Leveraging insight: The neglected strategic capability

High quality insights are crucial for telcos

Each year telcos invest in external insights from strategic and tactical research houses, alongside primary research budgets. This investment is a response to the ever-evolving trends that are shaping the industry, the need to understand them and support decision-making. It is therefore critical that telcos develop the capability to leverage them well.

What drives the need for insight?

Learning and seeking evidence drive the insight needs across the business. This ranges from individuals drafting a one-off client proposal, to strategy teams developing the corporate response to an emerging opportunity. The breadth of the insight need has implications for research buying and funding practices, as well as how insight is distributed.

Being in the business of external insights, STL Partners is always keen to understand how telco customers use insights and what research management practices they deploy to derive more value from insight services. STL Partners asked Olga Holin, a seasoned research buyer with recent telecoms experience, to talk to a group of her peers and synthesise their perspectives on what “good” insight practice looks like.

The report examines the drivers for external insight acquisition and the types of insights typically acquired. It outlines the insight management approaches at four telcos (representative of Olga’s sample) and highlights the benefits and challenges of each. It then sets forth several guidelines for operators and other organisations to ensure insight quality and derive more value from insight acquisitions going forward.

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Why are external insights necessary?

Across all the organisations we spoke to, respondents agreed that research insights were necessary and valuable, chiefly to drive learning and aid business decision making. The stated reasons for acquiring research include:

  • To identify future growth opportunities and threats in order to plan and innovate accordingly,
  • To inform and educate employees, thereby complementing existing capabilities,
  • To validate internal assumptions and build a deeper understanding of the business and its environment,
  • To assess business performance in context and validate effectiveness.

While some of this insight could conceivably be generated internally, the value drivers of external research over an internal function are:

  • “We don’t know what we don’t know” – To gain access to topics and trends potentially not on the organisational radar. Drawing on the expertise from external sources allows organisations to capture insight more easily and assures no threats or opportunities are missed.
  • To remove blind spots in internal thinking – To challenge mental models, by providing objectivity to change the way an organisation might perceive a certain technology or topic.
  • To influence senior executives – To strengthen the credibility of business cases and market overviews. The insights of analyst houses with strong reputations make analyses more convincing to senior management. As one telco put it, “They don’t always listen to us, but they usually listen to external reputable sources.”
  • To increase the speed of internal knowledge acquisition and learning – To develop the knowledge of employees quickly (they don’t have to find the information, just contextualise it).
  • To secure quality information – To ensure information is robust, unbiased, consistent with industry definitions (external agencies validate information via multiple sources and have no vested interests to protect).
  • To supplement limited internal insight resources – To answer information einquiries more quickly and through experts versus having to recruit internal experts to understand an emerging area.
  • To get access to information that might otherwise be unattainable (e.g. competitor information).
  • To seed change – The outside and informed perspective of a research house can highlight a need for change that may not be recognised due to internal mindsets and environment.

The value to the organisation of having these insights will be influenced by the extent to which findings can inform learning or decisions in more than one part of the business – and the longevity of the findings (how quickly they go out of date) or whether they have a future focus.

External insights may only be required to address needs in a limited business area at a specific point in time, e.g. where a product team wants to know how a newly launched product is faring versus competitor offerings. This type of insight can be considered tactical insight, as it provides the information to enable quick adjustments and decision making in the shorter term, more likely the type of decisions taken by middle managers.

Strategic insights, on the other hand, can generally inform decision making across the organisation more broadly. The topics are relevant to more than one area (e.g. digital transformation) and over a longer period (they say something about the future).

Strategic insights are able to influence decision making at an executive level, equipping teams for discussions around larger investments and those concerned with long-term returns rather than immediate gains. This is illustrated below.

 Tactical versus strategic research

external insights

Source: STL Partners

The nature of the research has implications as to how it should be managed to maximise value.

Table of Contents

  • Executive Summary
    • Recommendations to maximise insight value
    • Telco insights challenge
    • Next steps
  • Introduction
  • Why are external insights necessary?
  • Insight management across the research lifecycle
    • Basic insight management process
    • Advanced insight management process
  • Telco insight management case studies
    • Telco 1
    • Telco 2
    • Telco 3
    • Telco 4
    • Set-up versus research type
  • How to increase the value of research in organisations
  • Index

Related research

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Full Article: New Opportunities in Online Content Distribution

Summary: as part of our new ‘Broadband End-Games’ report, we’ve been defining in detail the opportunities for telcos to distribute 3rd party content and digital goods in new ways.

You can download a full PDF copy of this Note here.

Introduction

Telecoms operators have traditionally retailed their services to consumers, businesses, not-for-profit and public sector organisations. Carriers have also resold services to other operators as wholesale services (including regulated services such as interconnection).

At the Telco 2.0 initiative, we have long argued that there is an opportunity for telecoms operators to develop a new “2-sided” revenue stream, broadly divided into B2B VAS platform revenues and Distribution revenues. These services enable third party organisations in multiple vertical sectors to become much more effective and efficient in their everyday interactions and business processes. We have valued the potential to Telco’s’ at 20% of additional growth on core revenues in ten years’ time…. if they take-up the opportunity.

Figure 1: 2-sided business model framework

distribution%20chart%20one%202-sided.png

As Telco 2.0 concepts gain acceptance, we are being asked by operators to provide greater detail on both the B2B VAS Platform and Distribution opportunities. Operators are looking to quantify these in specific geographies. To this end, we have described the B2B VAS platform opportunity extensively, in particular in the 2-sided Business Model Platform Opportunity strategy report.

Also, we have modelled Distribution revenues for fixed and mobile broadband distribution and provided detailed commentary in our strategy report on Future Broadband Business Models. We have extended this work to cover Distribution using narrowband, voice and messaging. This Analyst Note provides a synthesis of this modelling work and an updated description of the Distribution revenue opportunity. A forthcoming Analyst Note will cover Sizing the 2-sided Distribution Opportunity for Telco.

Defining 2-sided distribution

Telecoms, historically focused on providing interpersonal communications, has increasingly become an electronic transport and delivery business. In defining the “distribution” element of 2-sided business opportunity, we highlight four criteria:

  • The distribution service is essentially concerned with moving electronic data from one location to another. Distribution revenues relate to this alone. The terms ‘upstream’ provider and ‘downstream’ customer relate to the commercial relationship and not to the flow of data. Distribution services can apply to moving data in either or both directions.
  • The service may include an ‘above-standard’ technical specification and quality of service to meet specific performance requirements, generally associated with the nature of the application for which the data is being sent.
  • The service is being paid for by the upstream third-party provider, but is often initiated by the downstream customer.
  • The distribution service is a minor telecoms component of the primary non-telecoms service or goods being accessed by the downstream user. Mostly, the distribution service is enabling interaction between the upstream third-party provider and downstream customer. For example, a Kindle user is paying Amazon for an e-book that is delivered over a network. Amazon pays the telecoms operator (in the US, this was Sprint and is now AT&T) for the delivery of the e-book (the main non-telecoms product).

This last criterion makes a distinction between two-sided distribution and wholesale telecoms (and carrier interconnection). This is a key distinction, as it highlights an underlying industry-level difference in business model and a move away from a closed Telco system to a more open platform. Operators that do not significantly compete in the same retail market as their wholesale customer(s) may not consider this distinction important. This is because they do not consider their wholesale customer(s) to be competition, but rather a channel. However, wholesale customers nearly always compete at some level. Furthermore, this is missing a key point: 2-sided distribution is about “growing the pie” for Telco whereas growing wholesale in a mature market, generally results in “shrinking the pie”.

There is a “grey area” between 2-sided distribution and carrier wholesale. Offloading mobile broadband onto fixed broadband networks is an example of Wholesale2.0, since it is primarily an inter-carrier arrangement intended to reduce mobile network costs. In most cases however, it is still possible to make a clear distinction, as illustrated in the final two examples in Figure 2.

Figure 2: Examples of 2-sided Telco distribution

Example

Description

Comment

Freephone

Callers use freephone services to access goods or services from upstream third-party provider.  Although they could achieve this through a retail call, the upstream third-party provider pays for the freephone call as part of their overall proposition around  their main service or product, which the downstream customer is ultimately accessing.  

The actual freephone call charges (excluding ‘B2B VAS platform’ charges for number provisioning, directory listing, or any inbound call handling features) are Telco distribution revenue because they relate to enabling an interaction (by carrying a voice conversation) that has been initiated by the downstream party, but paid for by the upstream third-party party in order to deliver something else.  This ‘something else’ main service could be booking a flight, ordering a pizza, calling the army recruitment centre or enquiring about installing loft insulation.

Premium SMS (carriage-only)

A premium SMS is a service offered by Telcos to upstream third-party providers that enables them to provide a service or goods to downstream users.  Although the telco may be billing for this, it is not the Telco’s service that the end user is buying. This is therefore not retail (one-sided) revenue, unless the Telco is also the upstream third-party content provider.  

Premium services include a host of B2B VAS services (notably payment and collection).  The charges levied by Telcos therefore include a combination of distribution and B2B VAS.  The distribution element relates to the pure SMS transport (carriage only) at normal bulk rates, not the full or even net SMS revenues.

TwitterPeek

TwitterPeek is a dedicated device offered by Twitter through Amazon, which gives users unlimited access to their Twitter account and the associated functions (Send Tweets, subscribe to others’ Tweets, Retweet, search Tweets, etc..  The service costs $99 for six months followed by $7 a month.  There is also a $199 option for lifetime use.

In this example, the main service is Twitter.  The connectivity service that supports TwitterPeek, is considered to be 2-sided distribution rather than wholesale because it does not directly compete with any core telco communications offering.   

Breaking down the opportunity

At its highest level, we have broken the types of distribution into wired or wireless. This distinction is partly technical (as it reflects the underlying network). It is also related to business model and regulatory regime (eg Net Neutrality, different rules & structures on interconnection and wholesale). Telecoms operators also still tend to be organised along these lines. Below this, we have grouped the main distribution opportunities into Voice, Messaging, Narrowband and Broadband. Again, this reflects typical Telco product line divisions. Below this, there are two broad types of distribution opportunities:

  • Distribution through the same user device as the Telco core services:
  • Distribution through a separate dedicated device (generally part of upstream third-party provider’s offer)
Key:
distribution%20block%20chart%20key%20dec%202009.png
Figure 3: Main Distribution Opportunities Schematic
distribution%20block%20chart%20main%20dec%202009.png

The “opportunity blocks” in more detail:

Wired

  • 0800 & Premium (access element): This is the “call charge” element of any inbound call service. It excludes ‘1-sided’ premium services offered directly by the Telco (no upstream third-party provider)
  • Fixed Broadband ‘slice & dice’: This includes a host of 2-sided business models that extract additional revenues from third parties looking to serve subscribers. Some of these are illustrated in figure 4 below.
  • Fixed Broadband ‘comes with’: Telco’s offer discounted prepaid broadband packages (e.g. 1 year broadband subscription) to hardware distributors who package this with their products (primarily PCs, but could also be a games console or media device).

Wireless

  • 0800 & Premium (access element): As for fixed voice. Although most mobile operators still charge users for accessing 0800 numbers, this is expected to change as mobile interconnection rates converge with fixed line interconnection. This should give freephone a new lease of life.
  • Mobile Broadband ‘slice & dice’: This includes a host of 2-sided business models that extract additional revenues from third parties looking to serve their mobile subscribers. Some of these are illustrated in figure 4 below.
  • Dedicated Broadband Device ‘comes with’: Telco’s’ offer discounted prepaid broadband packages (e.g. 1 year broadband subscription) to device distributors who package this with their products (laptops, dedicated application-specific devices). WIMAX is also expected to support many 2-sided business models, some of which are illustrated in figure 4 below.
  • Narrowband M2M: Machine-to-machine connectivity is expected to grow dramatically. These connections support devices that users do not interact directly with (smart meters, cars, remote sensors).
  • Application-specific narrowband devices: These dedicated devices support consumer services such as Kindle and business applications such as electronic point of sale. Services to upstream third-party providers may be flat rate or usage based.
  • Application-specific messaging devices: Twitterpeek is an example of this (in this case there are “comes with” and “subscription” options.
  • Bulk SMS / MMS, Short codes, Free and Premium SMS: Person-to-application and application-to-person messaging has grown rapidly and is expected to continue growing through the adoption of communications enabled business processes. The falling cost of messaging and its ubiquity make this a powerful tool for businesses to interact with users.

Many potential services within the opportunities shown above do not yet exist and may also be difficult to implement today, given technological and regulatory constraints. For example, the term “slice and dice” includes all sorts of 2-sided business models (see figure 4).

Figure 4: Fixed and mobile broadband ‘Slice and Dice’ examples (not exhaustive)

Application area

Description

Example

Sender pays:
Electronic content distribution
Targeted at users with pre-pay, low-cap or no-cap data plans.  This service essentially provides out-of-plan access to specific content or services.  Service or content provider may adopt a mix of revenue models to achieve a return (ad-funded, user subscription, freemium model).

A pre-pay mobile subscriber wishes to download a free video promoting a new film.  Their device is capable of viewing this but the subscriber does not wish to use their limited credits.  The film promoter therefore pays for delivery.  Note: for the promoter to only use this service for pre-pay customers, they would need to access customer data.  This would be a B2B VAS platform service.

Mobile Offload:
Fixed operator
service to MNOs

Managed service that enables mobile operators to offload high-volume traffic (particularly indoor traffic) onto fixed broadband through managed service over Wifi/Femtocell. This service concept is described in more detail in the Broadband End Games Strategy Report.

Mobile operator Crunchcom is finding that users are exploiting their unlimited data plans on their devices at home.  Network capacity needs and the associated capital investment are growing far too fast.  Fixed broadband operator Loadsapipe offers Crunchcom a managed offload service to move traffic onto the fixed broadband network.

Clever Roaming:
Transitory service
Innovative data-only pre-pay roaming packages targeted to upstream third-party providers of content and services to visitors without a local service.  These include application-specific, location-specific, constrained bit-rate, and time-based services (e.g. 1 week unlimited).

Electronic version of the Rough Guide to Liverpool includes a roaming service that enables any user (regardless of home network) to access free of charge;  local information, videos, music and offers to local attractions.   Restricted roaming service is provided to Rough Guides by UK mobile operator.  Rough guides recovers cost through guide charges, advertising and revenue share.

QoS  bandwidth:
Video Streaming
The broadband provider offers an SLA to the upstream third-party provider for guaranteeing throughput for a streaming service.  The SLA also requires provision of B2B VAS services on performance monitoring and delivery reporting. Variations: Freemium model (HD-only charged, peak congestion times charged).

NewTube experiences peak hour congestion on MNQSNN[1] ISP.  NewTube agrees to pay a one-off annual fee to ISP for a 99% peak hour delivery guarantee. Congestion radically reduces.  Reporting required to monitor SLA is B2B VAS platform service and charged separately.

Low latency: Real-time cloud
apps

SLA offered to upstream third-party provider on minimal latency for applications such as gaming and cloud-based business applications.

Web-based provider of interactive on-line collaborative tools requires low latency connection to multiple external users.  Broadband operator offers SLA for all customers (including wholesale) on its network. Reporting required to monitor SLA is B2B VAS platform service and charged separately.

Volume:
Very large file
transfer (XXGb)

Sending party pays for “special delivery” of very large data files that would normally exceed consumers’ cap/fair use policy.   Also could apply for upstream third-party volumes (legitimate P2P apps, home monitoring).

National Geographic channel is offering pay-per-view HD videos.  However, many customers of Gotcha ISP would breach their 5Gb quota and so National Geographic pays Gotcha a one-off fee for a national “waiver” so that their videos do not count towards the user “cap”. 

[1] Maybe Not Quite So Net Neutral

Guaranteed income?

In theory, Telco’s’ do not need to develop the B2B VAS platforms and associated services in order to secure distribution revenues. The distribution service are extensions of core Telco offerings that could be provided as ‘dumb pipes’. However, as illustrated in the above examples, in practice both B2B VAS platform and distribution often need to come together. It would be complacent for the industry to assume that distribution revenues are inevitable. Many of these distribution services will be of limited interest (and therefore not achieve their potential) if they only cover a small proportion of end users in a given market. Furthermore, the ability of operators to capture the full potential value from distribution will be heavily constrained if they are only able to offer these as a commodity.


Online Video Distribution Market Study

Options and Opportunities for Distributors in a time of massive disruption


Summary:
As online video challenges traditional distribution models, both old and new suppliers are pushing into the value chain in the hope of grabbing a share of the emerging global market. But how will the market develop and which companies will be the ultimate winners?

STL Partners has analysed the potential of online video, identified possible market winners and losers, and set out three interlocking scenarios depicting the evolution of the market. In each scenario, the role of distributors is examined, possible threats and opportunities revealed, and strategic options are discussed. (March 2009)

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This report is now availalable to members of our Telco 2.0 Research Executive Briefing Service. Below is an introductory extract and list of contents from this strategy Report that can be downloaded in full in PDF format by members of the executive Briefing Service here. 

For more on any of these services, please email contact@telco2.net/ call +44 (0) 207 247 5003 

Key Points

  • Market background, size and dynamics
  • Differences in, and lessons from, different geographies
  • Analysis of prospects by content type: movies, sport, music, adult and user-generated
  • Hulu Vs YouTube: Comparative business model analysis
  • Market forecasts for revenues related to online and mobile video
  • Evolving market scenarios
  • Positioning to maintain / develop advantages in scenarios
  • Recommends specific short, medium and long term actions for moving forward

Who is this report for?

The study is an invaluable guide to managers across the TV and video value chain who are seeking insight into how the online market will develop and the opportunities and threats it presents.

CxOs, Strategists, Product Managers, Investors, Operational Managers in Telecom’s Operators, Broadband Service Providers and ISPs, Media Companies, Content Aggregators and Creators.

Key Questions Answered

  • How will the online video market develop and what are the implications for value chain players?
  • Are there historical lessons (from cinema and TV) from which to learn?
  • Which content categories will be most affected by the shift online?
  • What is the best strategy for distributors and aggregators to maximise chances of success?

Background – Online Video: the Growing Bulge in the Fat Pipe

All recent data point towards video being the fastest growing segment of all internet traffic and the trend looks set to continue for the foreseeable future. This is true whichever metric is used: absolute number of viewers, total time spent viewing, data traffic volumes.

Growth is not limited to a content category: adult, sports, movies and music are all rapidly moving online. The internet has also led to a completely new category: User Generated Content – home movies have moved out of the privacy of the living room and are becoming more and more professional.

Growth is also not limited to a specific geography: the movement online is a worldwide phenomenon. The internet has no respect for traditional geographies and boundaries.

Overall, the evidence points towards a future where the internet will be a critical distribution channel for all forms of video.

The New Distribution is disruptive and no longer centrally controlled

Innovation in Video Distribution is nothing new and over the last century we have seen cinema, broadcast networks and physical media creating temporary shocks to older methods of distributing content – but the older methods survive.

However, there is only a certain amount of time in the day available for entertainment in general and watching video specifically. Legacy distribution channels are understandably worried about whether video online will be additive to or cannibalise their audiences, and our survey respondents largely share this view.

More Growth + Less Control = More Unpredictability

Positively, individuals have generated their own content and made it available to the world. Negatively, some individuals have used interactivity to distribute content without regard of the rights of the copyright holders. Copyright holders have struggled to enforce their rights. Illegal distribution of content not only threatens the absolute value of content, but has lead to unpopular and complicated mechanisms to protect content.

The absolute volume growth has also placed the internet access providers under severe strain: attempting to increase prices to compensate for the growth in traffic and gain extra revenue through developing additional services is proving very difficult.

These forces have generated a considerable amount of experimentation in the market especially in the area of pricing models: subscription, pay-as-you-go, advertising funded, bundles with other distribution channels and offset/subsidy – all exist in a variety of forms.

How & why is the current model broken?

The net result is the video market is in a state of flux and increasing tension as key players explore their positions. Will order emerge from the chaos? In what form will this new order take? What will be impact on the existing players in the video value chain? And, will powerful new players emerge?

How can it be fixed?

We believe that Video Distribution on the internet will reshape the value chain and the current forces point towards great uncertainty in the short term. In these circumstances, the key step is to explore possible future scenarios to assess their viability and robustness in the face of change.

Case Studies, Companies and Services, and Technologies & Applications Covered

Case Studies: Apple, Hulu, Phreadz, YouTube.

Companies and Organisations Covered: 3 UK, AllOfMP3.com, Amazon, AOL Music, Apple, Babelgum, Barnes & Noble, BBC, BBC iPlayer, Bebo, Bit Torrent, Black Arrow, BlipTV, Blockbuster, BT, BT Openreach, BT Vision, Comscore, Del.icio.us, Deutsche Telecom, Deutsches Forschungsnetz (DFN), Diggnation, Digital Entertainment Content Ecosystem (DECE), eMarketer, EMI, European Union, Eurosat, Facebook, Flickr, Flickr, Forbes, Frost & Sullivan, Gartner, Google, Hanaro, Hitwise, Hulu, iBall, IBM, Imagenio, International Movie Database (IMDB), Joost, KDDI, Korea Times, KT+A94, Lenovo, London Business School, MGM, Mobilkom Austria, Mobuzz, MP3Sparks, MSN Music, MTV, MySpace, Napster, National Information Society Agency (NISA), NBC, Net Asia Research, Netflix, NewTeeVee, NicoNicoDouga, Nielsen SoundScan, Nintendo, Now, NTT DoCoMo, Ofcom, Orange, Phorm, Phreadz, Powercomm, Qik, Recording Industry Association of America (RIAA), Revision 3, Screen Digest, Seesmic, Seskimo, Silicon Valley Insider, Sky, Softbank, Sony, The Guardian, T-Mobile, Tremor Media, UK Football Premier League, Verizon, Video Egg, Virgin Media, Vivid, Walmart, Web Marketing Guide, Wikipedia, World Intellectual Property Organisation (WIPO), Yahoo, YouPorn, YouTube.

Technologies & Applications Covered: 3G, 3GP, AAC, Adobe Flash, AMR, Android, Apple Quicktime, Apple TV, AVI, Batrest, BBC iPlayer, Beacon, Betamax, Broadband, CD, Cinema, DivX, DOCSIS 2.0, DOCSIS 3.0, DRM, DSL, DVD, Ethernet to the home, Fibre to the home, Final Cut HD/Pro/Studio, FLV, FON WLAN, Fring, GIF, H.264, H.264/AVC, HSDPA, iDVD, iMovie, Iobi, IP, iPhone, iPod, IPTV, iTunes, JPEG, Linux, MOV, MP3, MP4, MPEG, MPEG-2 SD, MPEG4, MPEG-4, NVOD, OGG, P2P, PAL, PNG, PopTab, P2P, RM, RMVB, Scopitones, Sky +, Slingbox, Soundies, TiVo, TV, VCR, VHS, Video over IP, VOB, VOD, WiFi, W-LAN, WMV, XviD.

Markets Covered and Forecasts Included

Markets Covered: Global, US, Canada, UK, France, Germany, Italy, Hungary, Spain, Sweden, Finland, Japan, South Korea.

Forecasts Included: Online Video Vs Cinema & TV 2012, Global TV, Video and Cinema to 2018, Online Video Subscription and Advertising Revenues, Pro-Tail content advertising forecasts, Mobile TV and Video 2013.

Summary of Contents

  • Introduction
  • Executive summary
  • Part 1: Online video – the situation today
  • Part 2: Future scenarios
  • Part 3: Evolution of specific media genres
  • Part 4: Mobile evolution
  • Part 5: Geographical differences

The Research Process

The research evaluates the likelihood of three scenarios: Old Order Restored, Pirate World and New Players Emerge. Each of which paints a picture of the future entertainment industry in terms of: technology developments; consumer behaviour; service uptake and usage.

The research is based on comprehensive literature reviews, industry research and interviews with key staff from relevant organizations that shed insight on the needs and dynamics of the key players. Key Case Studies bring the story to life and provide a context for both successes and failures. An economic model of the resultant value chain is produced for each of the scenarios with analytical commentary.

Research Format
  • 130+ page manuscript document

This report is now availalable to members of our Telco 2.0 Research Executive Briefing Service. Below is an introductory extract and list of contents from this strategy Report that can be downloaded in full in PDF format by members of the executive Briefing Service here.  To order or find out more please email contact@telco2.net, call +44 (0) 207 247 5003.

Full Article: BBC’s iPlayer nukes “all you can eat” ISP business model

The UK’s largest broadcaster finally launched its online video streaming and download service on Christmas Day. Plusnet, a small ISP owned by BT,  has provided a preliminary analysis of the traffic and the results should send shivers down the spine of any ISP currently offering an unlimited “all-you-eat” service.

The iPlayer service is basically a 7-day catch-up service which enables people who missed and didn’t record a broadcast to watch the programme at their leisure on a PC connected to the internet. The iPlayer differs from any other internet-based video service in certain key respects:

It is funded by the £135.50 annual licence fee which pays for the majority of BBC activities.

  1. The BBC collected 25.1m licence fees in 2006/7. No advertising is required for the iPlayer business model to work.
  2. It is heavily promoted on the BBC broadcast TV channels. The BBC had a 42.6% share of overall UK viewing in 2006/7 and therefore a lot of people already know about the existence of the iPlayer after one month of launch.
  3. it is a high quality service and is designed for watching whole programmes rather than consumption of small vignettes.

This is sharp contrast to the current #1 streaming site, YouTube.

A massive rise in costs

The key outputs from the Plusnet data is that in January:

  1. more customers are streaming;
  2. streamers are using more; and most importantly
  3. peak usage is being pushed up

This equates for Plusnet to streaming cost increasing in total to £51.7k/month from £17.2k, or an increase of 18.3p/user from 6.1p/user. This is a 200% cost increase in just the first MONTH of the service. If we assume that the Plusnet base of 282k customers is a representative sample of the whole UK internet universe than we can draw some interesting conclusions about the overall impact of the iPlayer on the UK internet. On the whole UK IPstream base of 8.5m the introduction of the iPlayer would equate to an increase in costs to £1.5m in January from 500k.

Despite access unbundling, ‘middle mile’ costs remain a key bottleneck

IPstream is a wholesale product from BT, with BT being being responsible for the transit of the data from the customer’s home to an interconnect point of the ISP’s choice. The ISP pays for bandwidth capacity at the point of interconnect. BT Retail acts like an external ISP in the structurally separated model. The overall effect of the iPlayer for the BT’s IPstream-based customers is roughly neutral, with the increase in revenues at wholesale (external base of 4.2m customers) being offset by the increase in costs at BT Retail (total base of 4.2m customers). Of course, this assumes no bandwidth overages at BT Retail, which probably is not the case as both BT and Plusnet have bandwidth caps. In effect, incremental cost for ISPs using the IPstream product is determined by ordering extra BT IPstream pipes which come in 155-meg bit size chunks. The option for the ISP is either to allow a degradation in performance or order more capacity.

Time to buy more pipes

We tested the bandwidth profile using Wireshark watching a 59mins documentary celebrating the 50 year anniversary of Sputnik with both streaming and P2P. The streaming traffic is easy to analyse as it comes through on port 1935, which is the port used by Flash for streaming. Basically a jitter-free screening ran on average at around 0.5Mbit/sec. Using the 155-meg ordering slice this means only around 300 people need to be watching the iPlayer at the same time (peak = 8pm-10pm) to fill a pipe. Seeing that IPstream customers are aggregated across the UK to a single point, a lot of ISPs will be thinking of the need to order extra capacity. The BBC also offers a P2P download which is of higher quality than the streaming. We managed to download the 500Mb file in just over 20 minutes at an average speed of 3.5Mbit/sec. The total traffic (including overhead) for the streaming was 231MB and for the P2P delivery was 544Mb.

Full unbundling still leaves ISPs at the mercy of backhaul costs

The story for facility-based LLU(Local Loop Unbundling) players, which account for another 3.7m UK broadband customers, is slightly different as it depends completely on network design and distribution of the base across the exchanges. Telco 2.0 market intelligence says that some unbundlers have ordered 1-gig links for the backhaul and should be unaffected least in the short term. However, some unbundlers have only ordered 100-meg links and could be in deep trouble with peak hour people really noticing the difference in experience. The only real option for these unbundlers is to order extra capacity on their backhaul links which could be extremely expensive. The average speed for someone just browsing and doing emails is quite low compared to someone sat back watching videos stream.

Cable companies understand sending telly over wires

The story for Virgin Media, which is the main UK cable operator with 3.3m broadband subscribers, is again is dependent on network design. This time it depends upon the load on the UBR(Universal Broadband Router) within the network segment. Virgin Media have a special angle to this as the iPlayer will be coming to their Video-on-Demand service in the spring, and therefore we assume this will take a lot of load off their IP network. The Virgin VoD service runs on dedicated bandwidth within their network and allows for the content to be watched on TV rather than PC. A big bonus for the Virgin Media subscribers.

Modelling the cost impact

For both cable and LLU players the cost profile is radically different to IPstream players, and it is not a trivial task to calculate the impact. However, we can extrapolate the Plusnet traffic figures to note the effect in volumes of data. We have modelled four scenarios: usage the same as in Jan 2008 (i.e. an average of 19min/month/user) rising to 1 hour/month, 1 hour/week and 1 hour/day. These would give an increase in cost of £1,035k/month, £3,243k/month, £14,053k/month and £98,638k/month respectively for the IPstream industry, only based upon Plusnet cost assumptions. Of course this is assuming the IPstream base stays the same (and they don’t just all go bust straight away!). Across the whole of the UK ISP industry, the increase in traffic (Gb/month) is 1,166, 3,655, 15,837 and 111,161 respectively. That’s a lot of data. The obvious conclusion is that ISP pricing will need to be raised and extra capacity will needed to be added. The data reinforces our belief expressed in our recent Broadband Report that “Video will kill the ISP star”. The problem with the current ISP model is it is like an all you can eat buffet, where one in ten customers eats all the food, one in a hundred takes his chair home too, and one in a thousand unscrews all the fixtures and fittings and loads them into a van as well.

A trigger for industry structural change?

An interesting corollary to the increase in costs for the ISPs is that we believe that the iPlayer will actually speed up consolidation across the industry and make the life of smaller ISPs even more difficult than it is today. Additionally because of the high bandwidth needs of the iPlayer, the long copper lengths in rural England and the lack of cable or LLU competition to the IPstream product, we believe that the iPlayer will increase the digital divide between rural and suburban UK. The iPlayer also poses an interesting question for the legion of UK small businesses who rely on broadband and yet don’t have a full set of telecommunications skills. What do they do about the employee who wants to eat their lunch at their desk whilst simultaneously watching last nights episode of top soap EastEnders?

Time to stop the game of ‘pass the distribution cost parcel’

The BBC is actually in quite a difficult situation, especially as publicity starts to mount over the coming months with users breaking their bandwidth limits and more or more start to get charged for overages. The UK licence payers expect they paid for both content and distribution when they handed over £133.50. In 2006/7, the BBC paid £99.7m for distributing its broadcast TV signal, £42.6m for its radio signal and only £8.8m for its online content. This is out of a total of £3.2bn licence fee income. I would suggest that the easiest way for the BBC to escape the iPlayer conundrum is for them to pay an equitable fee to the ISPs for distributing their content and the ISP plan comes with unlimited BBC content, possibly with a small retail mark-up. The alternative of traffic-shaping your users to death doesn’t seem like a great way of creating high customer satisfaction. The old media saying sums up the situation quite nicely:

“If content is King, then distribution is King Kong”

[Ed – to participate in the debate on sustainable business models in the telecoms-media-tech space, do come to the Telco 2.0 ‘Executive Brainstorm’ on 16-17 April in London.]