet proved worth its $105 million cost to BT.

However, in addition to aiming to use Ribbit widely to provide ‘Voice 2.0′ applications for corporate customers and SMBs, and starting to use it in its core network, BT is following a key Telco 2.0 principle and using Ribbit applications internally to improve productivity and flexibility. There are a lot of telephone calls going on within a company the size of BT, so a productivity tool based on voice and messaging has obvious relevance for their internal business processes.

In our view, an essential part of the ‘Roadmap’ to new Telco 2.0 style business models is to ensure that synergies with existing business models are maximised. These synergies may not simply be additional revenues from the new line of business, but also beneficial effects on any of the five components of the existing business model as illustrated below.

Figure 4 – Five Components of a Business Model

Source: Telco 2.0

While Ribbit is intended primarily to differentiate BT from its competitors in the SMB market, and to a lesser extent in its consumer and contact centre businesses, it also gives BT some new technical capabilities and opportunities to recruit new partners into its value network.

We think that BT’s approach to Ribbit embodies an important lesson in the development of the business case for new telco business models, which is that the cases will often be based on a combination of expected direct revenues from the new line of business, and incremental improvements to the existing lines of business. These can include:

direct revenue enhancements, such as driving minutes of use through the core BT voice network and up-selling existing SMB customers for voice and Internet service to richer networked IT products;
indirect but equally valid top-line benefits such as improved competitiveness, customer loyalty, and reduced churn, for example, by buttressing customer retention with eye-catching new features;cost and productivity improvements, such as better personal productivity tools and contact centre systems within BT internally;
and more difficult-to-quantify enhancements to capabilities and technologies which potentially enable further opportunities, such as future developments of Ribbit and the BT technology platform, and upgrades to the capability BT Global Services can offer its enterprise customers.

Full Article: QQ: China’s Monster ‘Facebook’ – on a screen near you soon

Summary: An analysis of QQ.com – a profitable Chinese social networking and instant messaging service with 1 billion usernames, 75 million peak concurrent users, and plans to grow beyond China.

Introduction

The world is full of fast-growing, hyper-fashionable social networking and user-generated content plays. Almost to a man, they lack one thing – profits, or even revenues. An English-speaking technology media and analyst/investor community obsessed by the US West Coast has practically ignored QQ.com, one example of spectacular success, because it’s Chinese.

A Profitable and Valuable Social Network

At the 30th of June, Tencent (QQ’s owners) had thrown off RMB993 million (US$145 million) in free cash in six months, even after spending RMB1.9bn in CAPEX and a further RMB593 million in financing costs. For comparison, Facebook went marginally cashflow positive for the first time in August and isn’t yet profitable.

The bottom line is impressive too; at the last count, Tencent’s gross margin was at 67.3% and net margin was 41.75% – this smashes HP’s investment criterion of “fascinating margins”, i.e. 45% gross, and Iliad’s 70% ROI on new fibre deployment. We previously estimated the gross margin for October 2008 as 63.5%, so it appears that things have consistently been going well for QQ.

The shares (listed in Hong Kong) have gone from HK$60 to 120 since April, showing that this performance is also attracting plenty of demand from investors – albeit at a somewhat toppy price/earnings ratio of over 50.

Nearly a Billion ‘Users’

There were 990 million user identities on QQ as at the 30th of June, 2009. Given the current growth rate, the billionth user will almost certainly be announced in the next quarterly results – but a nontrivial percentage of these are inactive, are multiple aliases, or are spambots. [NB. This is true of all IM communities except, perhaps, for the 17 million users of IBM Lotus Notes Sametime inside their enterprise firewalls, as we pointed out in the Consumer Voice & Messaging 2.0 strategy report.]

As impressive as this is, instant messaging user bases are usually only weakly bound to the service, they are usually non-paying, and many people have multiple usernames. A more useful metric is peak concurrent users – the maximum number of users simultaneously logged in during the period in question. To be counted, a user name has to be active in that they are online, so it’s reasonable to deduce that they exist. It doesn’t prove that they are a human being (or for that matter a useful application rather than a pest); however, whether or not a logged-in user is human, they are consuming system resources.

So, measuring peak concurrent users provides us both with better data on uptake and a more useful indicator of capacity related costs. It’s a standard telecommunications engineering principle to “provision for the peak” – that is to say, it’s useless to build a network with only sufficient capacity for the average traffic, as 50% of the time it will be congested and probably non-functional through overload. To be available, the system must supply enough spare capacity to handle the peaks in demand. Peak load determines scale, and hence cost.

In 2008, at various times, QQ’s parent company Tencent claimed to have between 355 and 570 million users. At the end of June, 2009, the user count stood at 990 million – so the nominal user base had roughly doubled. In 2008, peak concurrent users were 45.3 million, growing to 65 million in June 2009. According to QQ.com’s live statistics readout (you can watch it grow in real time here), the record at time of writing was 79 million. According to Alexa, 3.26% of global Web users visited one of the various qq.com sites in September 2009.

For comparison, Skype’s all-time peak concurrent user count is 15 million, although it has the advantage of using user-provided infrastructure, whereas QQ has a client-server architecture and therefore a constant need for rack-space.

Not just users, but Paying Users

In 2007, out of 12 million peak concurrent users, 7.3 million had spent money with QQ, or to put it another way, 61% of verifiable QQ users were buying value-added services. (How many mobile operators can claim that?)

In March, 2009, we thought it unlikely that this high proportion would continue to pay as the service grew – and that it was quite possible that the 7.3 million earlier payers were dominated by early adopters and power users, so that future recruits would be less committed to the community, less geeky, and lower-income.

However, when Tencent’s Q1 results appeared at the end of March, 36.9 million users had purchased value-added services during the quarter, growing at a monthly rate of 8.4% to reach 40 million by the end of June. This latter figure was against a concurrent user base of 65 million, meaning that 62% of concurrent users were paying users.

We think this is an impressively high proportion at such volumes, and suggests that the revenue may scale reasonably well as it grows penetration further. As one might expect the cost model of such a volume business to scale efficiently, this implies further prospects of profitability. It is likely that such thoughts are one of the influences on the aforementioned growth in QQ’s share valuation.

So, how did they do it?

In our Serving the Digital Generation Strategy Report, we identified a list of key factors that anyone who wants to attract the customer of the future would have to address, which together describe what we call the participation imperative. Specifically, four axes define the customer’s aims:

To interact socially with a peer group
To personalise and customise their environment
To express creativity – e.g. user generated content
To maintain privacy/anonymity or seek notoriety

These require and depend upon four key affordances:

Portability – broad ability to work across multiple PCs, mobiles
Payments – virtual currencies, transactions
Feedback – ratings, comments, discussion, personalisation, hackable APIs
A directory – to find other people

We assess that QQ hits 7 out of 8 criteria squarely. Really, the only one they don’t cover is privacy – although they do have rich presence-and-availability control, it’s in the nature of such a community that going offline could be a noticeable act, and there have been problems with the Public Security Bureau (Chinese secret police).

NB. The Customer of the Future can be a complex and powerful character. When the Shanghai PSB demanded that QQ filter references to the Diayou islands (a controversial nationalist cause in China), the ensuing user revolt caused even the PSB to back off.]

QQ caters to user creativity and the need for personalisation much more deeply than most social networks with the possible exception of Facebook. Although officially proprietary, the system API is documented and QQ, the company, positively encourages a hacker ecosystem of interesting new applications. This goes some way beyond the skins and avatars most socnets offer. Similarly, you can’t offer more effective feedback to more advanced users than the ability to tinker with the works. Portability is well catered for – there are multiple client applications, SMS integration, various mobile clients, and the Web site.

Print your own Digital Money

QQ’s in-world digital currency is no trivial add-on. QQ derives revenue from selling applications, other in-game goods, and extra services such as a blog, games, and a streaming music service, in return for its internal digital currency. This market creates a sink for the digital currency, and therefore gives it value, which creates a further demand for it as a gift and reputation good. It shares revenue from the store with the creators of in-game goods, thus feeding user creativity.

In Telco 2.0 terms, QQ’s business model is collecting money from the downstream side and subsidising the upstream partners, in order to encourage the creation of saleable goods and the purchase of digital currency. In return for their participation, users get the core functions of the directory and the messaging layer to service their peer group and burnish their on-line identity.

In-World Currency dwarfs Advertising

Although QQ also does contextual advertising, its core business is the in-world economy. We remarked back in March that the ad business was overshadowed by the VAS business, and this is even more true now. Online advertising grew just under 10% year-on-year, but now makes up just 9% of total revenues, falling from 11%. Internet VAS revenues were up 107% and mobile VAS was up 38%.

In part, this is the unavoidable downside of being hackable; advertising is a tax on your attention, so some people will want to be rid of it. Just as many Mozilla Firefox users install Adblock Plus to screen out Web advertising, multiple unofficial QQ clients exist that strip the ads. But if the users buy the clients from the QQ Store, who’s complaining?

QQ’s ‘Two-Sided’ Business Model Strategy

We’ve identified three types of generic ‘two-sided’ business model strategy, and concluded that the most successful companies were those who operated at the creative edge between each type.

Strategy One involves giving away services before and after a transaction, and collecting a percentage of the transaction. Think Amazon – or a casino.
Strategy Two involves giving something away to create a trading hub, then selling something to the crowd. Think of the original Lloyds’ Coffee House – it didn’t write marine insurance itself, it sold coffee to the insurance brokers, who came for the liquidity and rumours, and stayed for the coffee.
Strategy Three involves selling access for third parties to the trading hub – like BAA plc renting shops at Heathrow Airport, or Google giving away a whole range of services in order to create inventory it can sell adverts next to.

QQ would initially appear to straddle Strategies Two (selling to the crowd) and Three (charging for access) in the two-sided business model. But the domination of in-world trade over advertising in its P&L statement suggests something else – much of what it sells to the crowd originates in the crowd. Isn’t this an example of the Amazon-like Strategy One, facilitating transactions in return for a turn on the deal? If so, they’ve brought off the impressive feat of exploiting creative ambiguity between all three.

Next: your market?

Where does QQ go from here? The answer appears to be “right here” – in August 2009, Tencent launched an English-language portal (imqq.com). Interestingly, the site is marketed directly at business, which is an extension of a strategy shift they have already undertaken in China. For some time, Tencent has been marketing a version of the client at business users which borrows the look-and-feel of Microsoft Live Messenger (apparently being boring can be a valid strategy).

The business version of QQ is paid for – sensibly in our view, Tencent don’t expect small companies to be spending much time trying to achieve legendary status in the QQ user community. As (supposed) serious, responsible adults, they’re meant to have a secure identity and reputation already, so they’re not likely to contribute that much to the in-world economy by trying to burnish them. Therefore, a traditional, one-sided model is being used to derive revenue from this submarket.

Conclusion: Watch with Care

Our conclusion is at this stage that the Telcos who aren’t yet familiar with QQ should keep a close watch on them in both home and away markets. At a minimum there’s a lot to be learned from how this smart and complex operator employs the ‘two-sided’ business models. At other extremes are competitor threat and partner opportunity scenarios that we’ll be looking at in more depth in our future analysis.

Even though there are a lot of mobile industry execs with scars from trying to transplant successes from (usually) Japan into WENA (Western Europe & North American) markets, complacency would be extremely unwise faced with a potential competitor that has demonstrated such a deft grasp of two-sided business models, such a close understanding of user needs, and such a solid base of competence in high scalability Internet engineering.

And Finally…

Bill Gates recently gave a speech in which he claimed that two out of the five most profitable firms in China “don’t pay for their software”. He was telling the truth, in a sense; a quick “curl -i im.qq.com” demonstrates that Tencent isn’t paying a penny for its server software – the site is served with Apache running on BSD Unix machines. That may not be what Bill meant, but perhaps he should have.

Full Article: Nokia and Symbian – Missing an Opportunity?

The recent purchase of Symbian by Nokia highlights the tensions around running a consortium-owned platform business. Obviously, Nokia believes that making the software royalty-free and open source is the key to future mass adoption. While Nokia is busy buying Symbian, the competition has moved on and offers a lot more than purely handset features. The team at Telco 2.0 disagree and believe the creation of the Symbian Foundation will cure none of the governance or product issues going forward. Additionally, Symbian isn’t strong in the really important bits of the mobile jigsaw that generates the real value to any of the end-consumer, developer or mobile operator.

In this article, we look at the operating performance of Symbian. In a second we examine the “openness? of Symbian going forward, since “open? remains such a talisman of business model success.

Background

Symbian’s core product is a piece of software code that the user doesn’t interact with directly — it’s low-level operating system code to deal with key presses, screen display, and controlling the radio. Unlike Windows (but rather like Unix) there are three competing user interfaces built on this common foundation: Nokia’s Series 60 (S60), Sony Ericsson’s UIQ, and DoCoMo’s MOAP. Smartphones haven’t taken the world by storm yet, but Symbian is the dominant smartphone platform, and thus is well positioned to trickle down to lower-end handsets over time. What might be relevant to 100m handsets this year could be a billion handsets in two or three years from now. As we saw on the PC with Windows, the character of the handset operating system is critical to who makes money out of the mobile ecosystem.

The “what? of the deal is simple enough — Nokia spent a sum of money equivalent to two years’ licence fees buying out the other shareholders in Symbian, before staving off general horror from other vendors by promising to convert the firm into an open-source foundation like the ones behind Mozilla, Apache and many other open-source projects. The “how? is pretty simple, too. Nokia is going to chip in its proprietary S60, and assign the S60 developers to work on Symbian Foundation projects.

Shareholding Structure

The generic problem with consortium is typically not all members are equal and almost certainly have different objectives. This has always been the case with Symbian.

It is worth examining the final shareholder structure which has been stable since July 2004: Nokia – 47.9%, Ericsson – 15.6%, SonyEricsson – 13.1%, Panasonic – 10.5%, Siemens – 8.4% and Samsung – 4.5%. At the bottom of the article we have listed the key corporate events in Symbian history and the changes in shareholding.

It is interesting to note that: Siemens is out of the handset business, Panasonic doesn’t produce Symbian handsets (it uses LiMo), Ericsson only produces handsets indirectly through SonyEricsson, and Samsung is notably permissive towards handset operating systems.

SonyEricsson has been committed towards Symbian at the top end of its range, although recently is adding Windows Mobile for its Xperia range targeted at corporates.

Nokia seems almost committed though has recently purchased Trolltech — a notable fan of Linux and developer of Qt.

The tensions within the shareholders seem obvious: Siemens was probably in the consortium for pure financial return, whereas for Nokia it was a key component of industrial strategy and cost base for its high-end products. The other shareholders were somewhere in between those extremes. The added variable was that Samsung, Nokia’s strongest competitor, seemed hardly committed to the product.

It is easy to produce a hypotheses that the software roadmap and licence pricing for Symbian was difficult to agree and that was before the user interface angle (see below).

Ongoing Business Model

Going forward, Nokia has solved the argument of licence pricing — it is free. Whether this passed to consumers in the form of lower handset prices is open to debate. After all, Nokia somehow has to recover the cost of an additional 1,000 personnel on its payroll. For SonyEricsson with its recent profit warning, any improvement in margin will be appreciated, but this doesn’t necessarily mean a reduction in pricing.

It also seems obvious that Nokia will also control the software roadmap going forward: it seems to us that handset operators using Symbian will be faced with three options: free-ride on Nokia; pick and choose components and differentiate with self-build components; or pick another OS.

We think that given the chosen licence (Eclipse — described in more detail in next article), plus the history of Symbian user-interfaces, and the dominance of Nokia, all point towards other handset operators producing their own flavours of Symbian going forward.

Competition

Nokia may have bought Symbian, even without competitive pressures, purely to reduce its own royalties. However, the competitive environment adds an additional dimension to the decision.

RIM and Microsoft are extremely strong in the corporate space and both share two features that Symbian are currently extremely weak in — they both excel in synchronizing with messaging and calendaring services.

Apple has also raised the bar in usability. This is something where Symbian has stayed clear, but is certainly not one of the strengths of S60, the Nokia front end. The wife of one of our team — tech-savvy, tri-lingual, with a PhD in molecular biology — couldn’t work out how to change the ringtone, and not for lack of trying. What do you mean it’s not under ‘settings’? Some unkind tongues have even speculated that the S60 user interface was inspired by an Enigma Machine stolen to order by Nokia executives.

Qualcomm is rarely mentioned when phone operating systems are talked about, and that is because they take a completely different approach. Qualcomm’s BREW would be better classified as a content delivery system, and it is gaining traction in Europe. Two really innovative handsets of last year, the O2 Coccoon and the 3-Skypephone, were both based upon Qualcomm software. Qualcomm’s differentiator is that it is not a consumer brand and develops solutions in partnership with operators.

The RIM, Microsoft, Apple and Qualcomm solutions share one thing in common: they incorporate network elements which deliver services.

Nokia is of course moving into back-end solutions through its embryonic Ovi services. And this may be the major point about Symbian: it is only one, albeit important piece of the jigsaw. Meanwhile, as we’ve written before, Ovi remains obsessed around information and entertainment services, neglecting the network side of the core voice and messaging service. Contrast with Apple’s first advance with Visual Voicemail.

As James Balsillie, CEO of RIM, said this week “The sector is shifting rapidly. The middle part is hollowing — there are cheap, cheap, cheap phones and then it is smartphones to a connected platform.��?

Key Symbian Dates.

June 1998 – Launch with Psion owning 40%, Nokia 30% & Ericsson 30%.
Oct 1998 – Motorola Joins Consortium

Jan 1999 – Symbian acquires Ronneby Labs from Ericsson and with it the original UIQ team & codebase.

Mar 1999 – DoCoMo partnership

May 1999 – Panasonic joins Consortium. Equity Stakes now: Psion – 28%, Nokia / Ericsson / Motorola – 21%, Panasonic – 9%.

Jan 2002 – Funding Round of £20.75m. SonyEricsson tales up Ericsson Rights.

Jun 2002 – Siemens Joins Consortium with £14.25m for 5%. Implied Value £285m

Feb 2003 – Samsung Joins Consortium with £17m for 5%. Implied Value £340m.

Aug 2003 – Five Years Anniversary. Original Consortium Members can now sell. Motorola sells stake for £57m to Nokia & Psion. Implied Value £300m.

Feb 2004 – Original Founder Founder Psion decides to sell out. Announces to Sell 31.7% for £135.5m with part of payment dependant of future royalties. Implied Value £427m. Nokia would have > 50% control. David Potter of Psion says total investment in Symbian was £35m to-date, so £135.5m represents a good return.

July 2004 – Preemption of Psion Stake by Panasonic, SonyEricsson & Siemens. Additional Rights issue of £50m taken up by Panasonic, SonyEricsson, Siemens & Nokia. New Shareholding structure: Nokia – 47.9%, Ericsson – 15.6%, SonyEricsson – 13.1%, Panasonic – 10.5%, Siemens – 8.4% and Samsung – 4.5%.

Agree to rise cost base to c. £100m/per annum and headcount of c. 1,200.

Feb 2007 – Agree to sell UIQ to SonyEricsson for £7.1m.

June 2008 – Nokia buys rest of Symbian with Implied Value of €850m (£673m) with approx. payout of – Ericsson – £105m, SonyEricsson – £88.2m, Panasonic – £70.7m, Siemens of £56.5m and Samsung £30.3m. Note, Symbian had net cash of €182m. The price quoted by Nokia of €262m is the net price paid by Nokia to buy out the consortium not the value of the company.

Full Article: Verizon’s Volte-Face, Virtue or Vice?

“Verizon Wireless will open up its network to any device that a partner wishes to bring along. What are the business model implications and how should Verizon finesse this into a Telco 2.0 play?”

It’s been all across the tech news and blogosphere: Verizon Wireless has announced that they’re moving to a, well, less closed, network attachment model. For those whose job isn’t to surf the web, the summary is that pace certification testing by Verizon’s labs, and an unknown amount of bizdev negotiation, you can attach any device you like to the Verizon Wireless network. If you had to sum up Verizon’s strategy to date, it would be “Execute!?. They’ve simply done a great job of merging Airtouch, GTE and other properties; building out more coverage than the opposition; keeping an adequate level of handset and content innovation; and generally not screwing up.

The key details of the new offer — price, process and terms — remain hidden behind the PR fog. So what’s the unique Telco 2.0 slant on the news? When the market leader switches strategy, it’s not some short-term panic over Apple, Google, WiMax or spectrum auctions. It’s part of the deeper structural shifts in progress. So as we’re in the final assembly stage of our shiny new Broadband Business Models 2.0 report, here’s what’s on our minds about the future of connected devices:

Firstly, disaggregation of the value chain is a long-term inevitability. Regardless of Verizon’s taste in cell phones, there’s always going to be a need to assemble devices, software and content in configurations Verizon doesn’t think of, and sell through channels Verizon can’t access. For example, we’ve concluded content aggregation has strong increasing returns to scale, and as telcos aren’t very good at being media companies, they will exit the portal business — be it for text, video or music.

So in one sense, it’s “what took you so long?.

Secondly, Verizon can now offer up its assets — billing, retail logistics, care, etc. — to partners. These assets can be sweated far harder. Verizon takes ideas for handset and content, develops them together, markets, retails, supports and bills for it. Along that chain there is always a weak link. By allowing other businesses to go around the weak link, the full value of the other parts of the business can be realised.

As it happens, they’ve got a good network, retail, customer care and billing. So handsets and content are probably the bottleneck in delivering value. The CDMA ecosystem is smaller than the GSM one, and many of the handsets available only appeal to the techno-mad Japanese and Koreans. Far from being a “dumb pipe?, we’d anticipate Verizon moving to a broad platform play offering a suite of services to partners. For example, did you know there are around 30000 sales tax jurisdictions in the US? Offering phone service is hideously complex due to a maze of federal, state and local regulation. Why fight through these thorns to the sleeping princess yourself when Verizon can rent you a ladder over the hedge?

If you were having a Coasian view of the world, you’d simply note that commodity IT, web services and the Internet have lowered the cost of integrating outsiders into the business. Hence the relative value of internal vs. market transactions has changed. “Open? and “closed? aren’t virtues and vices, but merely stages of evolution.

Next up, if you were running Verizon Wireless and looking to make your business more efficient, what can you do? You could set higher targets for your execs and exhort them to do better. However, management targets and incentives (as the UK public sector has discovered) are blunt instruments. You might get cost savings or revenues at the expense of investment and brand quality. So instead you draw inspiration from the structurally separated fixed-line business. Benchmark your retail operation against outsiders. Make them feel the heat of competition purely on the merits of their own sub-part of the business. The Verizon retail business is no longer a monopsonist buyer of Verizon’s network and wholesale assets.

Finally, the most critical factor in Verizon making a success of wholesale network access will be to construct pricing that incentivises the desired behavior. Offering flat-rate vanilla ISP plans to wholesale partners will be a fatal mistake. Consumers need simplicity. Wholesale clients do not. You should not be afraid to confront them with complex wholesale pricing that reflects both the value and the cost of running the network. That means reflecting peak and off-peak times, congested areas where there is less spectrum or fewer attachment rights, and differential pricing depending on where Verizon has an advantage over competitors in terms of speed or coverage. The partners then have to work out how to design and package their product around these parameters, and create the simple retail propositions.

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