Tag: fibre

Fibre for 5G and edge: Who does it and how to build it?

Opportunities for fibre network operators

4G/5G densification and the growth in edge end points will place fresh demands on telecoms network infrastructure to deliver high bandwidth connections to new locations. Many of these will be sites on the streets of urban centres without existing connections, where installation of new fibre cables is costly. This will require careful planning and optimum selection of existing infrastructure to minimise costs and strengthen the business cases for fibre deployment.

While much of the growth in deployment of small cells and edge end points will be on private sites, their deployment in public areas, in support of public network services, will pose specific challenges to providing the broad bandwidth connectivity required. This includes both backhaul from cell sites and edge end points to the fibre transport network, plus any fronthaul needs for new open RAN deployments, from baseband equipment to radio units and antennas. In almost all cases this will entail installing new fibre in areas where laying a new duct is at its most expensive, although in a few cases fixed point-to-point radio links could be deployed instead.

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Global deployments of small cells and non-telco edge end points
in public areas

Source: Small Cell Forum, STL research and analysis

In addition, operators of 5G small cells and public cloud edge sites will require access to fibre links for backhaul to their core networks to provide the high bandwidths required. In some cases, they may need multiple fibres, especially if diverse paths are needed for security and resilience purposes.

Many newer networks have been built for a specific purpose, such as residential or business FTTP. Others are trunk routes to connect large businesses and data centres, and may serve local, regional, national or international areas. In addition, changing regulations have encouraged the creation of new businesses such as neutral hosts (also called “open access” for wholesale fibre) and, as a result, the supply side of the market is composed of an increasing variety of players. If this pattern were to continue, then it would very likely prove uneconomic to build dedicated networks for some applications, such as small cell densification or some standalone edge applications.

However, provided build qualities meet the required standard and costs can be contained there is no reason why networks deployed to address one market cannot be extended and repurposed to serve others. For new fibre builds being planned, it is also important to consider these new FTTX opportunities upfront and in some detail, rather than as an afterthought or just a throw-away bullet point on investor slide-decks.  

This report looks at the opportunities these developments offer to fibre network operators and considers the business cases that need to be made. It looks at the means and scope for minimising costs necessary to profitably satisfy the widest range of needs.

The fibre market is changing

FTTH/P has been largely satisfied in many countries, and even in slower markets such as the UK and Germany, the bulk of the network is expected to be in place by 2025/6 for most urban premises, at least on the basis of “homes passed”, if not actually connected.

By contrast the requirement of higher bandwidth connectivity for mobile base stations being upgraded from 3G to 4G and 5G is current and ongoing. Demand for links to small cells needed to support 5G densification, standalone edge, and smart city applications is only just beginning to appear and is likely to develop significantly over the next 10 years or more. In future high speed broadband links will be required to support an increasing range of applications for different organisations: for example, autonomous and semi-autonomous vehicle (V2X) applications operated by government or city authorities.

Both densification and edge will need local connections for fronthaul and backhaul as well as longer connections to provide backhaul to the core network. Building from scratch is expensive owing to the high costs associated with digging in the public highway, especially in urban centres. Digging can be complex, depending on the surfaces and buried services encountered, and extensions after the initial main build can be very expensive.

Laying fibre and ducts are a long-term investment and can usually be amortised over 15 to 20 years.  Nevertheless, network operators need to be sure of a good return on their investment and therefore need to find ways to minimise costs while maximising revenues. In markets with multiple players, there will also be a desire by potential acquisition targets to underscore their valuations, by maximising their addressable market, while reducing any post-merger remedial or expansion costs. Good planning, including watching for new opportunities and trends and the smart use of existing assets to minimise costs, can help ensure this.

  • Serving multiple markets through good forecasting and planning can help maximise revenues.
  • Operators and others can make use of various infrastructure assets to reduce costs, including incumbents’ physical duct/pole infrastructure sewers, disused water and hydraulic pipes, neutral hosts’ networks, council ducts, and traffic management ducts. Obviously these will not extend everywhere that fibre is required, but can make a meaningful contribution in many situations.

The remaining sections of this report examine in more detail the specific opportunities offered to fixed network operators, by densification of mobile base stations and growth of edge computing. It covers:

  • Market demand, including drivers of demand, and end users’ and the industry’s needs and options
  • The changing supply side and regulation
  • Technologies, build options and costs
  • How to maximise revenues and returns on investment.

Table of Contents

  • Executive Summary
  • Introduction
    • The fibre market is changing
  • Small cell and edge: Demand
    • Demand for small cells
    • Demand for edge end points
  • Small cell and edge: Supply
    • The changing network supply structure
  • Build options
    • Pros and cons of seven building options
  • How do they compare on costs?
  • Impact of regulation and policy
  • How to mitigate unforeseen costs
  • The business case
  • Conclusions
  • Index

Related Research

 

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The new telcos: A field guide

Introduction

The traditional industry view is that “telcos” are a well-defined and fairly cohesive group. Industry associations like GSMA, ETNO, CTIA and others have typically been fairly homogeneous collections of fixed or mobile operators, only really varying in size. The third-ranked mobile operator in Bolivia has not really been that different from AT&T or Vodafone in terms of technology, business model or vendor relationships.

Our own company, STL Partners used to have the brand “Telco 2.0”. However, our main baseline assumption then was that the industry was mostly made up the same network operators, but using a new 2.0 set of business models.

This situation is now changing. Telecom service providers – telcos – are starting to emerge in a huge variety of new shapes, sizes and backgrounds. There is fragmentation in technology strategy, target audiences, go-to-market and regional/national/international scope.

This report is not a full explanation of all the different strategies, services and technological architecture. Instead of analysing all of the “metabolic” functions and “evolutionary mechanisms”, this is more of a field-guide to all the new species of telco that the industry is starting to see. More detail on the enablers – such as fibre, 5G and cloud-based infrastructure – and the demand-side (such as vertical industries’ communications needs and applications) can be found in our other output.

The report provides descriptions with broad contours of motivation, service-offerings and implications for incumbents. We are not “taking sides” here. If new telcos push out the older species, that’s just evolution of those “red in tooth and claw”. We’re taking the role of field zoologists, not conservationists.

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Field guides are collections/lists of natural & human phenomena

animal-species-telcos-stl-partners

Source: Amazon, respective publishers’ copyright

The historical landscape

The term “telco” is a little slippery to define, but most observers would likely agree that the “traditional” telecoms industry has mostly been made up of the following groups of CSPs:

  • MNOs: Countries usually have a few major mobile network operators (MNOs) that are typically national, or sometimes regional.
  • Fixed operators: Markets also have infrastructure-based fixed telcos, usually with one (or a small number) that were originally national state-owned monopolies, plus a select number of other licensed providers, often with greenfield FTTX fibre. Some countries have a vibrant array of smaller “AltNets”, or competitive carriers (originally known as CLECs in the US).
  • Converged operators: These combine fixed and mobile operations in the same business or group. Sometimes they are arms-length (or even in different countries), but many try to offer combined or converged service propositions.
  • Wholesale telcos: There is a tier of a few major international operators that provide interconnect services and other capabilities. Often these have been subsidiaries (or joint ventures) of national telcos.

In addition to these, the communications industry in each market has also often had an array of secondary connectivity or telecom service providers as a kind “supporting cast”, which generally have not been viewed as “telecom operators”. This is either because they fall into different regulatory buckets, only target niche markets, or tend to use different technologies. These have included:

  • MVNOs
  • Towercos
  • Internet Exchanges
  • (W)ISPs
  • Satellite operators

Some of these have had a strong overlap with telcos, or have been spun-out or acquired at various times, but they have broadly remained as independent organisations. Importantly, many of these now look much more like “proper telcos” than they did in the past.

Why are “new telcos” emerging now?

To some extent, many of the classes of new telco have been “hiding in plain sight” for some time. MVNOs, towercos and numerous other SPs have been “telcos in all but name”, even if the industry has often ignored them. There has sometimes been a divisive “them and us” categorisation, especially applied when comparing older operators with cloud-based communications companies, or what STL has previously referred to as “under the floor” infrastructure owners. This attitude has been fairly common within governments and regulators, as well as among operator executives and staff.

However, there are now two groups of trends which are leading to the blurring of lines between “proper telcos” and other players:

  • Supply-side trends: The growing availability of the key building blocks of telcos – core networks, spectrum, fibre, equipment, locations and so on – is leading to democratisation. Virtualisation and openness, as well as a push for vendor diversification, is helping make it easier for new entrants, or adjacent players, to build telecom-style networks
  • Demand-side trends: A far richer range of telecom use-cases and customer types is pulling through specialist network builders and operators. These can start with specific geographies, or industry verticals, and then expand from there to other domains. Private 4G/5G networks and remote/underserved locations are good examples which need customisation and specialisation, but there are numerous other demand drivers for new types of service (and service provider), as well as alternative business models.

Taken together, the supply and demand factors are leading to the creation of new types of telcos (sometimes from established SPs, and sometimes greenfield) which are often competing with the incumbents.

While there is a stereotypical lobbying complaint about “level playing fields”, the reality is that there are now a whole range of different telecom “sports” emerging, with competitors arranged on courses, tracks, fields and hills, many of which are inherently not “level”. It’s down to the participants – whether old or new – to train appropriately and use suitable gear for each contest.

Virtualisation & cloudification of networks helps newcomers as well as existing operators

virtualisation-cloudification-networks-STL-Partners

Source: STL Partners

Where are new telcos likeliest to emerge?

Most new telcos tend to focus initially on specific niche markets. Only a handful of recent entrants have raised enough capital to build out entire national networks, either with fixed or mobile networks. Jio, Rakuten Mobile and Dish are all exceptions – and ones which came with a significant industrial heritage and regulatory impetus that enabled them to scale broadly.

Instead, most new service providers have focused on specific domains, with some expanding more broadly at a later point. Examples of the geographic / customer niches for new operators include:

  • Enterprise private 4G/5G networks
  • Rural network services (or other isolated areas like mountains, offshore areas or islands)
  • Municipality / city-level services
  • National backbone fibre networks
  • Critical communications users (e.g. utilities)
  • Wholesale-only / shared infrastructure provision (e.g. neutral host)

This report sets out…

..to through each of the new “species” of telcos in turn. There is a certain level of overlap between the categories, as some organisations are developing networking offers in various domains in parallel (for instance, Cellnex offering towers, private networks, neutral host and RAN outsourcing).

The new telcos have been grouped into categories, based on some broad similarities:

  • “Evolved” traditional telcos: operators, or units of operators, that are recognisable from today’s companies and brands, or are new-entrant “peers” of these.
  • Adjacent wireless providers: these are service provider categories that have been established for many years, but which are now overlapping ever more closely with “traditional” telcos.
  • Enterprise and government telcos: these are other large organisations that are shifting from being “users” of telecoms, or building internal network assets, towards offering public telecom-type services.
  • Others: this is a catch-all category that spans various niche innovation models. One particular group here, decentralised/blockchain-based telcos, is analysed in more detail.

In each case, the category is examined briefly on the basis of:

  • Background and motivation of operators
  • Typical services and infrastructure being deployed
  • Examples (approx. 3-4 of each type)
  • Implications for mainstream telcos

Table of contents

  • Executive Summary
    • Overview
    • New telco categories and service areas
    • Recommendations for traditional fixed/mobile operators
    • Recommendations for vendors and suppliers
    • Recommendations for regulators, governments & advisors
  • Introduction
    • The historical landscape
    • Why are “new telcos” emerging now?
    • Where are new telcos likeliest to emerge?
    • Structure of this document
  • “Evolved” traditional telcos
    • Greenfield national networks
    • Telco systems integration units
    • “Crossover” Mobile, Fixed & cable operators
    • Extra-territorial telcos
  • Adjacent wireless providers
    • Neutral host network providers
    • TowerCos
    • FWA Fixed Wireless Access (WISPs)
    • Satellite players
  • Enterprise & government telcos
    • Industrial / vertical MNOs
    • Utility companies offering commercial telecom services
    • Enterprises’ corporate IT network service groups
    • Governments & public sector
  • New categories
    • Decentralised telcos (blockchain / cryptocurrency-based)
    • Other “new telco” categories
  • Conclusions

Related Research

 

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The state of the art on work from home propositions

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WFH: From survival to strategy

The imposed shift to homeworking has divided many businesses. Some (including Facebook, Twitter, Slack, Microsoft, Indeed, AMEX, Mastercard) say they will never require office work again, whereas others are eager to bring back the personal element and re-introduce the “office dynamic”. The concept of ‘Zoom Fatigue’ has left some people pining for the office, and many companies find themselves on standby, aiming to reopen the offices to all staff during 2021.

A survey by Ipsos MORI found that the majority of people expect normality to return somewhere between six months to two years. One thing is apparent – the ability and timing to even consider a full return to work is uncertain.

Figure 1: Ipsos MORI survey of homeworkers in the UK

Ipsos Mori WFH survey

Source: Ipsos MORI

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When the lockdowns started, uncertainty caused paralysis to strategic initiatives as budgets diverted towards creating a Work From Home (WFH) culture. Survival became the priority for businesses, delaying planned spend on corporate connectivity and networking. That same survival instinct saw telcos and suppliers react and reposition products and services toward remote work.

As WFH continued throughout the pandemic various advantages came to the fore, such as reduction in pollution from travel and the ability to hire great talent which may not be located near a corporate office. Businesses started or accelerated a journey of massive (and sometimes painful) transformation but, from that, have either accelerated or embarked on a digital transformation journey. The gains in efficiency and business opportunity have the potential to be significant. WFH is no longer an approach to survival but instead, part of a broader strategy to optimise operations across a

increasingly complex physical and digital worlds. This growing need across all enterprises and consumers is one of the key elements within STL’s vision of the Coordination Age.

A hybrid approach is here to stay

Homeworking must continue for some time to come as we wait for the pandemic to subside. As we have adopted a homeworking culture, albeit forced upon us, the investments in people, technologies and processes have already been committed. Although there is much conflicting opinion about the long-term outcomes, there is no looking back. The workplace has transformed, and the connectivity and business enablement products to support it have become commonplace.

There are three considerations which will continue to drive the support and growth of WFH.

  1. Covid-19 does not have a defined end. The uncertainty and unfortunate lengthy road to fully managing the virus means that businesses will need to continue efforts towards supporting a large amount of remote work.
  2. Remaining relevant. Many businesses will embrace a no-office, online-only culture (including typical storefronts) in response to changing customer and employee preferences. To do business in such an environment will require the adoption of the latest online tools and practices.
  3. Investment in digital transformation. Before Covid-19 and independent to any prior appetite for home working, digital transformation has already led many businesses to adopt cloud services, online collaboration tools and uCaaS solutions for voice and video. It is now generally accepted that Covid-19 has accelerated and rapidly matured the integration of these solutions into many businesses. According to BT, the “technology/digital transformation journey” in the UK has been sped up by almost 5.5 years.

The support of WFH, fully or hybrid, is therefore strategic and something likely to feature in business plans for the foreseeable future. Even when offices do eventually begin to fill up again, work from home will transition and merge into the “work from anywhere” culture.

Telcos are in a unique position to provide all the connectivity and services required to assist in these projects, but to do that they need to offer appropriately positioned solutions. As consumer and business connectivity become intertwined, it creates a large area of uncertainty for businesses. As both consumer and business connectivity are core competencies for telcos, bringing the two together is the next natural step.

The telco role: An opportunity or obligation?

The adaptation of businesses towards increased homeworking is, of course, complex and touches nearly every part of the business, from people to processes and technology. Almost every business function will have invested considerable time and effort towards establishing new ways of working. In many cases, this would result in a change to the supporting technologies.

Underpinning all of this is a large assumption that each employee will be able to reliably connect to the new virtual business environment from wherever they want, and the technology will just work. To all but the most technically advanced businesses, the homeworker’s personal connectivity is just that – personal – and not an area that many businesses can currently manage.

The telco is in a unique position when it comes to WFH as it can touch every part of the service delivery chain. With many businesses unable to address the broad spectrum of WFH needs, the opportunity for telcos is to offer the enabling services. Telco solutions must now support businesses by providing the right mix of physical connectivity and enablement services.

Figure 2: The telco touchpoints in WFH service delivery

The touch points in telco WFH service delivery

Source: STL Partners

Telcos have had an obligation to provide continued service to businesses and homes, throughout the pandemic. Universal service obligations needed to be maintained while national charters to keep the country connected were agreed. When the pandemic started, the demand for connectivity within the business segment shifted to the consumer segment and telcos had to respond.

Businesses initially froze all internal connectivity projects and focused on the remote workforce — this impacted Q2 revenues in telcos’ business segments. At the same time telcos did everything they could to make the transition as easy as possible, removing data limits and speed caps and providing free trials of collaboration and communications tools. More detail is provided in STL Partners review of the initial telco responses.

Figure 3: Liberty Global Q3 2020 results illustrate the impact to the business segment

Liberty Global Q320 results

Source: Liberty Global

Eventually IT infrastructure projects re-started. Businesses with significant office-based operations (as opposed to, e.g. manufacturing) applied new focus on creating more flexible and agile networks which can support mass WFH. The dependency on digital collaboration and ensuring that homeworkers can work without disruption has now become a high priority. A Q3 improvement in business spending is partly down to collaboration enabling technologies creating new opportunities for telcos – to address the shifts from legacy business spend on connecting large sites towards a more distributed concept where households connectivity is both personal and business focused.

Consumer connectivity products must now simply articulate the support for all household needs, including WFH. Business products must enable the agility a business needs to adapt to any future changes, while easily embracing their employees’ consumer connectivity.

 

Table of Contents

  • Executive Summary
    • A six point plan for embracing WFH opportunities
    • How telcos responded to ‘work going home’ in 2020
    • Two essential areas in need of development
    • What next: Considerations for different types of telco
  • Introduction
    • WFH: From survival to strategy
    • A hybrid approach is here to stay
    • The telco role: An opportunity or obligation?
    • Embracing the consumer architecture
  • The WFH journey: From initial responses to strategic opportunities
    • Uncoordinated connectivity: The initial stakeholder responses
    • Intelligent networking for WFH
    • Long term WFH: The telco opportunity
  • Telco WFH propositions today
    • How telcos are positioning WFH services
    • Consumer broadband: Overlay services for the household
    • Dedicated WFH: Made-to-measure
    • WFH as part of wider transformation efforts
  • Conclusion and recommendations
    • The innovation opportunity

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Consumer strategy: What should telcos do?

Globally, telcos are pursuing a wide variety of strategies in the consumer market, ranging from broad competition with the major Internet platforms to a narrow focus on delivering connectivity.

Some telcos, such as Orange France, Telefónica Spain, Reliance Jio and Rakuten Mobile, are combining connectivity with an array of services, such as messaging, entertainment, smart home, financial services and digital health propositions. Others, such as Three UK, focus almost entirely on delivering connectivity, while many sit somewhere in between, targeting a single vertical market, in addition to connectivity. AT&T is entertainment-orientated, while Safaricom is financial services-focused.

This report analyses the consumer strategies of the leading telcos in the UK and the Brazil – two very different markets. Whereas the UK is a densely populated, English-speaking country, Brazil has a highly-dispersed population that speaks Portuguese, making the barriers to entry higher for multinational telecoms and content companies.

By examining these two telecoms markets in detail, this report will consider which of these strategies is working, looking, in particular, at whether a halfway-house approach can be successful, given the economies of scope available to companies, such as Amazon and Google, that offer consumers a broad range of digital services. It also considers whether telcos need to be vertically-integrated in the consumer market to be successful. Or can they rely heavily on partnerships with third-parties? Do they need their own distinctive service layer developed in-house?

In light of the behavourial changes brought about by the pandemic, the report also considers whether telcos should be revamping their consumer propositions so that they are more focused on the provision of ultra-reliable connectivity, so people can be sure to work from home productively. Is residential connectivity really a commodity or can telcos now charge a premium for services that ensure a home office is reliably and securely connected throughout the day?

A future STL Partners report will explore telcos’ new working from home propositions in further detail.

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The UK market: Convergence is king

The UK is one of the most developed and competitive telecoms markets in the world. It has a high population density, with 84% of its 66 million people living in urban areas, according to the CIA Factbook. There are almost 272 people for every square kilometre, compared with an average of 103 across Europe. For every 100 people, there are 48 fixed lines and 41 broadband connections, while the vast majority of adults have a mobile phone. GDP per capita (on a purchasing power parity basis) is US$ 48,710, compared with US$ 65,118 in the US (according to the World Bank).

The strength of the state-funded public service broadcaster, the BBC, has made it harder for private sector players to make money in the content market. The BBC delivers a large amount of high-quality advertising-free content to anyone in the UK who pays the annual license fee, which is compulsory to watch television.

In the UK, the leading telcos have mostly eschewed expansion into the broader digital services market. That reflects the strong position of the leading global Internet platforms in the UK, as well as the quality of free-to-air television, and the highly competitive nature of the UK telecoms market – UK operators have relatively low margins, giving them little leeway to invest in the development of other digital services.

Figure 1 summarises where the five main network operators (and broadband/TV provider Sky) are positioned on a matrix mapping degree of vertical integration against the breadth of the proposition.

Most UK telcos have focused on the provision of connectivity

UK telco B2C strategies

Source: STL Partners

Brazil: Land of new opportunities

Almost as large as the US, Brazil has a population density is just 25 people per square kilometre – one tenth of the total UK average population density. Although 87% of Brazil’s 212 million people live in urban areas, according to the CIA Fact book, that means almost 28 million people are spread across the country’s rural communities.

By European standards, Brazil’s fixed-line infrastructure is relatively sparse. For every 100 people, Brazil has 16 fixed lines, 15 fixed broadband connections and 99 mobile connections. Its GDP per capita (on a purchasing power parity basis) is US$ 15,259 – about one third of that in the UK. About 70% of adults had a bank account in 2017, according to the latest World Bank data. However, only 58% of the adult population were actively using the account.

A vast middle-income country, Brazil has a very different telecoms market to that of the UK. In particular, network coverage and quality continue to be important purchasing criteria for consumers in many parts of the country. As a result, Oi, one of the four main network operators, became uncompetitive and entered a bankruptcy restructuring process in 2016. It is now hoping to to sell its sub-scale mobile unit for at least 15 billion reais (US$ 2.8 billion) to refocus the company on its fibre network. The other three major telcos, Vivo (part of Telefónica), Claro (part of América Móvil) and TIM Brazil, have made a joint bid to buy its mobile assets.

For this trio, opportunities may be opening up. They could, for example, play a key role in making financial services available across Brazil’s sprawling landmass, much of which is still served by inadequate road and rail infrastructure. If they can help Brazil’s increasingly cash-strapped consumers to save time and money, they will likely prosper. Even before COVID-19 struck, Brazil was struggling with the fall-out from an early economic crisis.

At the same time, Brazil’s home entertainment market is in a major state of flux. Demand for pay television, in particular, is falling away, as consumers seek out cheaper Internet-based streaming options.

All of Brazil’s major telcos are building a broad consumer play

Brazil telco consumer market strategy overview

Source: STL Partners

Table of contents

  • Executive Summary
  • Introduction
    • The UK market: Convergence is king
    • BT: Trying to be broad and deep
    • Virgin Media: An aggregation play
    • O2 UK: Changing course again
    • Vodafone: A belated convergence play
    • Three UK: Small and focused
    • Takeaways from the UK market: Triple play gridlock
  • Brazil: Land of new opportunities
    • The Brazilian mobile market
    • The Brazilian fixed-line market
    • The Brazilian pay TV market
    • The travails of Oi
    • Vivo: Playing catch-up in fibre
    • Telefónica’s financial performance
    • América Móvil goes broad in Brazil
    • TIM: Small, but perfectly formed?
    • Takeaways from the Brazilian market: A potentially treacherous transition
  • Index

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COVID-19: Impact on telco priorities

The goal of this research is to understand how telecoms operators’ investment priorities and investments are likely to change in response to COVID-19.  To do this, we collected more than 200 survey responses from participants in telecoms operators, telecoms vendors, and analysts and consultants and other groups. All responses are treated in strict personal and company confidence. Take the survey here.

This research builds on our initial research on the impact of the pandemic to the telecoms industry, COVID-19: Now, next and after, published in March 2020.

Background to the telco COVID-19 survey

The respondents were fairly evenly split between telcos, vendors, and ‘others’ (mainly analysts and consultants). This sample contained a higher proportion of European and American respondents than industry average, so is not fully globally representative. We have drawn out regional comparisons where possible.

Who took the survey?

COVID-19 survey respondents by company and region

Source: STL COVID-19 survey, 202 respondents, May 8th 2020

Meanwhile, 44% of respondents were C-Level/VP/SVP/Director level. Functionally, most respondents work in senior HQ and operational management areas.

What are their roles?

COVID-19 survey respondents by seniority

Source: STL COVID-19 survey, 202 respondents, May 8th 2020

How respondents perceive the risks from COVID-19

Respondents were positive on the prospects for most areas overall. We have taken a slightly more pessimistic view in our analysis of the survey results and the categorisation below to balance this bias and factor in future economic risk.

While not all activities we have categorised as “at risk” will necessarily be delayed, we believe that in some telcos there may be more pressure in these areas if the financial impact of COVID-19 is harsher than expected at the time of the survey. We expect that when Q2 results come out, many operators will have a clearer view of how the crisis will affect them financially – and those that are ahead of the curve in adopting technologies such as automation will be in a good position to accelerate their impact, those that are behind the curve may face a more difficult uphill battle.

A relative view of how respondents perceived the outlook for telcos in different business areas and verticals

COVID-19 survey perceived risks to business

Source: STL Partners analysis of COVID-19 survey, 202 respondents, May 8th 2020

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Notes on the research findings

  • The way research respondents perceive any given question is generally dependent on their current situation and knowledge. To get relevant answers, we asked all respondents if they were interested or involved in specific areas of interest (e.g. ‘consumer services’), and to not answer questions they couldn’t (e.g. for confidentiality reasons) or simply didn’t know or have a clear opinion.
  • We saw no evidence that respondents were ‘gaming’ the results to be favourable to their interests.
  • Results need to be seen in the context that telcos themselves vary widely in size, profitability and market outlook. For example, for some, 5G seems like a valid investment, whereas for others the conditions are currently much less promising. COVID-19 has clearly had some impact on these dynamics, and our analysis attempts to reflect this impact on the overall balance of opinions as well as some of the specific situations to bring greater nuance.
  • As of mid May 2020, the total economic impact of COVID-19 was probably less clear to the majority of the respondents than the operational and lifestyle changes it has brought. It is therefore likely that as telco results for Q2 start to be circulated, and before then internally to the telcos, differing pressures will arise than that existed at the time of this survey. The resulting intentions may therefore become more or less extreme than shown in this research, though the relative positions of different activities in the various maps of risk and opportunity may change less than the absolute levels shown here.
  • We’ve interpreted the results as best we can given our knowledge of the respondents and what they told us, and added in our own insights where relevant.
  • Inevitably, this is a subjective exercise, albeit based on 200+ industry respondents’ views.
  • Nonetheless, we hope that it brings you additional insights to the many that you already possess through your own experiences and access to data.
  • Finally, things continue to change fast. We will continue to track them.

Table of contents

  • Executive summary: What’s most likely to change?
  • Research background
  • Technology impacts: Implementing automation, cloud and edge
  • Network impacts: Making sense of divergent 5G viewpoints
  • Enterprise sector impacts: Healthcare and consumerisation
  • Consumer sector impacts: What will last?
  • Leadership impacts: Building on new foundations
  • What next?

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5G: Bridging hype, reality and future promises

The 5G situation seems paradoxical

People in China and South Korea are buying 5G phones by the million, far more than initially expected, yet many western telcos are moving cautiously. Will your company also find demand? What’s the smart strategy while uncertainty remains? What actions are needed to lead in the 5G era? What questions must be answered?

New data requires new thinking. STL Partners 5G strategies: Lessons from the early movers presented the situation in late 2019, and in What will make or break 5G growth? we outlined the key drivers and inhibitors for 5G growth. This follow on report addresses what needs to happen next.

The report is informed by talks with executives of over three dozen companies and email contacts with many more, including 21 of the first 24 telcos who have deployed. This report covers considerations for the next three years (2020–2023) based on what we know today.

“Seize the 5G opportunity” says Ke Ruiwen, Chairman, China Telecom, and Chinese reports claimed 14 million sales by the end of 2019. Korea announced two million subscribers in July 2019 and by December 2019 approached five million. By early 2020, The Korean carriers were confident 30% of the market will be using 5G by the end of 2020. In the US, Verizon is selling 5G phones even in areas without 5G services,  With nine phone makers looking for market share, the price in China is US$285–$500 and falling, so the handset price barrier seems to be coming down fast.

Yet in many other markets, operators progress is significantly more tentative. So what is going on, and what should you do about it?

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5G technology works OK

22 of the first 24 operators to deploy are using mid-band radio frequencies.

Vodafone UK claims “5G will work at average speeds of 150–200 Mbps.” Speeds are typically 100 to 500 Mbps, rarely a gigabit. Latency is about 30 milliseconds, only about a third better than decent 4G. Mid-band reach is excellent. Sprint has demonstrated that simply upgrading existing base stations can provide substantial coverage.

5G has a draft business case now: people want to buy 5G phones. New use cases are mostly years away but the prospect of better mobile broadband is winning customers. The costs of radios, backhaul, and core are falling as five system vendors – Ericsson, Huawei, Nokia, Samsung, and ZTE – fight for market share. They’ve shipped over 600,000 radios. Many newcomers are gaining traction, for example Altiostar won a large contract from Rakuten and Mavenir is in trials with DT.

The high cost of 5G networks is an outdated myth. DT, Orange, Verizon, and AT&T are building 5G while cutting or keeping capex flat. Sprint’s results suggest a smart build can quickly reach half the country without a large increase in capital spending. Instead, the issue for operators is that it requires new spending with uncertain returns.

The technology works, mostly. Mid-band is performing as expected, with typical speeds of 100–500Mbps outdoors, though indoor performance is less clear yet. mmWave indoor is badly degraded. Some SDN, NFV, and other tools for automation have reached the field. However, 5G upstream is in limited use. Many carriers are combining 5G downstream with 4G upstream for now. However, each base station currently requires much more power than 4G bases, which leads to high opex. Dynamic spectrum sharing, which allows 5G to share unneeded 4G spectrum, is still in test. Many features of SDN and NFV are not yet ready.

So what should companies do? The next sections review go-to-market lessons, status on forward-looking applications, and technical considerations.

Early go-to-market lessons

Don’t oversell 5G

The continuing publicity for 5G is proving powerful, but variable. Because some customers are already convinced they want 5G, marketing and advertising do not always need to emphasise the value of 5G. For those customers, make clear why your company’s offering is the best compared to rivals’. However, the draw of 5G is not universal. Many remain sceptical, especially if their past experience with 4G has been lacklustre. They – and also a minority swayed by alarmist anti-5G rhetoric – will need far more nuanced and persuasive marketing.

Operators should be wary of overclaiming. 5G speed, although impressive, currently has few practical applications that don’t already work well over decent 4G. Fixed home broadband is a possible exception here. As the objective advantages of 5G in the near future are likely to be limited, operators should not hype features that are unrealistic today, no matter how glamorous. If you don’t have concrete selling propositions, do image advertising or use happy customer testimonials.

Table of Contents

  • Executive Summary
  • Introduction
    • 5G technology works OK
  • Early go-to-market lessons
    • Don’t oversell 5G
    • Price to match the experience
    • Deliver a valuable product
    • Concerns about new competition
    • Prepare for possible demand increases
    • The interdependencies of edge and 5G
  • Potential new applications
    • Large now and likely to grow in the 5G era
    • Near-term applications with possible major impact for 5G
    • Mid- and long-term 5G demand drivers
  • Technology choices, in summary
    • Backhaul and transport networks
    • When will 5G SA cores be needed (or available)?
    • 5G security? Nothing is perfect
    • Telco cloud: NFV, SDN, cloud native cores, and beyond
    • AI and automation in 5G
    • Power and heat

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Cloud gaming: New opportunities for telcos?

Gaming is following video to the cloud

Cloud gaming services enable consumers to play video games using any device with a screen and an Internet connection – the software and hardware required to play the game are all hosted on remote cloud services. Some reviewers say connectivity and cloud technologies have now advanced to a point where cloud gaming can begin to rival the experience offered by leading consoles, such as Microsoft’s Xbox and Sony’s PlayStation, while delivering greater interactivity and flexibility than gaming that relies on local hardware. Google believes it is now feasible to move gaming completely into the cloud – it has just launched its Stadia cloud gaming service. Although Microsoft is sounding a more cautious note, it is gearing up to launch a rival cloud gaming proposition called xCloud.

This report explores cloud gaming and models the size of the potential market, including the scale of the opportunity for telcos. It also considers the potential ramifications for telecoms networks. If Stadia, xCloud and other cloud gaming services take off, consumer demand for high-bandwidth, low latency connectivity could soar. At the same time, cloud gaming could also provide a key test of the business rationale for edge computing, which involves the deployment of compute power and data storage closer to the end users of digital content and applications. This allows the associated data to be processed, analysed and acted on locally, instead of being transmitted long distances to be processed at central data centres.

This report then goes on to outline the rollout of cloud gaming services by various telcos, including Deutsche Telekom in Germany and Sunrise in Switzerland, while also considering Apple’s strategy in this space. Finally, the conclusions section summarises how telcos around the world should be preparing for mass-market cloud gaming.

This report builds on previous executive briefings published by STL Partners, including:

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What is cloud gaming?

Up to now, keen gamers have generally bought a dedicated console, such as a Microsoft Xbox or Sony PlayStation, or a high-end computer, to play technically complex and graphically rich games. They also typically buy a physical copy of the game (a DVD), which they install on their console or in an optical disc drive attached to their PC. Alternatively, some platforms, such as Steam, allow gamers to download games from a marketplace.

Cloud gaming changes that paradigm by running the games on remote hardware in the cloud, with the video and audio then streamed to the consumer’s device, which could be a smartphone, a connected TV, a low-end PC or a tablet. The player would typically connect this device to a dedicated handheld controller, similar to one that they would use with an Xbox or a PlayStation.

There is also a half-way house between full cloud gaming and console gaming. This “lite” form of cloud gaming is sometimes known as “command streaming”. In this case, the game logic and graphics commands are processed in the cloud, but the graphics rendering happens locally on the device. This approach lowers the amount of bandwidth required (sending commands requires less bandwidth than sending video) and is less demanding from a latency perspective (no encoding/ decoding of the video stream). But the quality of graphics will be limited to the capabilities of the graphic processing unit on the end-user’s device. For keen players that want to play graphically rich games, command streaming wouldn’t necessarily eliminate the need to buy a console or a powerful PC.

As well as relocating and rejigging the computing permutations, cloud gaming opens up new business models. Rather than buying individual games, for example, the consumer could pay for a Netflix-style subscription service that would enable them to play a wide range of online video games, without having to download them. Alternatively, cloud gaming services could use a pay-as-you-go model, simply charging consumers by the minute or hour.

Today, these cloud gaming subscriptions can be relatively expensive. For example, Shadow, an existing cloud gaming service charges US$35 a month in the U.S., £32 a month in the U.K. and €40 a month in France and Germany (but there are significant discounts if the subscriber commits to 12 months). Shadow can support graphics resolution of 4K at 60 frames per second and conventional HD at 144 frames per second, which is superior to a typical console specification. It requires an Internet connection of at least 15 Mbps. Shadow is compatible with Windows 7/8/10, macOS, Android, Linux (beta), iOS (beta) and comes with a Windows 10 license, which can be used for other PC applications.

At those prices, Shadow is a niche offering. But Google is now looking to take cloud gaming mainstream by setting subscription charges at around US$10 a month – comparable to a Spotify or Netflix subscription, although the user will have to pay additional fees to buy most games. Google says its new Stadia cloud gaming service is accessible from any device that can run YouTube in HD at 30/60 frames per second (fps), as long as it has a fast enough connection (15–25Mbps). The consumer then uses a dedicated controller that can connect directly to their Wi-Fi, bypassing the device with the screen. All the processing is done in Google’s cloud, which then sends a YouTube video-stream to the device: the URL pinpoints which clip of the gameplay to request and receive.

In other words, Stadia will treat games as personalised YouTube video clips/web-pages that a player or viewer can interact with in real time. As a result, the gamer can share that stream easily with friends by sending them the URL. With permission from the gamer, the friend could then jump straight into the gameplay using their own device.

What is cloud gaming?

Table of contents

  • Executive Summary
  • Introduction
  • What is cloud gaming?
    • Why consumers will embrace cloud gaming
  • Ramifications for telecoms networks
    • Big demands on bandwidth
    • Latency
    • Edge computing
    • The network architecture underpinning Google Stadia
  • How large is the potential market?
    • Modelling the U.S. cloud gaming market
    • New business models
  • Telcos’ cloud gaming activities
    • Microsoft hedges its bets
    • Apple takes a different tack
  • Conclusions
    • Telcos without their own online entertainment offering
    • Telcos with their own online entertainment offering

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Why fibre is on fire again

Introduction

Fibre to the home is growing at a near-explosive rate

Every company faces the problems of mature markets, disappointing revenues and tough decisions on investment. Everyone agrees that fibre delivers the best network experience, but until recently most companies rejected fibre as too costly.

Now, 15 of the world’s largest phone companies have decided fibre to the home is a solution. Why are so many now investing so heavily?

Here are some highlight statistics:

  • On 26th July 2018, AT&T announced it will pass 5 million locations with fibre to the home in the next 12 months, after reaching 3 million new locations in the last year.[1] Fibre is now a proven money-maker for the US giant, bringing new customers every quarter.
  • Telefónica Spain has passed 20 million premises – over 70% of the addressable population – and continues at 2 million a year.
  • Telefónica Brazil is going from 7 million in 2018 to 10 million in 2020.
  • China’s three giants have 344 million locations connected.[2]
  • Worldwide FTTH connections grew 23% between Q1 2017 and Q1 2018.[3]
  • In June 2018, China Mobile added 4.63 million broadband customers, nearly all FTTH.[4]
  • European FTTH growth in 2017 was 20%.[5]
  • In India, Mukesh Ambani intends to connect 50 million homes at Reliance Jio.[6]

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Even the most reluctant carriers are now building, including Deutsche Telekom and British Telecom. In 2015, BT Openreach CTO Peter Bell said FTTH was “impossible” for Britain because it was too expensive.[7] Now, BT is hiring 3,500 engineers to connect 3 million premises, with 10 million more homes under consideration.[8]

Credit Suisse believes that for an incumbent, “The cost of building fibre is less than the cost of not building fibre.”

Contents:

  • Executive Summary
  • Introduction
  • Fibre to the home is growing at a near-explosive rate
  • Why the change?
  • Strategies of leading companies
  • Frontrunners
  • Moving toward rapid growth
  • Relative newcomer
  • The newly converted
  • Alternate carriers
  • Naysayers
  • U.S. regionals: CenturyLink, Frontier and Windstream
  • The Asian pioneers
  • Two technologies to consider
  • Ten-gigabit equipment
  • G.fast
  • The hard question: How many will decide to go wireless only?

Figures:

  • Figure 1: Paris area fibre coverage – Orange has covered most of the capital
  • Figure 2: European fibre growth
  • Figure 3: Top five European incumbents, stock price July 2016 – July 2018
  • Figure 4: DT CEO Tim Höttges and Bavarian Prime Minister Dr. Markus Söder announce a deal to fibre nearly all of Bavaria, part financed by the government

[1] https://www.fastnet.news/index.php/11-fib/715-at-t-fiber-run-rate-going-from-3m-to-5m-year

[2] https://www.fastnet.news/index.php/8-fnn/713-china-1-1b-4g-400m-broadband-328m-fibre-home-rapid-growth

[3] http://point-topic.com/free-analysis/world-broadband-statistics-q1-2018/

[4] https://www.chinamobileltd.com/en/ir/operation_m.php

[5] http://www.ftthcouncil.eu/documents/PressReleases/2018/PR%20Market%20Panorama%20-%2015-02-2018-%20FINAL.pdf

[6] https://www.fastnet.news/index.php/11-fib/703-india-unreal-jio-wants-50m-ftth-in-1100-cities

[7] G.fast Summit May 2015

[8] https://www.theguardian.com/business/2018/feb/01/bt-openreach-hire-3000-engineers-drive-to-fill-broadband-not-spots

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Gigabit Cable Attacks This Year

Introduction

Since at least May, 2014 and the Triple Play in the USA Executive Briefing, we have been warning that the cable industry’s continuous improvement of its DOCSIS 3 technology threatens fixed operators with a succession of relatively cheap (in terms of CAPEX) but dramatic speed jumps. Gigabit chipsets have been available for some time, with the actual timing of the roll-out being therefore set by cable operators’ commercial choices.

With the arrival of DOCSIS 3.1, multi-gigabit cable has also become available. As a result, cable operators have become the best value providers in the broadband mass markets: typically, we found in the Triple Play briefing, they were the cheapest in terms of price/megabit in the most common speed tiers, at the time between 50 and 100Mbps. They were sometimes also the leaders for outright speed, and this has had an effect. In Q3 2014, for the first time, Comcast had more high-speed Internet subscribers than it had TV subscribers, on a comparable basis. Furthermore, in Europe, cable industry revenues grew 4.6% in 2014 while the TV component grew 1.8%. In other words, cable operators are now broadband operators above all.

Figure 1: Comcast now has more broadband than TV customers

Source: STL Partners, Comcast Q1 2015 trending schedule 

In the December, 2014 Will AT&T shed copper, fibre-up, or buy more content – and what are the lessons? Executive Briefing, we covered the impact on AT&T’s consumer wireline business, and pointed out that its strategy of concentrating on content as opposed to broadband has not really delivered. In the context of ever more competition from streaming video, it was necessary to have an outstanding broadband product before trying to add content revenues. This was something which their DSL infrastructure couldn’t deliver in the context of cable or fibre competitors. The cable competition concentrated on winning whole households’ spending with broadband, with content as an upsell, and has undermined the wireline base to the point where AT&T might well exit a large proportion of it or perhaps sell off the division, refocusing on wireless, DirecTV satellite TV, and enterprise. At the moment, Comcast sees about 2 broadband net-adds for each triple-play net-add, although the increasing numbers of business ISP customers complicate the picture.

Figure 2: Sell the broadband and you get the whole bundle. About half Comcast’s broadband growth is associated with triple-play signups

Source: STL, Comcast Q1 trending schedule

Since Christmas, the trend has picked up speed. Comcast announced a 2Gbps deployment to 1.5 million homes in the Atlanta metropolitan area, with a national deployment to follow. Time Warner Cable has announced a wave of upgrades in Charlotte, North Carolina that ups their current 30Mbps tier to 200Mbps and their 50Mbps tier to 300Mbps, after Google Fiber announced plans to deploy in the area. In the UK, Virgin Media users have been reporting unusually high speeds, apparently because the operator is trialling a 300Mbps speed tier, not long after it upgraded 50Mbps users to 152Mbps.

It is very much worth noting that these deployments are at scale. The Comcast and TWC rollouts are in the millions of premises. When the Virgin Media one reaches production status, it will be multi-million too. Vodafone-owned KDG in Germany is currently deploying 200Mbps, and it will likely go further as soon as it feels the need from a tactical point of view. This is the advantage of an upgrade path that doesn’t require much trenching. Not only can the upgrades be incremental and continuous, they can also be deployed at scale without enormous disruption.

Technology is driving the cable surge

This year’s CES saw the announcement, by Broadcom, of a new system-on-a-chip (SoC) for cable modems/STBs that integrates the new DOCSIS 3.1 cable standard. This provides for even more speeds, theoretically up to 7Gbps downlink, while still providing a broadcast path for pure TV. The SoC also, however, includes a WLAN radio with the newest 802.11ac technology, including beamforming and 4×4 multiple-input and multiple-output (MIMO), which is rated for gigabit speeds in the local network.

Even taking into account the usual level of exaggeration, this is an impressive package, offering telco-hammering broadband speeds, support for broadcast TV, and in-home distribution at speeds that can keep up with 4K streaming video. These are the SoCs that Comcast will be using for its gigabit cable rollouts. STMicroelectronics demonstrated its own multigigabit solution at CES, and although Intel has yet to show a DOCSIS 3.1 SoC, the most recent version of its Puma platform offers up to 1.6Gbps in a DOCSIS 3 network. DOCSIS 3 and 3.1 are designed to be interoperable, so this product has a future even after the head-ends are upgraded.

Figure 3: This is your enemy. Broadcom’s DOCSIS3.1/802.11ac chipset

Source: RCRWireless 

With multiple chipset vendors shipping products, CableLabs running regular interoperability tests, and large regional deployments beginning, we conclude that the big cable upgrade is now here. Even if cable operators succeed in virtualising their set-top box software, you can’t provide the customer-end modem nor the WiFi router from the cloud. It’s important to realise that FTTH operators can upgrade in a similarly painless way by replacing their optical network terminals (ONTs), but DSL operators need to replace infrastructure. Also, ONTs are often independent from the WLAN router or other customer equipment , so the upgrade won’t necessarily improve the WiFi.

WiFi is also getting a major upgrade

The Broadcom device is so significant, though, because of the very strong WiFi support built in with the cable modem. Like the cable industry, the WiFi ecosystem has succeeded in keeping up a steady cycle of continuous improvements that are usually backwards compatible, from 802.11b through to 802.11ac, thanks to a major standards effort, the scale that Intel and Apple’s support gives us, and its relatively light intellectual property encumbrance.

802.11ac adds a number of advanced radio features, notably multiple-user MIMO, beamforming, and higher-density modulation, that are only expected to arrive in the cellular network as part of 5G some time after 2020, as well as some incremental improvements over 802.11n, like additional MIMO streams, wider channels, and 5GHz spectrum by default. As a result, the industry refers to it as “gigabit WiFi”, although the gigabit is a per-station rather than per-user throughput.

The standard has been settled since January 2014, and support is available in most flagship-class devices and laptop chipsets since then, so this is now a reality. The upgrade of the cable networks to 802.11ac WiFi backed with DOCSIS3.1 will have major strategic consequences for telcos, as it enables the cable operators and any strategic partners of theirs to go in even harder on the fixed broadband business and also launch a WiFi-plus-MVNO mobile service at the same time. The beamforming element of 802.11ac should help them to support higher user densities, as it makes use of the spatial diversity among different stations to reduce interference. Cablevision already launched a mobile service just before Christmas. We know Comcast is planning to launch one sometime this year, as they have been hiring a variety of mobile professionals quite aggressively. And, of course, the CableWiFi roaming alliance greatly facilitates scaling up such a service. The economics of a mini-carrier, as we pointed out in the Google MVNO: What’s Behind It and What Are the Implications? Executive Briefing, hinge on how much traffic can be offloaded to WiFi or small cells.

Figure 4: Modelling a mini-carrier shows that the WiFi is critical

Source: STL Partners

Traffic carried on WiFi costs nothing in terms of spectrum and much less in terms of CAPEX (due to the lower intellectual property tax and the very high production runs of WiFi equipment). In a cable context, it will often be backhauled in the spare capacity of the fixed access network, and therefore will account for very little additional cost on this score. As a result, the percentage of data traffic transferred to WiFi, or absorbed by it, is a crucial variable. KDDI, for example, carries 57% of its mobile data traffic on WiFi and hopes to reach 65% by the end of this year. Increasing the fraction from 30% to 57% roughly halved their CAPEX on LTE.

A major regulatory issue at the moment is the deployment of LTE-LAA (Licensed-Assisted Access), which aggregates unlicensed radio spectrum with a channel from licensed spectrum in order to increase the available bandwidth. The 5GHz WiFi band is the most likely candidate for this, as it is widely available, contains a lot of capacity, and is well-supported in hardware.

We should expect the cable industry to push back very hard against efforts to rush deployment of LTE-LAA cellular networks through the regulatory process, as they have a great deal to lose if the cellular networks start to take up a large proportion of the 5GHz band. From their point of view, a major purpose of LTE-LAA might be to occupy the 5GHz and deny it to their WiFi operations.

  • Executive Summary
  • Introduction
  • Technology is driving the cable surge
  • WiFi is also getting a major upgrade
  • Wholesale and enterprise markets are threatened as well
  • The Cable Surge Is Disrupting Wireline
  • Conclusions
  • STL Partners and Telco 2.0: Change the Game 
  • Figure 1: Comcast now has more broadband than TV customers
  • Figure 2: Sell the broadband and you get the whole bundle. About half Comcast’s broadband growth is associated with triple-play signups
  • Figure 3: This is your enemy. Broadcom’s DOCSIS3.1/802.11ac chipset
  • Figure 4: Modelling a mini-carrier shows that the WiFi is critical
  • Figure 5: Comcast’s growth is mostly driven by business services and broadband
  • Figure 6: Comcast Business is its growth start with a 27% CAGR
  • Figure 7: Major cablecos even outdo AT&T’s stellar performance in the enterprise
  • Figure 8: 3 major cable operators’ business services are now close to AT&T or Verizon’s scale
  • Figure 9: Summary of gigabit deployments
  • Figure 10: CAPEX as a % of revenue has been falling for some time…

 

Key Questions for The Future of the Network, Part 2: Forthcoming Disruptions

We recently published a report, Key Questions for The Future of the Network, Part 1: The Business Case, exploring the drivers for network investment.  In this follow-up report, we expand the coverage into two separate areas through which we explore 5 key questions:

Disruptive network technologies

  1. Virtualisation & the software telco – how far, how fast?
  2. What is the path to 5G? And what will it be used for?
  3. What is the role of WiFi & other wireless technologies?

External changes

  1. What are the impacts of government & regulation on the network?
  2. How will the vendor landscape change & what are the implications of this?

In the extract below, we outline the context for the first area – disruptive network technologies – and explore the rationales and processes associated with virtualisation (Question 1).

Critical network-technology disruptions

This section covers three huge questions which should be at the top of any CTO’s mind in a CSP – and those of many other executives as well. These are strategically-important technology shifts that have the potential to “change the game” in the longer term. While two of them are “wireless” in nature, they also impact fixed/fibre/cable domains, both through integration and potential substitution. These will also have knock-on effects in financial terms – directly in terms of capex/opex costs, or indirectly in terms of services enabled and revenues.

This is not intended as a round-up of every important trend across the technology spectrum. Clearly, there are many other evolutions occurring in device design, IoT, software-engineering, optical networking and semiconductor development. These will all intersect in some ways with telcos, but there are so many “logical hops” away from the process of actually building and running networks, that they don’t really fit into this document easily. (Although they do appear in contexts such as drivers of desirable 5G network capabilities).

Instead, the focus once again is on unanswered questions that link innovation with “disruption” of how networks are conceived and deployed. As described below, network-virtualisation has huge and diverse impacts across the CSP universe. 5G will likely have a large gap versus today’s 4G architecture, too. This is very different to changes which are mostly incremental.

The mobile and software focus of this section is deliberate. Fixed-network technologies – fast-evolving though they are – generally do not today cause “disruption” in a technical sense. As the name suggests, the current newest cable-industry standard, DOCSIS3.1, is an evolution of 3.0, not a revolution. There is no 4.0 on the drawing-boards, yet. But the relative ease of upgrade to “gigabit cable” may unleash more market-related disruptions, as telcos feel the need to play catch-up with their rivals’ swiftly-escalating headline speeds.

Fibre technologies also tend to be comparatively incremental, rather than driving (or enabling) massive organisational and competitive shifts. In fixed networks there are other important drivers – competition, network unbundling, 4K television, OTT-style video and so on – as well as important roles for virtualisation, which covers both mobile and fixed domains. For markets with high use of residential “OTT video” services such as Netflix – especially in 4K variants – the push to gigabit-range speeds may be faster than expected. This will also have knock-on impacts on the continued improvement of WiFi, defending against ever-faster cellular WiFi networks. Indeed, faster gigabit cable and FTTH networks will be necessary to provide backhaul for 4.5G and 5G cellular networks, both for normal cell-towers and the expected rapid growth of small-cells.

The questions covered in more depth here examine:

  • Virtualisation & the “software telco”: How fast will SDN and NFV appear in commercial networks, and how broad are their impacts in both medium and longer terms? 
  • What is the path from 4G to 5G? This is a less-obvious question than it might appear, as we do yet even have agreed definitions of what we want “5G” to do, let alone defined standards to do it.
  • What is the role of WiFi and other wireless technologies? 

All of these intersect, and have inter-dependencies. For instance, 5G networks are likely to embrace SDN/NFV as a core component, and also perhaps form an “umbrella” over other low-power wireless networks.

A fourth “critical” question would have been to consider security technology and processes. Clearly, the future network is going to face continued challenges from hackers and maybe even cyber-warfare, against which we will need to prepare. However, that is in many ways a broader set of questions that actually reflect on all the others – virtualisation will bring its own security dilemmas, as (no doubt) will 5G. WiFi already does. It is certainly a critical area that bears consideration at a strategic level within CSPs, although it is not addressed here as a specific “question”. It is also a huge and complex area that deserves separate study.

Non-disruptive network technologies

As well as being prepared to exploit truly disruptive innovations, the industry also needs to get better at spotting non-disruptive ones that are doomed to failure, and abandoning them before they incur too much cost or distraction. The telecoms sector has a long way to go before it embraces the start-up mentality of “failing fast” – there are too many hypothetical “standards” gathering dust on a metaphorical shelf, and never being deployed despite a huge amount of work. Sometimes they get shoe-horned into new architectures, as a way to breathe life into them – but that often just encumbers shiny new technologies with the failures of the past.

For example, over the past 10+ years, the telecom industry has been pitching IMS (IP Multimedia Subsystem) as the future platform for interoperating services. It is finally gaining some adoption, but essentially only as a way to implement VoIP versions of the phone system – and even then, with huge increases in complexity and often higher costs. It is not “disruptive” except insofar as sucking huge amounts of resources and management attention, away from other possible sources of genuine innovation. Few developers care about it, and the “technology politics” behind it have helped contribute to the industry’s problems, not the solutions. While there is growth in the deployment of IMS (e.g. as a basis for VoLTE – voice on LTE, or fixed-line VoIP) it is primarily an extra cost, rather than a source of new revenue or competitive advantage. It might help telcos reduce costs by retiring old equipment or reclaiming spectrum for re-use, but that seems to be the limit of its utility and opportunity.

Figure 1: IMS-based services (mostly VoIP) are evolutionary not disruptive

Source: Disruptive Analysis

A common theme in recent years has been for individual point solutions for technical standards to seem elegant “in isolation”, but actually fail to take account of the wider market context. Real-world “offload” of mobile data traffic to WiFi and femtocells has been minimal, because of various practical and commercial constraints – many of which have been predictable. Self-optimising networks (where radio components configured, provisioned and diagnosed themselves automatically) suffered from apathy by vendors – as well as fears from operator staff that they might make themselves redundant. A whole slew of attempts at integrating WiFi with cellular have also had minimal impact, because they ignored the existence of private WiFi and user behaviour. Some of these are now making a return, engineered into more holistic solutions like HetNets and SDN. Telcos execs need to ensure that their representatives on standards bodies, or industry fora, are able to make pragmatic decisions with multiple contributory inputs, rather than always pursue “engineering purity”.

Virtualisation & the “software telco” – how far, how fast?

Spurred by rapid advances in standardised computing products and cloud platforms, the idea of virtualisation is now almost ubiquitous across the telecom sector. Yet the specialised nature of network equipment means that “switching to the cloud” is a lot more complicated than is the case for enterprise IT. But change is happening – the industry is now slowly moving from inflexible, non-scalable network elements or technology sub-systems, to ones which are programmable, running on commercial hardware, and which can “spin up” or down in terms of capacity. We are still comparatively early in this new cycle, but the trend now appears to be inexorable. It is being driven both by what is becoming possible – and also the threats posed by other denizens of the “cloud universe” migrating towards the telecoms industry and threatening to replace aspects unilaterally.

Two acronyms cover the main developments:

  • Software-defined networks (SDN) change the basic network “plumbing” – rather than hugely-complex switches and routers, transmitting and processing data streams individually, SDN puts a central “controller” function in charge of more flexible boxes. These can be updated more easily, have new network-processing capabilities enabled, and allow (hopefully) for better reliability and lower costs.
  • Network function virtualisation (NFV) is less about the “big iron” parts of the network, instead focusing on the myriad of other smaller units needed to do more specific tasks relating to control, security, optimisation and so forth. It allows these supporting functions to be re-cast in software, running as apps on standard servers, rather than needing a variety of separate custom-built boxes and chips.

Figure 2: ETSI’s vision for NFV

                                                                                    Source: ETSI & STL Partners

And while a lot of focus has been placed on operators’ own data-centres and “data-plane” boxes like routers and assorted traffic-processing “middle-boxes” even, that is not the whole story. Virtualisation also extends to the other elements of telco kit: “control-plane” elements used to oversee the network and internal signalling, billing and OSS systems, and even bits of the access and radio network. Tying them all together – and managing the new virtual components – brings new challenges in “orchestration”.

But this begs a number of critical subsidiary questions.

  • Executive Summary
  • Introduction
  • Does the network matter? And will it face “disruption”?
  • Raising questions
  • Overview: Which disruptions are next?
  • Critical network-technology disruptions
  • Non-disruptive network technologies
  • Virtualisation & the “software telco” – how far, how fast?
  • What is the path to 5G? And what will it be used for?
  • What is the role of WiFi & other wireless technologies?
  • What else needs to happen?
  • What are the impacts of government & regulation?
  • Will the vendor landscape shift?
  • Conclusions & Other Questions
  • STL Partners and Telco 2.0: Change the Game
  • Figure 1: New services are both network-integrated & independent
  • Figure 2: IMS-based services (mostly VoIP) are evolutionary not disruptive
  • Figure 3: ETSI’s vision for NFV
  • Figure 4: Virtualisation-driven services: Cloud or Network anchored?
  • Figure 5: Virtualisation roadmap: Telefonica
  • Figure 6: 5G timeline & top-level uses
  • Figure 7: Suggested example 5G use-cases
  • Figure 8: 5G architecture will probably be virtualised from Day 1
  • Figure 9: Key 5G Research Initiatives
  • Figure 10: Cellular M2M is growing, but only a fraction of IoT overall
  • Figure 11: Proliferating wireless options for IoT
  • Figure 12: Forthcoming IoT-related wireless technologies
  • Figure 13: London bus with free WiFi sponsored by ice-cream company
  • Figure 14: Vendor landscape in turmoil as IT & network domains merge

 

Free-T-Mobile: Disruptive Revolution or a Bridge Too Far?

Free’s Bid for T-Mobile USA 

The future of the US market and its 3rd and 4th operators has been a long-running saga. The market, the world’s richest, remains dominated by the duopoly of AT&T and Verizon Wireless. It was long expected that Softbank’s acquisition of Sprint heralded disruption, but in the event, T-Mobile was simply quicker to the punch.

Since the launch of T-Mobile’s “uncarrier” price-war strategy, we have identified signs of a “Free Mobile-like” disruption event, for example, substantial net-adds for the disruptor, falling ARPUs, a shakeout of MVNOs and minor operators, and increased industry-wide subscriber growth. However, other key indicators like a rapid move towards profitability by the disruptor are not yet in evidence, and rather than industry-wide deflation, we observe divergence, with Verizon Wireless increasing its ARPU, revenues, and margins, while AT&T’s are flat, Sprint’s flat to falling, and T-Mobile’s plunging.

This data is summarised in Figure 1.

Figure 1: Revenue and margins in the US. The duopoly is still very much with us

 

Source: STL Partners, company filings

Compare and contrast Figure 2, which shows the fully developed disruption in France. 

 

Figure 2: Fully-developed disruption. Revenue and margins in France

 

Source: STL Partners, company filings

T-Mobile: the state of play in Q2 2014

When reading Figure 1, you should note that T-Mobile’s Q2 2014 accounts contain a negative expense item of $747m, reflecting a spectrum swap with Verizon Wireless, which flatters their margin. Without it, the operating margin would be 2.99%, about a third of Sprint’s. Poor as this is, it is at least positive territory, after a Q1 in which T-Mobile lost money. It is not quite true to say that T-Mobile only made it to profitability thanks to the one-off spectrum deal; excluding it, the carrier would have made $215m in operating income in Q2, a $243m swing from the $28m net loss in Q1. This is explained by a $223m narrowing of T-Mobile’s losses on device sales, as shown in Figure 2, and may explain why the earnings release makes no mention of profits instead of adjusted EBITDA despite it being a positive quarter.

Figure 3: T-Mobile’s return to underlying profitability – caused by moderating its smartphone bonanza somewhat

Source: STL Partners, company filings

T-Mobile management likes to cite its ABPU (Average Billings per User) metric in preference to ARPU, which includes the hire-purchase charges on device sales under its quick-upgrade plans. However, as Figure 3 shows, this is less exciting than it sounds. The T-Mobile management story is that as service prices, and hence ARPU, fall in order to bring in net-adds, payments for device sales “decoupled” from service plans will rise and take up the slack. They are, so far, only just doing so. Given that T-Mobile is losing money on device pricing, this is no surprise.

 

  • Executive Summary
  • Free’s Bid for T-Mobile USA
  • T-Mobile: the state of play in Q2 2014
  • Free-Mobile: the financials
  • Indicators of a successful LBO
  • Free.fr: a modus operandi for disruption
  • Surprise and audacity
  • Simple products
  • The technical edge
  • Obstacles to the Free modus operandi
  • Spectrum
  • Fixed-mobile synergy
  • Regulation
  • Summary
  • Two strategic options
  • Hypothesis one: change the circumstances via a strategic deal with the cablecos
  • Hypothesis two: 80s retro LBO
  • Problems that bite whichever option is taken
  • The other shareholders
  • Free’s management capacity and experience
  • Conclusion

 

  • Figure 1: Revenue and margins in the US. The duopoly is still very much with us
  • Figure 2: Fully-developed disruption. Revenue and margins in France
  • Figure 3: T-Mobile’s return to underlying profitability – caused by moderating its smartphone bonanza somewhat
  • Figure 4: Postpaid ARPU falling steadily, while ABPU just about keeps up
  • Figure 5: T-Mobile’s supposed “decoupling” of devices from service has extended $3.5bn of credit to its customers, rising at $1bn/quarter
  • Figure 6: Free’s valuation of T-Mobile is at the top end of a rising trend
  • Figure 7: Example LBO
  • Figure 8: Free-T-Mobile in the context of notable leveraged buyouts
  • Figure 9: Free Mobile’s progress towards profitability has been even more impressive than its subscriber growth

 

Why closing Telefonica Digital should make Telefonica more digital (and innovative)

Several different CSP organisation designs for Telco 2.0 Service Innovation

Telefonica is one of the companies that we have analysed in depth in the Telco 2.0 Transformation Index research. In this report, we analyse Telefonica’s recent announcement that it is restructuring its Digital Business unit. We’ll also be exploring strategies for transformation at the OnFuture EMEA 2014 Brainstorm, June 11-12, London.

Telco 2.0 strategy is a key driver of organisation design

We have defined Telco 2.0 and, specifically, Telco 2.0 Happy Piper and Telco 2.0 Service Provider strategies in other reports  so will not focus on the implications of each on service offerings and customer segments here.  It is, however, important to understand the implications each strategy has on the organisation in terms of capability requirements and, by definition, on organisation design – structure, processes, skills and so forth.

As Figure 1 shows, the old Telco 1.0 world required CSPs to focus on infrastructure-oriented capabilities – cost, service assurance, provisioning, network quality of service, and congestion management.

For a Telco 2.0 Happy Piper, these capabilities are even more important:

  • Being low-cost in a growing telecoms market gives a company an advantage; being low-cost in a shrinking telecoms market, such as Europe, can mean the difference between surviving and going under.
  • Congestion management was important in the voice-oriented telecoms market of yesteryear but is even more so in the data-centric market in which different applications (including voice) co-exist on different networks – 2G, 3G, 4G, Wi-Fi, Fibre, Copper, etc.

Telco 2.0 Happy Pipers also need to expand their addressable market in order to thrive – into Infrastructure Services, M2M, Embedded Connectivity and, in some cases, into Enterprise ICT including bespoke vertical industry solutions.  For sure this requires some new Service Development capabilities but, perhaps more importantly, also new partnerships – both in terms of service development and delivery – and a greater focus on Customer Experience Management and ‘Customer data/Big data’ in order to deliver valuable solutions to demanding enterprise customers.

For a Telco 2.0 Service Provider, the range of new capabilities required is even greater:

  • The ability to develop new platform and end-user (consumer and enterprise) services.
  • Brand management – not just creating a stolid telecoms brand but a vibrant end-user one.
  • New partners in other industries – financial services, media, advertising, start-ups, developers and so forth.


Figure 1: Capabilities needed for different Telco 2.0 strategies

Fig1 Capabilities need for different Telco 2.0 Strategies

Source: STL Partners/Telco 2.0

Most leading CSPs are pursuing a Telco 2.0 ‘Service Provider’ strategy

STL Partners analysis suggests that the majority of CSPs (and certainly all the tier 1 and 2 players) have at least some aspirations as a Telco 2.0 Service Provider.  Several, such as AT&T, Deutsche Telekom Orange, SingTel, Telefonica and Telenor, have been public with their ‘digital services’ aspirations.

But even more circumspect players such as Verizon and Vodafone which have to date largely focused on core telecommunications services have aspirations to move beyond this.  Verizon, for example, is participating in the ISIS joint venture on payments, albeit something of a slow burn at present.  Vodafone has also pushed into payments in developing markets via its successes with mPesa in Kenya and is (perhaps a slightly reluctant) partner in the WEVE JV in the UK on digital commerce.

Further back in their Telco 2.0 development owing to the attractiveness of their markets from a Telco 1.0 perspective are the players in the rapidly developing Middle Eastern and Asian markets such as Axiata, Etisalat, Mobily, Ooredoo, and Zain.  These players too aspire to achieve more than Happy Piper status and are already pushing into advertising, content and payments for consumers and M2M and Cloud for enterprises.

Telco 2.0 Service Providers are adopting different organisation designs

It is clear that there is no consensus among management about how to implement Telco 2.0 services. This is not surprising given how new it is for telecoms operators to develop and deliver new services – innovation is not something associated with telcos.  Everyone is learning how to take their first tentative steps into the wonderful but worrisome world of innovation – like toddlers stepping into the shallow beach waters of the ocean.

There is no tried and tested formula for setting up an organisation that delivers innovation but there is consensus (among STL Partners’ contacts at least) that a different organisation structure is needed to the one that manages the core infrastructure business.  Most also agree that the new skills, partnerships, operational and financial model associated with Telco 2.0 innovation needs to be ring-fenced and protected from its mature Telco 1.0 counterpart.

The degree of separation between the old and new is the key area of debate.  We lay out the broad options in Figure 2.

Fig 2 Organisation design models for Telco 2.0 Service Innovation

Fig 2 Organisation design models for Telco 2.0 Service Innovation

Source: STL Partners/Telco 2.0

For some, a central independent strategy unit that identifies potential innovations and undertakes an initial evaluation is a sufficient degree of separation.  AT&T and Verizon in the US have gone down this route – see Figure 3.

Fig 3 Organisation design approaches of 9 CSPs across 4 regions

Fig 3 Organisation design approaches of 9 CSPs across 4 regions

Source: STL Partners/Telco 2.0

In this model, ideas that are deemed promising are handed over the operating units to develop and deliver where, frankly, many are ignored or wallow in what one executive described to us as ‘Telco goo’ – the slow processes associated with the 20-year investment cycles of an infrastructure business.

Players such as Etisalat, Mobily and Ooredoo that are taking their first steps into Telco 2.0 services, but harbouring great aspirations, have gone a step further than this and set up Central Innovation Units.   In additional to innovation ideation and evaluation, these units typically undertake piloting, investment and, in some cases, some modest product development.  This approach is a sensible ‘first step’ into innovation and echoes the earlier attempts by many multi-national European players in the early 2000’s that had central group marketing functions that undertook proposition development for several countries.  The benefit is that the company can focus most resources on growth in existing Telco 1.0 services and Telco 2.0 solutions do not become a major distraction.  The downside is that Telco 2.0 services are seen as small and distant are always far less important than voice, messaging and connectivity services or devices ranges that can make a big impact in the next 3-6 months.

Finally, the most ambitious Telco 2.0 Service Providers – Deutsche Telekom, SingTel, Telenor, Telefonica and others – have developed separate New Business Units  The Telco 2.0 New Business Unit is given end-to-end responsibility for Telco 2.0 services.  The units find, develop, launch and manage new digital services and have full P&L responsibility.

STL Partners has long been a fan of this approach.  Innovation is given room to develop and grow under the guidance of senior management.  It has a high profile within the organisation but different targets, processes, people and partnerships to the core business which, left unchecked, would intentionally or unintentionally kill the new ‘rival’ off.

Five Principles for developing a Telco 2.0 New Business Unit

  1. Full control and responsibility.  The unit must have the independence from the core business to be able to control its own destiny and not be advertently or inadvertently impeded by the core business.  Telefonica, for example, went as far as to give its unit a separate physical location in central London.
  2. Senior management support.  While the unit is largely independent, it must be part of the corporate strategy and decisions about it must be made at the highest level.  In other words, the unit must be tied to the core business right at the top of the organisation – it is not completely free and decisions must be made for the overall good of the company.  Sometimes those decisions will be to the benefit or detriment of either the core business or the new business unit.  This is inevitable and not a cause for alarm – but these decisions need to be considered carefully and rationally by the senior team.
  3. Go OTT to start with.  One of the challenges faced by senior managers is how to leverage the capabilities of the core business – the network, customer data, retail outlets, brand, etc. – in the digital services offered by the new unit.  Clearly, it makes sense to use these assets to differentiate against the OTT players.  However, STL Partners recommends not trying to do this initially as the complexity of building successful interfaces between the new unit and the core business will prove too challenging.  Instead, establish some momentum with OTT services that the new unit can develop and deliver independently, without drawing on the core business, before then adding some specific core business capabilities such as location data, customer preference data or network QoS.
  4. Don’t forget to change management incentives …There is no point in filling the new business unit with senior management and fresh talent imbued with new skills and undertaking new business processes and practices unless they are clearly incentivised to make the right decisions!  It seems an obvious point but CSPs have a long and successful infrastructure legacy which means that management incentives are typically suitable for this type of business.  Managers typically have to hit high EBITDA margins, revenue targets that equate to around 50% of the capital base being generated a year, strong on-going capital investment – things that are at odds with a product innovation business (lower EBITDA margins, much lower capital intensity).  Management incentives need to change to reflect this and the fact that they business is a start-up not a bolt-on the core business.  These incentives need to be specific and can affect those in the core business as well as new unit.For example, if collaboration between the new unit and the core business units is a key requirement for long-term success (to build Telco 2.0 services that leverage core assets), then instigate a 360º feedback programme for all managers that measures how effectively they collaborate with their counter-parties in the other business units.  Scores here could be used to determine bonuses, share options or promotion – a sure way to instigate the required behaviour!
  5. …and investor metrics.  As mentioned above, a product innovation business has a different financial model to an infrastructure business.  Because of this, a new set of investor metrics is required focusing on lower margins and capital intensity.  Furthermore, users will often be a key metric rather than subscribers.  In other words, many users will not directly generate revenue (just as they do not for Google or Facebook) but remain an important driver of third-party sponsorship and advertising revenues.  Linked to this, ARPU will become a less important metric for the new business unit because the end user will be one of several revenue sources.

Many of the leading telecoms players have, therefore, done the right thing with the development of their digital units. So why have they struggled so much with culture clashes between the core telecoms business and the new digital innovations?  The answer lies in the way the units have been set up – their scope and role, the people that reside within them, and the processes and metrics that are used to develop and deliver services. This is covered in the next section of this report.

 

  • Even the boldest players are too Telco-centric with their digital business units
  • Defining traditional and new Telco 2.0 services
  • Current digital business units cover all the new Telco 2.0 services but should they?
  • Option: Reduce the scope of the Digital Business Units
  • Telefonica’s recent closure of Telefonica Digital
  • How might Telefonica’s innovation and ‘digital services’ strategy play out?

 

  • Figure 4: Defining Telco 2.0 new services
  • Figure 5: The mixed bag of services found in current digital business units
  • Figure 6: Separate new Telco 2.0 Services from traditional telecoms ones
  • Figure 8: The organisation structure at Telefonica
  • Figure 9: Telefonica’s strategic options for implementing ‘digital services’

Full Report – Entertainment 2.0: New Sources of Revenue for Telcos?

Summary: Telco assets and capabilities could be used much more to help Film, TV and Gaming companies optimize their beleaguered business model. An extract from our new 38 page Executive Briefing report examining the opportunities for ‘Hollywood’ and telcos.

 

NB A PDF of this 38 page report can be downloaded here.

Executive Summary

Based on output from the Telco 2.0 Initiative’s 1st Hollywood-Telco International Executive Brainstorm held in Los Angeles in May 2010 and subsequent research and analysis, this Executive Briefing provides an introduction to new opportunities for strategic collaboration between content owners and telcos to address some of the fundamental challenges to their mutual business models caused by the growth of online and digital entertainment content.

To help frame our analysis, we have identified four new business approaches that are being adopted by media services providers. These both undermine traditional value chains and stimulate the creation of new business models. We characterise them as:

  1. “Content anywhere” – extending DSAT/MSO subscription services onto multiple devices eg SkyPlayer, TV Anywhere, Netflix/LoveFilm
  2. “Content storefront” – integrating shops onto specific devices and the web. eg Apple iTunes, Amazon, Tesco
  3. “Recreating TV channels through online portals” – controlling consumption with new online portals eg BBC iPlayer, Hulu, YouTube
  4. “Content storage” – providing digital lockers for storing & playback of personal content collections eg Tivo, UltraViolet (formerly DECE)/KeyChest

To thrive in this environment, and counter the continuing threat of piracy, content owners need to create new functionality, experiences and commercial models which are flexible and relevant to a fast moving market.

Our study shows that Telco assets are, theoretically at least, ideally suited to enable these requirements and that strategic collaboration between telcos and content owners could open up new markets for both parties:

  • New distribution channels for content: Telcos building online storefront propositions more easily, with reduced risk and lower costs, based on digital locker propositions like Keychest and UltraViolet;
  • Improved TV experiences: developing services for mobile screens that complement those on the primary viewing screen;
  • Direct-to-consumer engagement for content owners: studios taking advantage of unique telco enabling capabilities for payments, customer care, and customer data for marketing and CRM to engage with consumers in new ways;
  • Operational cost reduction for Studios and Broadcasters: Telco cloud-based services to optimise activities such as content storage, distribution and archive digitisation.

To realise these opportunities both parties – telcos and content owners – need to re-appraise their understanding of the value that each can offer the other.

For telcos, rather than just creating bespoke ‘enterprise ICT solutions’ for the media industry – which tends to be the current approach – long term, strategic value will come from creating interoperable platforms that provide content owners with ‘plug and play’ telco capabilities and enabling services.

For content owners, telcos should be seen as much more than just alternative sales channels to cable.

There is a finite window of opportunity for content owners and telcos to establish places in the new content ecosystems that are developing fast before major Internet players – Apple, Google – and new players use their skills and market positions to dominate online markets. Speedy collaborative action between telcos and studios is required.

In this Executive Briefing, we concentrate on the US market as it is both the largest in the world and the one that most influences the development of professional video content, and the UK, as the largest in Europe.

The developments in both are indicative of the types of changes that are facing all markets, although the exact opportunities and challenges are influenced by the existing make up of the video entertainment market in each country and the specific regulatory environment.

This report is part of an ongoing, integrated programme of research and events by the Telco 2.0 Initiative to foster productive collaboration on new business models in the global digital entertainment marketplace.

Sizing the opportunity

The online entertainment opportunity is often talked down by both telcos and media companies. It is, after all, just a small percentage of the current consumer and advertising spend. Examples are easily cited that diminish the value of the opportunity: global Mobile TV revenues (revenues not profits) don’t reach $1bn; on demand represents just 2% of total TV revenues; online film (rental and download) does slightly better but hasn’t yet reached 5% of filmed entertainment revenues.

Individually, these are not the sort of figures that are going to get telco execs bouncing with enthusiasm but collectively (as illustrated below) the annual digital entertainment market reached revenues of $55.4bn in 2009 and has a growth rate approaching 20%. And that figure is even better if you discount digital magazine and newspaper ad revenue. So, even today, digital entertainment is a market that equates to 83% of Vodafone Group’s 2009/10 revenue and it is experiencing the kind of growth that the mobile industry was once famed for. Realistically, the telco share will remain small for some time but as a growth market it cannot be ignored.

Table 1: Global Value of Digital Entertainment by Content Type 2009

Digital Content Type Revenue (US$ bn) % increase year-on-year
Video on Demand

4.09

11.6
Pay-per-view TV

4.56

-1.9
Mobile TV

0.99

7.2
Online and Mobile TV Ads

2.95

17.5
Digital Music Distribution

8.1

29.3
Online Film Rental

4.2

25.8
Digital Film Downloads

0.59

49.3
Online Games

11.63

21.3
Wireless Games

7.31

18.2
Online Game and in-game Ads

1.55

16.2
Consumer Magazine Digital  Ads

1.31

-0.2
Newspaper Digital Ads

5.48

-5.6
Electronic Book Publishing

1.79

50.4
Total

54.55
Average

18.39

 

Source: Telco 2.0 Initiative and PricewaterhouseCoopers Global Entertainment and Media Outlook: 2010-2014

An important factor to note here is the continued growth of digital music distribution revenue. Music can easily be discounted as a medium that has already moved online but it still has a huge amount of growth space as a year-on-year revenue increase of approaching 30% indicates. This is the key point, digital entertainment is a growth opportunity for the next decade and when you look at the size of the physical products that currently serve the markets targeted by these digital alternatives, it is high growth potential for a market that is already of a considerable size, as illustrated in the table below:

Segment Revenue 2009 ($bn)
Television subscriptions and licence fees

185.9
TV Advertising

148.56
Recorded Music

26.37
Filmed Entertainment

85.14
Newspapers

154.88
Trade publishing

148.11
Book publishing

108.2
Total

857.16

Source: Telco 2.0 Initiative and PricewaterhouseCoopers Global Entertainment and Media Outlook: 2010-2014

Once you take out the existing on line spend and those elements, such as movie theatre revenues that won’t move online, the current addressable market is in the region of $700bn a year.

Again, to put that in context at our recent Best Practice Live! online conference and exposition, Anthony Hill from Nokia Siemens Networks valued the web services 2.0 market at $1 trillion.

What is more, there is evidence to suggest that as well as the substitution of digital online for physical and broadcast formats, the virtual world is also bringing additional viewers and potentially additional revenue with it. An extract from Nielsen’s A2/M2 Three Screen Report presented at our 1st Hollywood-Telco Executive Brainstorming, suggests that while online video viewing in the US grew 12% year-on-year and mobile viewing grew 57%, this was not at the cost of TV viewing in the home which also grew, if only very marginally by 0.5%.

It is not surprising therefore that content owners are looking to take advantage of the shifts in the market and move up the value chain to take a greater share of the revenues, and that telcos also want to play a part in a significant growth market. Indeed, the motivations pushing both groups towards digital and online entertainment are truly compelling.

In the next two sections we examine these in more detail.

Telcos: Let us entertain you

Telcos are keen to build a bigger role in online entertainment for four reasons:

  • Entertainment provides the kind of eye catching and compelling content that broadband networks, both fixed and mobile, were built for
  • Broadband networks will carry the traffic irrespective of the role of the telco, so it’s strategically important to play in a part of the business that accounts for a majority of their total data traffic
    (We estimate that online video makes up one-third of consumer internet traffic today and that this could grow more than ten times by 2013 to account for over 90% of consumer traffic overall. That makes it vitally important that telcos understand and maximise the opportunities associated with video and although not all video will be entertainment and not all entertainment is video, video entertainment is a major market driver. For more on broadband data trends, see our latest Broadband Strategy Report)

  • Entertainment is a growth market and the type of opportunity that can help build a Telco 2.0 business that, in conjunction with others, could re-ignite the interest of the financial markets in telecoms as a growth stock

  • It is a defensive play. Cable and DSAT providers are bundling communications services – broadband and telephony – into their service offering, eating into the customer bases of telcos. While telcos are still receiving revenue from these through wholesale, they are losing the direct link to customers and the associated customer information, both of which are integral to the ability of telcos to build effective two-sided business models

Downstream opportunity and challenges

Today, the vast majority of telcos are concentrating their activities in the entertainment arena in downstream activities – in IPTV and mobile TV, backed in some instances by a web TV offering as well. The primary success factors are, as might be expected, coverage/reach, quality of service and of course the appeal of the content. These are pre-requisites for success but there are no universally applicable targets by which we can judge success as so much depends on the competitive landscape within each market.

For example, mobile TV is bigger in China and India than in Western Europe and North America and this is despite the late entry of 3G systems in China and the very recent 3G spectrum auction in India which has kept connection speeds low. Furthermore, TV is far from ubiquitous, covering about 75% of the world’s population and Internet penetration sits around 25% and as low as 12% in developing markets, according to the ITU.

So why is mobile TV getting better take up on 2.5G in India than on 3G and 3.5G in mature markets? The simple answer can be found in the penetration levels of alternatives. Mobile simply has better reach than alternative transmission systems in emerging markets and the same factors influence mature markets with different results.
In developed markets, telcos are becoming part of the entertainment value chain as competitors to cable and DSAT but primarily with IPTV as opposed to mobile which, with a few exceptions, is coming more through content-specific apps than general services.

In the US, Comcast’s COO, Steve Burke recently cited telcos along with other cable providers and DSAT service providers as the company’s competition. Telcos have many options of how to enter the market but the default seems to be to think firstly, if not only, of full IPTV services or mobile TV, driven primarily by the desire to defend their communications markets.

Telcos are competing with TV cable and satellite companies for the home market on two fronts. Firstly to deliver high speed broadband connectivity and secondly to offer TV services. The problem for telcos is that IPTV, their TV service offering, has barely scratched the surface despite recent rapid growth.

According to the Broadband Forum, global IPTV subscribers grew 46% year on year for the first quarter of 2010. This equates to 11.4 million new IPTV subscribers, the most rapid growth in any 12 month period yet recorded and the global IPTV market totaled 36.3 million IPTV as at March 31st 2010. To put that number in some sort of context, according to Nielsen, there are 286 million TV viewers (not subscriptions) in the US alone.

The US IPTV broke the 6 million subscriber mark in the first quarter of 2010 and is growing fast but Europe is taking to the technology faster. France tops the IPTV charts, with just over 9 million users. This is perhaps no surprise given the weakness of its cable and satellite TV markets. Conversely, the UK which has decent broadband penetration, ranking 6th worldwide, doesn’t even register on the top ten for IPTV. Market entry is tough in the UK with BSkyB and Virgin Media dominating the pay TV market and in BSkyB’s case, tying up the premium content.

In many countries, telcos have also struggled to do the deals with studios and TV networks that will secure them the most compelling content and are therefore struggling to compete with cable and satellite services.

IPTV realities

In the US, AT&T’s U-verse and Verizon’s FiOS IPTV services have made some inroads. FiOS had 3 million subscribers at the end of Q1 2010, according to the company which also claims the service is available to 12.6 million premises or 28.8% of Verizon’s footprint. Its TV subscriber base had increased 46% to the end of 2009, while the major cable companies saw their shares drop by one or two percent but in absolute numbers cable remains dominant. Conversely, cable companies have seen their shares of broadband connectivity rise at the cost of the telcos.

Yet for telcos, the investments required for increasing speed and capacity through fibre is high. Fibre certainly represents the future for connectivity but its deployment is a long process and building complete end-2-end IPTV services will not make sense for every area in every country. Indeed, even within the US, Verizon is concentrating on core states and has sold its local wireline operations in 16 states to concentrate on building its fibre business where it is strongest. And fibre rollout is just the start.

Becoming a TV service provider is not straightforward and becoming a differentiated TV service provider is even more challenging. In addition to the technical connectivity, it requires deals to be made with networks to show their programming and, if real differentiation is to be made, deals also have to be brokered with studios, production companies and other owners of content, such as the governing bodies of sports, to secure broadcasting rights. Then it requires the development of an easy to use guide and the ability to at least keep up with the technical developments with which established TV providers are differentiating themselves – HD, 3D and integration with web features, such as social networking sites and delivery across multiple screens. This is a significant undertaking.

Many telcos are recognising that they cannot play every role in the video distribution value chain in every market. Indeed, even in France which we’ve established has receptive market conditions for IPTV, Orange has pulled out of competing in the sports and film genres that so often dictate the success of paid for TV services, and France is not alone.

At our 1st Hollywood-Telco Executive Brainstorm and at the 9th Telco 2.0 Executive Brainstorm, Telecom Italia’s representatives reiterated the company’s belief that IPTV was primarily a defensive play, designed to protect broadband revenues and that entertainment-related revenues would come instead from using telco assets and telco-powered capabilities to build new services around TV.

For Telecom Italia this is primarily about the upstream play based around QoE, CRM, billing and customer data and it also believes a business can be built around context and targeted advertising for free content on three screens. Building such functionality, linking consumer information and data about the environment to supplement TV services themselves and offer similar functionality to third parties is a core strategic decision being made by Telecom Italia, more about which can be seen on Antonio Pavolini’s presentation on our Best Practice Live! event site.

The upstream potential for telcos is something we shall return to later but we also believe that by working with, rather than in competition with studios and other content owners, telcos can become involved faster and more effectively in delivering entertainment services to their customers.

In addition, we believe an alternative and more accessible downstream opportunity exists based on digital rights lockers.

Digital Lockers: an alternative downstream option

Digital rights lockers are virtual content libraries hosted in the cloud that allow consumers to develop collections of content that are not tied to a physical format or device. There are a number of digital locker developments for online video, most notably Disney’s Keychest and UltraViolet, the new brand for the Digital Entertainment Content Ecosystem (DECE), a cross industry development.

These basically mean that a consumer can buy a piece of content once and then view it on any device at any time. For example, if a consumer buys Avatar on Blu-ray disc they would be able to register the disc into an UltraViolet-powered rights locker at the time of purchase or at a later date. Once registered, the digital proof of purchase is held in the cloud and then media service providers – cable companies, telcos etc., can access that information in my rights locker to know that they can deliver it to the consumer.

There are two important points here. The first is that from a consumer point of view it gives them what they want in the form of a one-time purchase for multiple formats; the second is that it breaks the tie between the device and the content. Content, in the form of rights, is held in the cloud, and is delivered in the appropriate form for any supported and registered device.

Ultraviolet works using a network-based authentication service and account management hub from Neustar that allows consumers log in and access digital entertainment they have rights to. The system authenticates rights to view content from multiple services, with multiple devices as well as manages the content and registration of devices in consumer accounts.

It means that content doesn’t keep a user locked with a particular device manufacturer as, for example, iTunes content does to the iPhone or iPad. Therefore if a consumer switches to a different device, assuming it is also supported, content will be viewable.

Furthermore, the fact that UltraViolet has multiple content owners committed, namely Fox Entertainment Group, NBC Universal, Paramount, Sony (which chairs UltraViolet) and Warner Brothers, makes it a strong proposition, as to try to compete with a proposition limited to one vendor, with one that was multi-device but limited to the content of a single owner is unlikely to succeed.

What this means for telcos is that an ecosystem is being built that they can simply tap into. A telco could use an UltraViolet-provided API to build access into its own customers offerings, whether that be IPTV, mobile TV or through a web-enabled storefront. They can access the rights locker in the cloud and see what a consumer is entitled to see and deliver it to them seamlessly. They make the enquiry, and deliver the video to the consumer which is in the right format for the device and complete with the necessary rights attached. An indication of how this flow works is illustrated in the diagram below.

Figure 1: Building the Digital Locker Proposition

Source: Telco 2.0 Initiative

The key point here for telcos is that such an approach overcomes the issues associated with scale and potentially with international distribution deals as well.

Both of these were uppermost in the minds of telco execs at the 1st Hollywood-Telco Executive Brainstorm, who constantly reiterated their frustrations at not being able to get the deals they need to give their customers the content they demand because of high ‘minimers’ and a mismatch between the internal operations and practices of telcos and studios. (See Telco 2.0 in Hollywood: There’s Gold in Them Thar Hills).

Collective activities such as UltraViolet are by definition more difficult to develop than those from an individual company as they require balancing of individual priorities and goals with those of the group. However, as we will discuss in more detail later, the desire of studios to compete with other groups to act as the retail and distribution point, makes working together more desirable.

It is also important to recognise that the strategic choices made by media companies have an impact on the options available to telcos. When media companies work together and create a new ecosystem, the value of upstream services from a single telco diminish, while their ability to enter as a downstream player increases as the open nature of an UltraViolet -like ecosystem allows them to grow incrementally. Should telcos want to play on the upstream side in such communities, then they too need to act collectively.

Telcos’ missed opportunity

Telcos have been notable by their absence in the development of UltraViolet which means many of the upstream capabilities they could have offered – authentication, billing, formatting for different devices – are being developed, at least in the first instance in different ways. However, there could be potential for these to develop over time based on building stronger relationships with the UltraViolet ecosystem, particularly around mobile device support. The formatting of data for specific devices is part of the basic operator function and this expertise could be highly valuable to the UltraViolet community but to be offered as an upstream service, rather than a downstream differentiator, it needs to be a collective proposition from the operator community, not piece meal.

However, if telcos are being challenged to develop new models to engage their customers, then content owners are even more so.

UltraViolet and other digital rights locker solutions open an alternative downstream opportunity for telcos and particularly for those that don’t have the market scale to compete with other Pay TV services. It is a middle ground that enables telcos to build an entertainment portfolio and overcome some of the challenges of building an entirely new business.

Content’s business model crunch

Once upon a time there were only two ways to get content to a large amount of people. Broadcast was one and the other was through a delivery chain made up of distributors, aggregators and retailers. The Internet changed that and high speed broadband access changes it again as even HD video can be accessed by individuals through the Internet, opening up new completion to those traditional channels.

All of these bring new challenges to the existing models of traditional media companies, which are both being challenged and pursuing new opportunities, as illustrated in the table below. The colour coding of the challengers reflects the severity of the challenge in the short to medium term (1-3 years).

Content Owner Category Upstream Business Model Downstream Business Model Upstream Business Challengers Downstream Business Challengers New Business Opportunities
Film Studios None Revenue share from various sales windows – movie theatre, DVD sales, DVD rentals, Pay TV, Free-to-air TV – with the respective distributor/retailer None New online rental and sales channels eg Netflix, LoveFilm, iTunes, plus free and pirates Downstream – sell direct to consumer getting all revenue and expand service offering with merchandising upsell etc

Upstream – create upstream advertising business
Free to Air TV Broadcasters Selling advertising inventory

 

Public/government funding

 

Syndication

 

   Fragmentation of peak audiences;

Google TV and online player services which undermine/destroy the value of advertising.

   Upstream – greater distribution, lifespan delivering more ad value/opportunities; greater value to advertisers based on better measurement; greater targeting and personalisation; instant purchase opportunity.
Pay TV Broadcasters Selling advertising inventory

 

Syndication

 Pay TV services to consumers Google TV and online player services which undermine/destroy the value of advertising. New sellers of TV content – Netflix, iTunes,

New distributors of TV content – Hulu

New Connected TV propositions – particularly Google TV

 Downstream – Maximise value of content with pre-broadcast promotion, post-broadcast access

Upstream – greater distribution, lifespan delivering more ad value/opportunities; greater value to advertisers based on better measurement; greater targeting and personalisation; instant purchase opportunity.
Games Publishers Licensing of IP to third parties eg films, TV, books, comics etc

Ad-funded apps

 Largest share of product sales revenue. Total shared with distributor, retailer + licence fee payable to platforms

In-play features

 Piracy Spiralling costs of production undermining profitability

Online distribution potential to open the market and reduce the power and value of the publisher role; Piracy

 On line potential to break links between the platform and the game and gain larger share of ‘hit’ game revenues; growth and monetisation of casual and mobile games
Independent Games Developers Commissions from Publishers, platforms and studios

Ad-funded apps

 Revenue from product sales revenue shared with distributor, retailer + licence fee payable to platforms Spiralling costs of production undermining profitability; Piracy Spiralling costs of production undermining profitability

 

 On line potential to break links between the platform and the game and gain larger share of ‘hit’ game revenues; growth and monetisation of casual and mobile games
Newspaper/Magazine Publishers Sell advertising inventory Revenue share with distributors and retailers Proliferation of online publications hitting subs bases and diluting value to advertisers. Free is the dominant model

 

 Online proliferation of publications; User-generated publications blogs etc;- readership dropping Online provides opportunity for instant access to news, views – faster turn over and more inventory.

Potential to leverage back catalogue and increase life/value of old articles
Book Publishers None Revenue share with distributors and retailers None Online cutting the price of the product and therefore revenue to be shared Potential to go direct to consumers and dramatically lower production costs
Music Labels Licensing model to third party Revenue share with artists, distributors and retailers None Piracy; Free and low cost online models taking too much revenue out of the value chain to sustain it Have to reinvent business model as opportunity already missed

Source: Telco 2.0 Initiative

For some entertainment sectors, especially the music labels, a major battle if not the entire war has been lost and the fear of following in their footsteps keeps the minds of TV and film studios, as well as publishers focused on the possible threats to their own revenue streams.

For other content owners, such as game developers, the opportunities look to outweigh the threats, as their position in the value chain is currently limited by the strength of the platforms and publishers. Indeed, by examining the games market we can see some of the opportunities that are developing for content owners to usurp failing business models and engage more directly with their customers in many more ways.

Games search for better business model

The online games market is currently the most valuable of online video content businesses but this is predominantly made up from mass online games, such as World of Warcraft, as well as casual games and not from the blockbuster platform games that permeate the market. There has long been a feeling amongst developers and even some of the smaller publishers that the business model is broken, stacking the odds against developers.

Developers, whether in-house with publishers or independent, face burgeoning costs caused by the fragmentation of platforms and the increasing reliance on mega hit games. These cost more and more due to competitive pressure driving the complexity and sophistication of the game itself plus licensing fees paid for IP and to console manufacturers, which bizarrely are paid according to the number of games produced not sold. Currently, average development costs range from $15m for two SKUs (the unit attached to each hardware version) to $30 million for all SKUs and the figures keep on rising. For example, according to Blitz games, it cost $40 million to develop Red Dead Redemption, the current number one best-selling game.

It is not surprising therefore that casual and social games which typically have six month development cycles and cost between $30,000 and $300,000 and mobile games which cost even less, generally in the range of $5000 to $20,000 per title, are attracting more of the time and energies of independent developers. What have been missing in the past are effective routes to market for these but in social networking sites for casual games and app stores for mobile games, these are now reaching mass audiences with ease and both bring new business models to the games industry.

The mobile model is a simple storefront revenue share one, which typically delivers 70% of revenue back to the developer. The causal gaming and social networking tie up is following a freemium model, whereby the basic game is played for free and higher levels, additional features and tools can be purchased. Both of these represent potential channels for ‘hardcore’ games to follow, if and it’s a big if, the experience of the console can be replicated online.
OnLive has become one of the first to examine this potential, launching the first version of its cloud-based games service on June 17, 2010 and we will follow up on the development of this and the business model alternatives and opportunities in an Analyst Note later in the year.

However, while the games market faces up to its own business model challenge, it, like many other content areas, should not be viewed in isolation. Games consoles are providing more functionality than just playing games. They also offer Internet access, apps, voice and are also capable of playing DVDs. Meanwhile, games also have the potential to be accessed via other entertainment channels and this is indicative of the blurring boundaries that have emerged across the entire entertainment arena.

Blurring boundaries

Today, we have global media companies, such as News Corp, that owns Film and TV studios, book and newspaper publishers, TV networks, DSAT and cable service providers.

This convergence is a long-standing trend which has also thrown up some very notable failures, such as AOL TimeWarner. However, the synergies across vertical entertainment sectors mean that companies continue to try for the ultimate media company. Indeed, the online environment only encourages this as the content type is no longer tied to the delivery medium. Furthermore, other companies are moving up and down the value chain. In fact the landscape is more complicated with three distinct but sometimes related trends emerging:

  • The value chain is breaking up with existing players given the opportunity to collapse it down to fewer elements and take a larger share for themselves
  • New players are disrupting the ecosystem with new business models that challenge the value of the existing chain just as it is being reconfigured
  • New functionality, such as integrated apps or extension to the mobile screen, is providing further ways to differentiate services

Each of these alone would be considered an industry challenge; combined they set up a bloody battlefield. What is more, the battle is not limited to a single content type. The distinctions between platforms are also blurring. You can get TV through your games console, films on TV from your pay TV service and TV through the internet and all together these forces are totally disrupting the value chain.

These forces have also prompted the emergence of four different business approaches as follows:

  • “Content anywhere” – extending DSAT/MSO subscription services onto multiple devices eg SkyPlayer, TV Anywhere, Netflix/LoveFilm
  • “Content storefront” – integrating shops onto specific devices and the web. eg Apple iTunes, Amazon, Tesco
  • “Recreating TV channels through online portals” – controlling consumption with new online portals eg BBC iPlayer, Hulu, YouTube
  • “Content storage” – providing digital lockers for storing & playback of personal content collections eg Tivo, UltraViolet /KeyChest

These are not mutually exclusive but are providing new approaches that media service providers are using alone or in combination to create new business models that are disrupting the traditional value chain and building new ones.

Disrupting and rebuilding the value chain

Using the example of video distribution, we can see more clearly how things are changing. The traditional value chain for video distribution (illustrated below) sees a consumer purchase the video content from a retailer, who in turn was supplied via a wholesale distributor who bought from the content creators, and watches it on a device bought specifically for the purpose – TV, video/DVD/Blu-Ray player, games console, hifi, etc.

Figure 2: Video Content Value Chain

Each role has a distinct group of companies that serve it and that are highly competitive amongst themselves but as distribution and delivery moves online, the two end points are moving towards the middle to gain greater control over the market and a larger slice of the pie.

The online digital value chain has the same functions to deliver but which companies should provide these are anything but clear as each player has a shot at cutting some of the others out of the chain completely. The obvious point of collapse is between the distribution and retail elements and this is where the likes of Amazon’s on-demand service come in. However, it is not the only convergence point and content owners should be defining the online value chain to position themselves at the centre of it, not taking what they are given.

In the physical world, selling content straight to the consumer had been a logistical impossibility for content owners other than TV broadcasters but with digital a direct channel to the consumer becomes a distinct possibility. What we now have is the possibility to combine distribution and content creation. For content creators this means direct serving through on-demand services of the Internet.

All the major film studios have their own service on-demand services and provide early access to on-demand content through these. For example, Universal launches films on its site the same day they are offered for release on DVD. This demonstrates that although the sale of DVDs is the most lucrative of the second rights windows, a direct online sales channel is even better value for the studios.

However, while a direct sales channel is good for studios, the highly lucrative DVD/Blu-ray retail market is being threatened from all sides – from subscription rental, from VoD download and streaming and from pirates – all of whom are targeting the online opportunities offered up by physical windows. Therefore studios are attempting to both maximise their opportunity for the new channel and protect their traditional revenue streams. It is a decidedly difficult path to tread and the winners and losers will be inevitably be defined by their ability to pull on the vital parts of the value chain.

Taking each link in the chain in turn, we can see how the four new business approaches are being created and how telcos could contribute to their development.

Content Creation

The major studios have the professional content ownership in the bag, at least for the time being. There is little doubt that while user generated content (UGC) creates an interesting new dynamic, especially for news services, and cheaper and more accessible production and online distribution theoretically opens up greater opportunities for independent productions, neither is close to making a serious challenge in reality.

There have been a few examples of this in music where independent artists have used the internet to distribute and social networks to market their work and thus cut out the need for a music label. Given that the experience that music companies have had with online distribution is the one cited as the one to avoid by all content owners, it is worth watching.

Perhaps a stronger play is to draw on new interactive capabilities to supplement the content creation process, helping to define plot lines and characters. This is an area that has already seen some collaboration between telcos and studios, for example when Sprint worked with WPP’s Mindshare and NBC to create a new character for Heroes. This was in fact seen as a development for advertising, rather than creative content but it establishes a precedent for engagement with a show’s audience.

These are both developments that demand tracking but they’re not the most pressing issue at the moment. That comes from the convergence of the online distribution and retail elements of the video value chain.

Distribution and Retail

The distinguishing line between retailers and distributors is a fading one in the digital world as getting the content from content owner to retailer is a simple electronic process. As a result no distributor is required and the content owner can go directly to the retailer, which, if independent of the studios can also act as an aggregator. So a more likely structure is that content owners will become their own retailers and they will compete with independent aggregator retailers that provide a one-stop shop for content for multiple media companies.

This might appear nothing but positive but without the distributor or a requirement for a physical outlet, retailers have the ability to completely reset the pricing model according to their vastly reduced cost base. Content owners have little or no influence over the prices retailers choose to set one the retailer, or indeed the renter has purchased the selling rights. That has already set a challenge to content owners, as we have seen with Apple iTunes and music and increasingly with TV and film content. The $0.99 film may appear a good deal to the consumer but is it enough to maintain the investment in new film development and once price expectations are set, can they be increased?
Studios are, not surprisingly, anxious to avoid having pricing dictated to them by a single dominant online retailer but to compete effectively they need to differentiate their online stores through content of course but also through the ease of use and relevance of its service.

Unlike telcos, or even cable cos and DSAT service providers, content owners have access to the content to differentiate their online service from competitors. They are of course limited to their own content but with a limited number of top studios or content creators, consumers would be able to find their way to the content they liked the most – just as they find their way to the content they want on different TV channels. But content alone does not a service make and this is the steep learning curve that content owners are embarking on.

A full service requires effective content delivery, quick, easy and secure payment/billing facilities, a slick search and recommendation engine, easy links and access to additional services or more video content and efficient customer care. None of these are core competencies for film and TV studios, or even games developers and publishers. However, they are core assets of telcos, the same telcos that are struggling to get the right level of premium content from the studios. There is a natural synergy here, even more so when you take into consideration the motivations for telcos to get into the entertainment arena.

To this end we have identified core telco assets that could aid that differentiation. These are:

  • Interactive Marketing and CRM, whereby telcos are capable and willing to share the information they hold on customers and their behaviours. These leverage both personal and contextual data to create valuable information services
  • Customer Care – a core telco competency that is completely lacking from the skill set of media companies
  • Three Screen Delivery – telcos have vast experience in identifying devices, the OS and software platforms, detecting software configurations and radio connectivity and transcoding to deliver content in the right format for the device
  • Direct Payments – through the telco bill, one click secure and easy payments are possible, overcoming one of the major obstacles identified to put off prospective customers. Includes the ability to detect account status, billing and payments capabilities
  • Identity-based Content Delivery – the telco ability to identify customers and deliver across platforms provides another way to build a content anywhere business

(For more, see How to Out-Apple Apple).

It will also be important for studios to act quickly as hardware vendors have watched the Apple phenomenon and are looking to get a slice of the pie, meaning there are many more than one new entrant.

New roles – device vendors sell content

Entertainment device manufacturers rely on new formats and technologies linked to content to sell new hardware – eg Hi-resolution and 3D films, TV and games. That is how their business model works but online also gives them potential to move up the value chain and get into the retail sector, grabbing a share of the revenue as Apple has done. It is a process that has been exemplified in the mobile industry. With apps and app stores, manufacturers of devices can build communities and develop the potential for three revenue streams: hardware sales, revenue share on app sales and even software licensing to app developers.

There are two converging trends involved here. On the one hand, entertainment and communications devices are becoming one and the same thing, while on the other, devices are moving up the value chain and vendors are looking to gain revenue from outside of the highly competitive consumer electronics markets.

For example, Sony has built up an Internet community around the PS3, using it as the backbone for its connected TV network. It is looking to gain a recurring revenue stream to go alongside the one-off hardware revenues of the TVs themselves. TV replacement cycles are around 7-8 years and while the speed of innovation is increasing – 3D is coming relatively quickly on the heels of HD when compared to the move from colour to remote control to digital for instance – it is still a more uncertain business and one more influence by macro economical trends than pay TV services.

Sony is particularly interesting because its previously separate divisions serving the consumer electronics and entertainment markets are combining their assets to provide a significant challenger to the value chain. For example, in 2008, the Sony Pictures film Hancock was offered to those in the US who had its Bravia TV sets just a few days after the cinema launch and before the DVD went on sale, completely usurping the window release process that sees films follow a well-defined path from cinema to DVD/Blu-Ray sale, then to rental, followed by pay TV and finally free-to-air TV.

The Hancock experiment has not been repeated and instead Sony has done deals other online distributors for film on its Bravia sets, such as with LoveFilm in the UK, but it does show the potential if, like Sony, a company can control both ends of the value chain. However, the new competition does not end there.

New players – TV changing times

Continuing with the TV example, we can see that traditional TV broadcasters look at web distribution as an opportunity to:

  • Extend their reach beyond the limitations of the time-specific schedule
  • Diversify their offering by creating additional services and interactivity around broadcast services

On the flip side of this though, the web is also a threat as it takes away the broadcaster’s iron control over the distribution channel. YouTube has proved to be a key battle ground as broadcast TV programmes that were one posted for free within minutes now have a fee attached and a raft of country-specific as well a general providers of managed solutions have emerged as quality becomes a greater differentiator.

Taking this a stage further are the internet players, such as Apple and Google, which have both released TV specific services that extend their Internet expertise and services to the TV screen. Most significantly though, these also extend their respective business models to the TV screen. How these fit into and challenge the overall connected TV market is illustrated in the table below, which features a number of players from the US, the biggest market for video entertainment and the UK, Europe’s largest market, that are trying out new business models in attempts to gain a greater share of the market.

Table 4: Who’s Doing What in Connected TV

Consumer Proposition Company Product Business Model Strengths/Weaknesses
Pay to view TV services

 

 Amazon Online retail community – streaming and download Retail model for sale and rental

New Business Approach: Content Storefront

 Strengths -strong online retail brand and community. Cloud based storage and access

Weaknesses – Complex rights management; weak mobile/portable service.
Apple Apple TV box plugs into any HD TV to provide the Apple interface to content through AppStore and iTunes and Mac-like computer navigation. Available now

Rumours persist about a $30 per month subscription service but Apple has not yet been able to secure the content deals to make this happen.

 Hardware sales and 30% revenue share of all film and TV downloads

New Business Approach: Content Storefront & Content Anywhere

 Strengths: Apple Brand; Leverages existing content environment; iPhone, iPad for mobile reach and ads

Weaknesses: On-demand service only, now schedule broadcast; Depends on content it can get – has held up sub-based monthly TV service
Google TV Box from Logitech or embedded in new Sony TV. Leverages Google search capabilities and Android developer community

To launch Autumn 2010

 Revenue share from Android market and extension of  AdWords from Internet to TV

New Business Approach: Content Channel & Content Anywhere

 Strengths: Google brand; search engine; Android App Developer Community and mobile reach;

Weaknesses: Scale -hardware has to be bought; Access to content, currently blocked by 4 major broadcasters in US; Dependence on hardware vendors and content owners
IPTV Verizon FiOS IPTV service with hundreds of channels, VoD and  PVR Triple play service – bundled with broadband and telephony. Defensive activity to protect comms revenues

New Business Approach: Content Anywhere

 Strengths: triple play – have control of both Internet and TV channels into the home; control over the delivery pipe

Weaknesses: Scale; Lack of exclusive access to premium content and content differentiation
Sky Player (UK) Web TV player behind pay wall giving same service to subscribers as they get through satellite TV service Watch anywhere value-add. Defensive play against web TV players

New Business Approach: Content Anywhere

 Strengths: Leverage existing premium content deals and original content – especially sports; Extensive back catalogue

Weaknesses: Ability to control the quality of the experience
NetFlix/LoveFilm Postal and online rental service Subscription model for rental that breaks pay-per-view rental model

New Business Approach: Content Anywhere & Content Channel

 Strengths: Subscription model attractive to consumers wanting set cost; model naturally migrates to online and gets stronger with lower distribution costs

Weaknesses: At the mercy of content owners wanting to protect revenue from other windows; No control over the pipe.
Cable TV Everywhere

In Beta testing on Comcast’s Fancast

 Led by Comcast and Time Warner, this provides online access to their cable content behind a pay wall Watch anywhere value-add to prop up premium subscription packages. Defensive play against web TV players such as Hulu

New Business Approach: Content Anywhere

 Strengths: Leverage existing premium content deals and original content; Extensive back catalogue; Ability to control the quality of the experience

Weaknesses: Late to the game. Limited to those who already have cable subscription – no online only business model
Hybrid Pay and Free Hulu Plus

Launched June 29, 2010

 $10 a month subscription premium service for near real-time access to TV content, on all screens with handover pick up and play across all of them Freemium model building value add on top of the free Hulu service adding subscription revenue to advertising

New Business Approach: Content Channel

 Strengths: access to premium new and catalogued content from its parent companies; two-sided business model; three screen delivery

Weaknesses: access to content outside of that from founders;  no control of QoS of pipe – possible victim of throttling

 
YouTube Free to view video upload for UGC, advertising supported professional content

Experimenting with paid for content

 Ad-funded

New Business Approach: Content Anywhere

 Strengths: Brand, scale and reach; Google technical and financial backing

Weaknesses: High costs of storage; lack of advertising placement
Free to view web TV services Free to Air – Project Canvas (UK) Extension of Freeview (all free to air digital channels)  to the web with full player capabilities Ad-funded

New Business Approach: Content Anywhere

 Strengths: reach – accessible by anyone with web access.

Weaknesses: player functions, such as fast forward, undermine value of advertising ; late to the game; no control over QoS of delivery – possible victim of blocking/throttling
Hulu Free access to a range of Flash-based streamed TV and Internet video. Scheduling based on Ad-funded, although the intention has been announced to introduce some paid services

New Business Approach: Content Anywhere

 Strengths: free access limited only by internet connections; access to premium new and catalogued content from its parent companies

Weaknesses: no control over the quality of the connection – possible victim of throttling; access to premium content from other media companies; non-sustainable business model for most valuable content

Source: Telco 2.0 Initiative

Apple goes it alone

Apple TV is predominantly a pay-as-you-go model based on iTunes; it is a virtual retailer and has pioneered the content storefront model. Interestingly, TV is the first Apple business not to be built around hardware, suggesting that the company believes its online store is strong enough to carry its own business. However, Steve Jobs has referred to Apple TV as a project that will remain a hobby for some time to come. Despite this, Apple still has a strong role influence over the online video market. Its pricing policies for video on iTunes reset pricing levels and its stand on not supporting Flash is not just a technology decision based on the ‘buggy’ nature of Flash as described by Jobs.

Flash fire

Certainly Flash is quite heavy and would slow the iPhone down, so Apple is protecting its user experience but it is also protecting both its up and downstream business models for professionally created video content.

The vast majority of online video services from Hulu to Netflix, LoveFilm and TV network players are Flash based. This means that they can be viewed via a browser by any device that supports Flash. By taking Flash out of the equation, video consumers on the iPhone are left with two choices: get a different device that supports Flash or purchase video content through iTunes and that means more revenue for Apple. Apple talks about HTML5 as the natural replacement for Flash but this is still new technology and Apple will look to maximise its position for as long as possible.

Video service providers or content owners also have two choices: to build a second site that works on HTML5, as the BBC has for the iPlayer; or create apps for the devices as Netflix, LoveFilm and Hulu have. This later again works well for Apple as the apps strengthen the consumers tie to Apple hardware as should the consumer want to move to say an Android device, they’d lose the app, so it reinforces the company’s hardware business model. Furthermore, where applicable, Apple also gets its 30% of the app revenue and of course, SDK revenue.

The decision not to support Flash may have something to do with technology and protecting the user experience but it clearly also has everything to do with reinforcing the strength of Apple’s existing business models.

As with all other services, Apple and Google are taking fundamentally different approaches with Apple expanding its closed iTunes environment, while Google is all open. Apple is betting on taking a share or distribution/retail revenue; Google on turning TV into another and potentially huge extension to its advertising platform.

The big question here therefore is what this means for the broadcaster’s advertising model, as if Google’s version, which is performance-based and uses real rather than predicted data, is available on a TV screen, won’t the value of TV advertising decrease?

In the Apple case, it establishes the direct relationship with the customer, while Google’s play is purely upstream, extending its reach and delivering a new audience to its advertisers.
Apple also has another and for them, more significant objective, and that’s selling new hardware. While its famous Appstore brought in $1 billion dollars in its first complete year of activity, 30% of which went to Apple, that is put into perspective by the company’s total revenues of $13.50 billion and net quarterly profit of $3.07 billion for the second quarter, 2010.

Connected TVs could represent another diversification for the company that has been so successful at moving into the mobile device market and, just as with the mobile industry, Apple is looking to leverage the tight integration of its content marketplace to differentiate its hardware. This has been the primary driver of Apple’s business model but the expectation is that the relatively low retail price of the box and the lack of any real design differentiation means that for TV, Apple will be looking to create value from the service on the big and combine this with tight integration on the portable ones – the iPod, iPhone, and iPad.

Google on the other hand, is working in conjunction with hardware companies, most notably Sony for the Internet-enabled TV end product and Intel to get the Google functionality embedded in the chipsets. And Google’s objectives are not small, as a spokesman for the company have been quoted saying that it aims to have as big an impact on the TV industry as smartphones have had on the mobile world.

Differentiation options

In essence all the forces converging on TV are competing for the eyeballs of the consumer and the way they are doing this is to offer the consumer more choice: more content on more devices to be watched at more times. The consumer utopia it seems is to be able to pick exactly what they want to watch, when they want to watch it and on what screen; or in other words, the complete antithesis of broadcast TV when you get what your given, when its broadcast and always on the same type of screen.

There are however, problems with the utopia and the companies that solve these most effectively will run out the long term winners. As we are starting to establish there are four key points of competition:

  • The range of premium content
  • Integration of Internet apps to enhance the viewing experience
  • The user interface/ guide for finding the content

Extension to the mobile screen for true anywhere anytime viewing and enhancement of the big screen viewing experience

This is not to say that they are the only ways to compete, merely that they are the primary ones at the moment. Of these, only the appeal of content is proven; consumer demand for and willingness to commit dollars to the other three are, as yet, not.

Companies are however beginning to place their bets and while some are predictable, such as Google looking to leverage its search expertise for content discovery and its Android app development community to bring Internet-style services to TV programming; a lot more remain unclear. In particular, the ability of content owners that don’t have an established distribution channel to draw upon, to go directly to consumers is in question.

Interaction with Internet applications

For Google, key is a Software Development Kit (SDK) that will help independent content providers develop widgets to access their platform, content and participate in Google’s advertising revenue sharing program, similar to AdSense on desktop apps.

The Google TV proposition is Android based to draw on the rapidly-growing global developer community to create new and innovative ways for TV viewers to interact with their TVs. Facebook and Twitter widgets would provide easy to use chat facilities around key programming, for example. They are already used and by linking them in real time with the programme screen itself adds a further level of social networking. Beyond that, the possibilities are almost limitless but platform owners must understand what they are doing and the possible impact on existing revenue streams, particularly advertising as they could find their business model undermined.

For example, at a recent conference in London, an ITV representative speaking about Project Canvas stated that widgets and other apps would be uploaded onto the platform for free. Now imagine if an existing advertiser, say BetFair, which advertisers alongside sports events, launched a widget that enabled live betting on the event being broadcast. Why would they pay for advertising in a prime spot when they can launch the widget for free?

So the big Internet companies are coming to the TV party. They bring with them their own business models and these will compete with and impact on those of established TV studios, networks and distributors.

Free to air broadcasting is a simple one-sided upstream business selling advertising timeslots, whereas pay TV has a two-sided business model which adds consumer subscriptions to the revenue pot. A third pay-per-view element also exists for some pay TV services but revenues from these have declined over recent years. Following these developments through, we can see some major changes on the horizon.

Impact on advertising

TV accounts for the largest single proportion of advertising spend. Globally, it secures 36.6% of total ad revenues, according to PWC, and although spending has fallen on TV advertising over the last two it remains a default choice for buyers. It’s the IBM decision – the no one gets fired for making the obvious decision but if the TV world is changing isn’t advertising following suit?

Initially at least, research suggests that the answer is no. The $56 billion US TV advertising segment is expected to recover, growing by 9.8% during 2010 and thus erasing last year’s losses and returning the sector back to 2006 -2008 levels, according to the Magna Global Advertising Forecast, April 13, 2010.

At the 1st Telco-Hollywood Executive Brainstorm, executives were at pains to point out how TV still dominated viewing consumption patterns, delivers a better reaction to advertisements and are therefore seen as more pervasive than radio, print or online. According to the TVB, Nielsen Media Research Custom Survey 2008, cited by one of the speakers, 70% of adults believe that TV adverts are more persuasive than adverts on other mediums. It would seem that the TV/advertising love affair is set fair. However, we believe that the building trend towards on-demand viewing is challenging this particularly for free-to-air broadcast services.

If we take online advertising, we can see that it currently accounts for 12% of marketing budgets versus 34% of time users spend online. However, tying strategy to a delivery medium rather than a business model is a fundamental mistake. It’s not about online or cable or broadcast but live or on-demand. This is the change that undermines the very foundation of TV, broadcast and scheduling.

Scheduling, search and discovery

Of all the new functions that are hitting the market, it is on-demand that is making the greatest impact at this stage. At the 9th Executive Brainstorm, we asked the audience whether discovery would become the new search. The results were negative but it was the wrong question for entertainment and particularly for TV. The bigger question is whether discovery can become the new scheduling?

Broadband connectivity means that there is the potential for anyone to watch what they want, when they want it and where they want to. In theory therefore the individual can do the job of the schedulers of TV networks and channels and personalize it for themselves. This is especially true for the mass of archived material that is the mainstay of a host of cable DSAT pay TV channels. And the usage figures seem to back up the fact that the desire for consumers to control their own viewing is an irreversible trend and not just a short term fad.

A clear trend has developed around time-shifting whether through VoD, on-demand, or delayed TV; watching when the viewer wants and not when the scheduler says, is proving ever more popular. According to ComScore research on US viewing behaviour, 55% of viewers now watch original programming at a time other than when it’s scheduled. Furthermore, although it is a more pronounced feature in the younger demographic groups, it is also permeating the viewing habits of the over 50s and even over 60s, with 43% of the over 65s watching programmes after they had been aired. In short: everyone is time shifting.

However, a completely unstructured service where consumers search for the content they want relies on them knowing what that is. TV is generally regarded as a ‘learn back’ experience. It doesn’t require a huge amount of concentration, unlike say, video games and as such consumers don’t want to and won’t spend protracted periods of time searching for something, especially if they don’t know what they are searching for. Therefore the default becomes to stick with what you know. Just as many of us do with music, our viewing tastes could get stuck in time and we will miss out on new and different content.

We therefore have two contradictory user behaviours driving service requirements for on-demand video. On the one hand, consumers want to choose their viewing not have it thrust upon them, on the other they don’t want to have to make a huge effort to find their viewing.

The viewing guide is one of the most criticised parts of cable, DSAT and IPTV services. Often slow and clunky the guides, which list the schedules for each channel, struggle to deliver the large amount of information they have in a meaningful and useful way. If we then take out the timings and searching becomes even more difficult.
More sophisticated ways of discovering content are needed that encompass search, recommendation and some form of default scheduling and models for this are appearing.

Recommendation engines such as that used by Amazon or Apple Genius, which use observed tastes to make suggestions for future purchases are now well-established practice for online retail. However, there is potential to take this a stage further.

For example, the online radio service Last.fm offers playlists based on popularity of tracks as a default, as well as search and recommendation. This is interesting primarily because it is having the effect of increasing the amount and variety of music listened to by consumers. This may seem to be a nice, fluffy feature, but it is important for the discovery and support of new music talent and therefore the continued life of the industry.

Last.fm has flaws. It runs two business models, a free, ad-funded one in the US and UK and a subscription model in all other territories. This, the company says, is because it doesn’t have the sales capabilities necessary to run an effective ad sales campaign outside of its core territories and which will dominate in the long term is still uncertain but the value of an effective recommendation engine that acts as a scheduler, is.

As one speaker said at the 9th Telco 2.0 Executive Brainstorm in London, the opinions that influence his viewing habits are those of British actor/comedian, Stephen Fry and his mate Dave. No scheduler can do that but an effective mash up of recommendations perhaps through Facebook, Twitter and a purpose built recommendation engine such as Amazon uses, could.

Pay TV services increased choice dramatically over free-to-air alone and split the ad revenue. That took the number or channels from single figures to hundreds. Now imagine what happens when everyone has an individual channel.
The impact is already being felt on advertising revenue as these predictions for the US market from Magna Global reflect.

Table 5: US Ad Revenue According to Platform

PLATFORM 2009 ($$$) Est. 2010 ($$$) Est. 2011 ($$) Est. % Difference
Digital Online $22,843.7 $24,611.7 $26,792.0  + 8.9%
Cable TV $20,148.8 $21,491.7 $22,477.3  + 4.6%
Broadcast TV  $27,789.3   $29,047.9 $27,384.0  – 5.7%

Source: Magna Global data presented at 1st Hollywood-Telco Executive Brainstorm, May 2010

It does, however, mean that advertisers can target far more effectively and finally put to bed John Wanamaker’s infamous adage: “I know 50% of my advertising is wasted, I just don’t know which half.”
However, there are problems with this vision as well.

On the revenue side, it requires new ways to measure viewing of shows and ads, while in terms of the user experience, it is essential to find an effective way for users to find what they want and discover what they will like but don’t yet know about.

Basically this is a data crunching business. It requires personal data, usage information, content meta data, device preferences and more to be combined to create valuable information. Telcos with their knowledge of the customer, device and environment have high value. Even more valuable is the willingness of telcos to share this data with content owners, unlike many of the alternatives.

Extension to the mobile screen

Beyond time and place shifting, the other major area of competition and development is the ability to deliver content across multiple screens. In many ways it is a development of the same trend: consumers do not want to be restricted on where, when and how they view. The seamless shift from one screen to another would, for example, allow a consumer to move from TV to mobile and then to PC as the commute to work.

These pause and pick up services are of course already in existence. Netflix supports this and it is a central part of the cable industry’s TV Everywhere initiative. Meanwhile, the ability to buy once and view on any screen is the functionality at the heart of rights locker propositions such as Disney’s KeyChest or the UltraViolet initiative that we mentioned earlier.

However, we believe that this alone is only part of the story.

User behaviour suggests that consumers actually like to use more than one screen to interact with content. For example, it’s all very well getting detailed stats to accompany a baseball game through a multi-screen view on IPTV say, but this interferes with the primary viewing function. As ESPN has discovered, a more effective approach is to provide the stats to a mobile device through an app, giving the consumer the ability to choose when and how they look up the info. Add in a chat facility and watching the ball game at home becomes a social activity as it would be seeing it live.

Getting the right platform for the right content is not a trivial matter. It is often assumed that the more intense the experience, the more it consumes the viewer, the more valuable it is. Furthermore, the value is assumed to increase the faster the connection gets as this allows greater intensity. This is not necessarily the case.
Some ‘lean forward’ activities can benefit from greater speeds. For example, many online games will improve with faster response times and these are highly immersive activities. However, not all activities require and always benefit from greater immersion. 3D TV has provoked great debate along these lines as the most intense experience is seen to require greater engagement and brain activity, making it a more complete viewing experience but also a less social one.

Sociability is both a sought after and valuable feature and is not necessarily driven by high immersion, high speed experiences. It’s about getting the right device for the experience, related to the user’s activity. And that requires information about what screens the user has, how they use them, where and when. This is the kind of new user data that telcos can collect and use without drawing heavily on complicated legacy BSS and OSS systems.

So, in summary, we have a situation in which online video distribution is a reality and growing at a fearsome pace but the business models and value chain are far from clear. Indeed, the stress points in existing models for both studios and telcos are more obvious than revenue opportunities. Both of these are areas in which telcos are well placed to play an important part.

The next section therefore looks at how the assets and developments of the content and telco industries can be combined for the benefit of both.

Telco and Media Collaboration

The options for telcos are many and the approach taken is dependent on the structure of the entertainment industry in their country and their own set up. Amongst the considerations they must assess are their willingness to collaborate, the assets and skills available to them and the regulatory environment. As we’ve already established, for some IPTV is a viable option, for others mobile as a mainline channel is also worth pursuing as it is the most ubiquitous option.

In addition, a third downstream option is emerging for telcos to be an access provider to digital rights lockers.
On the upstream side, the opportunities are many but they are far less defined and their development seems to be stuck in an endless chicken and egg situation in which each side is waiting for the other to define the services required. To help move this discussion on and to define some near term opportunities we have honed down the list of possibilities by examining what media companies are looking for from telcos.

Where to Start

Surprisingly, combatting piracy which gains so many headlines is not uppermost in the list of priorities, according to our research.Instead the issues that dominate the thoughts of media executives are primarily those that we have outlined earlier, namely the ability to differentiate through delivering across any screen, enhancing the user experience and improving content discovery, as illustrated in the table below. Underlying that is the desire to re-define and build the value of the upstream side of the entertainment business ie advertising.

Table 6: Importance of addressing issues facing media companies rated 1-5*

*Where 1 is of no importance and 5 is critical           Source: 1st Hollywood-Telco Executive Brainstorm, Santa Monica

However, along with piracy, the area in which telcos and entertainment distributors are most likely to interact is in conflict over the quality of the pipe they are receiving.

QoS, QoE and throttling back

Video is all about the viewing experience so anything that influences that experience is of vital importance to content owners and to the retailer/distributor if this is done by a third party such as Hulu, NetFlix or LoveFilm. As these media service providers have no ability to control pipe, they use adaptive rate video technology to sense the bandwidth available and deliver the quality of video the connection is capable of dealing with effectively.

Adaptive rate technology works to a point as it means that they can deliver the best possible video for the bandwidth at any given time. However, the underlying transmission speed and quality is still beyond the control of the media service provider, so though better connectivity may be possible it is not being delivered. Furthermore, within the confines of the thorny net neutrality debate, the throttling of service types and in some instances specific services is happening to the detriment of online video services. For example, in the UK, LoveFilm has examples of customers with 20MBit/s connections unable to get a satisfactory service even though other video streaming services including the BBC iPlayer work perfectly well.

Telcos want a share of the video revenue that is being generated over their networks, and in throttling, deliberately reducing the speed of connections, they have a stick to beat media service providers with, should they wish to and be allowed to use it. However, just like DRM, throttling is a negative activity and will serve no positive purpose as consumers are just as likely to move ISPs if their services don’t work as they are media service providers. If they want certain content, they will find a way to do and don’t be surprised if such throttling activities pushes more consumers to Pirate Bay and its like where an additional wait will be tolerated to download rather than stream and content comes free.

So is there a better relationship to be had?

Charging for QoS/QoE SLAs to media service providers would be the first choice of telcos and while our research suggests that telcos believe this to be more of a possibility now than a year ago, our view is that it is still a service that requires consistent failures in the market in order to prove its value before it could become a capability media service providers will pay for en masse. Therefore if telcos can’t charge upstream players for a guaranteed pipe, at least in the short term, they need to look at other what other telco assets can offer media companies.

In our analyst note, ‘How to Out-Apple Apple’, we identified a series of telco assets that could be valuable to media companies that are or are intending to sell their content directly to customers through online outlets. These and how they add up against competitors are summarised in the table below.

Table 7: Telcos Offer Unrivalled Asset Combination

Payments Content Delivery User Experience – 3screen Interactive Marketing/ CRM Customer Care
Apple Yes Yes No No* No
Amazon Yes Yes No No* No
Netflix Yes Yes No No No
Cable Cos/Satellite Yes Yes Partially Partially Yes
Other enablers Banks, Credit Cards, PayPal Eg Akamai, L3, Limelight – Marketing Ad Agencies Outsource
Telcos Yes Yes Yes (Converged telcos) Yes Yes

*Apple and Amazon have interactive marketing and CRM functions but do not pass data on to content owners.
Source: Telco 2.0 Initiative

At our first Telco-Hollywood Executive brainstorm the value of these telco assets and other capabilities were discussed and rated. All were recognised as offering possible value to studios in the development of their own services. As the graph below shows, it was the functions nearest to the consumer that rated the highest.

Table 8: Telco Capabilities Rated (1-5*) According to Their Perceived Value to Content Owners

*Where 1 is not valuable at all and 5 the most valuable
Source: 1st Hollywood-Telco Executive Brainstorm, Santa Monica

Again, the value of owning the network infrastructure is recognised as hosting content locally and ensuring its effective delivery are natural roles for telcos to take on. Usage and access distribution is the next highest rated capability and the expectation from studios and media companies is that telcos should enter the market as media service providers in some form or another and the downstream market should not be ignored. That said, those assets that are a stage further removed from consumers were also rated as valuable.

Identification and authentication, payments, decision support and data mining (listed under the heading of Interactive Marketing /CRM in table 7) and content protection are all rated as useful. However, there is a caveat here in that what media companies want is complete solutions not raw data or APIs that they then have to build services around.

Over the next 12 months, telcos need to develop complete solutions that can meet the needs of media companies. Simply saying that they have the assets and capabilities is not enough. Also the speed with which the market is changing means that solutions need to be developed fast as the window of opportunity for media companies to gain a more powerful position in the ecosystem will be relatively short. New and powerful players are entering the market and putting pressure of established price paradigms. Once changed these are difficult if not impossible to change back until serious failures in the market appear. The next 1-2 years are therefore vital.

From a telco point of view, this makes playing upstream difficult if they have not already begun to develop solutions that could be packaged for media companies. Downstream opportunities are in some ways less time sensitive but the current market flux offers up opportunities to establish a position that will be harder to reach when it is more stable.

Strategic choices

Telcos therefore have a series of strategic decisions to make about how and where they play in the entertainment market. We have developed a structure of generic strategy choices based on the willingness and ability of telcos to move on and off their own network and whether they intend to offer and end-to-end solution to consumers or play a specific and limited role in the ecosystem. The overall strategies these choices create are illustrated in figure 3 below.

Figure 3: Generic Two-Sided Business Model Strategies

Source: Telco 2.0 Initiative

Taking this a stage further, we can map this general theory onto the specific choices facing telcos in the entertainment market to create a framework with four different approaches to telco involvement in the entertainment ecosystem. As the market is developing, on-net activities are providing the greatest opportunities, as illustrated in figure 4 below.

Figure 4: Entertainment-specific Business Model Strategy Choices

Source: Telco 2.0 Initiative

Entertainment is an increasingly complicated market with collapsing value chains, new entrants and new technologies that are allowing established players to compete in different ways. Having a clear idea of where telcos fit into this dynamic market structure is important and there are roles for telcos to both support media companies in their attempts to go directly to consumers and to go directly to consumers themselves. A second phase, supporting multiple third party platforms and media service providers may emerge but this is a stage further removed as these are currently competing with what telcos and media companies are trying to do themselves.

Taking a look at the bottom left quadrant – enabling media companies to develop a direct sales channel – in more detail, it is possible to identify a range of way in which to do this. There are firstly a range of activities and assets that can be undertaken, as we have already outlined above, and secondly there is a range of ways in which to utilise those assets.

Using Telco 2.0’s established gold analogy, we can see that telcos have the opportunity to be more or less involved; to offer what they have in raw data to media companies and let them do as they wish with it at one end of the scale, right through to offering a complete end-2-end service.
Examples of what type of entertainment-orientated services can be offered at each stage by telcos are illustrated below.

Figure 5: Possible Telco Roles in Entertainment Industry

Telco 2.0 research suggests media companies put greatest value on telco assets that are packaged to them as services. As illustrated above, this means a managed one click payment capability, not an API on top of which they have to build their own payment service. What is more, they want things that have been proven to work, either for other industries or for the telcos itself. Eating your own dog food is not just a sound bite to be trotted out at conferences, it’s an essential tactic if telcos are going to gain credibility as upstream suppliers to the entertainment industry.

Fortunately this is something the telecoms industry is recognising, as a vote at the recent Telco 2 Executive Brainstorm in London where delegates demonstrated that to take full advantage of the customer data they have, they must first find ways to use it effectively themselves. During the session focused on the use and monetisation of customer data, the 180-strong group of executives were asked to rank 1 to 4, the importance of different strategies for beginning to use the customer data they hold in the short terms (next 12 months), using it for their own purposes ranked the highest.

Telco’s two-sided business model for entertainment

There is little doubt that telcos have a strong strategic interest in the entertainment industry both for its opportunity to grow and its impact on their existing businesses. However, they are entering a market that is itself in flux and the opportunities are neither well defined nor static. The market is constantly changing and so are the possible roles and activities open to telcos. Under such circumstances a two-sided approach to the business makes even more sense, giving more choice and opportunity to build revenue as illustrated below.

Figure 6: Telco two-sided business model for entertainment

 

Source: Telco 2.0 Initiative

However, the extent to which a specific telco gets involved in the up and downstream opportunities will depend on the specific market conditions, together with the skills and assets of the telco. These must also be mapped onto the needs of media companies as telcos must be aware of what the market is looking for.

Over the coming months we will look at each of the downstream models in detail, examining the conditions that make each play viable, together with the tactics that make each downstream strategy effective.

In addition to these we will develop use cases and identify case studies that help define realistic opportunities for upstream services.

Conclusions

  1. The transmission of entertainment online represents a significant growth market for at least the next decade. The addressable market is in the region of $700bn a year and growing, although it will take more than a decade if it ever happens to turn all entertainment into digital/online forms
  2. Content owners are being challenged by the changing patterns of distribution, retail and viewing and are looking to secure their place in new value chains that at least protect, if not increase their existing revenue streams
  3. Although the risks to content owners vary across genres, a major set of opportunities centre on the ability of content owners to go directly to consumers which requires a skill set outside of the core competencies of media companies. Telcos have many, if not all of these capabilities
  4. A second set of opportunities exist for media companies to work together to build ecosystems with their content at its heart that compete favourably with the offerings of new internet players. UltraViolet is an example of this which could compete with Apple iTunes. These approaches create new and better downstream opportunities for telco as they lower the barriers to telcos to enter the entertainment delivery business and allow them to build the business incrementally
  5. Complete end-2-end services in the form of IPTV require significant scale and huge investment. The success of these will be dependent on achieving these and they are heavily impacted by the maturity of competing solutions such as cable and DSAT. Therefore, while prospects look good in for telcos with large market shares that operate markets with weak pay TV markets, the majority of telcos will find differentiation through IPTV difficult and its deployment is therefore best seen as a defensive tactic against telephony and broadband service provision by TV service providers

  6. Other downstream plays are possible for telcos including:

    • Maximising the mobile opportunity by using it to enhance experiences on other screens and not just as another delivery channel. Telcos and content owners need to collaborate to develop value-added services that consumers will pay for
    • Operating as effective storefronts for entertainment content. Telcos have the customer scale, billing, customer information and CRM capabilities that make them ideal retailers but to be effective, telcos must offer content owners more than existing online retailers, such as Apple and Amazon. Of particular importance here is a willingness and ability of telcos to pass back to content owners on data about customer activity
    • The storefront proposition is strengthened further by developments such as UltraViolet which would enable telcos to build propositions while taking out the risk for both content owners and telcos
  7. Telcos have a range of core assets that could enhance the ability of content owners to move up the value chain and go directly to consumers and therefore gain a greater share of the entertainment revenue pie
  8. No other player has the range of enabling capabilities telcos have. However, the Telco USP is in combining these enablers and telcos must look at packaging them together as plug and play services for content owners. These need to apply across content categories (and possibly extend to other vertical markets) so that telcos can turn a niche vertical service into a broader and more valuable opportunity
  9. There is a finite window of opportunity for content owners and telcos to establish places in the new content ecosystems that are developing before major Internet players – Apple, Google – and new players use their skills and market positions to dominate those ecosystems. Speedy collaborative action between telcos and studios is required

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.

Full Article: Google anchors its carrier off the coast of Telcoland

Introduction

Google has “pre-bid” for a large block of radio spectrum in the US’s 700MHz ex-TV band. They want it to be sublicensed for public access. So why would anyone want nonexclusive spectrum? Isn’t it a contradiction in terms? And what does Google plan to do with it?

googleship

Google: Emerging Backbone

It’s well-known that Google’s infrastructure development has involved quite a lot of telcolike activity. For some years, Google has been a major buyer of dark fibre, constructing its own private (and apparently IPv6) backbone between its data centres. This makes a lot of sense; the opex cost of one’s own fibre is not great, especially for a company with hordes of its own engineers and network administrators, and fibre is a long-lived asset.

Therefore, Google seems to be assuming that a substantial fraction of its wholesale transit bill is made up of other people’s profits. Assuming that they expect to be in business a long time yet, the depreciation cost of buying dark fibre is minimal; it beats filling Level 3’s pockets, or relying on AT&T when AT&T likes to talk about charging Google packets at higher rates.

But this is all backbone networking. Nobody would seriously suggest using 700MHz for backbone/backhaul; range and penetration are inversely correlated with frequency, which is why the 700s are so coveted, but throughput is positively correlated with frequency, which is why high-capacity point-to-point microwave links are 5GHz and above.

The Access Cartel

Google’s real strategic problem, vis-a-vis the US telcos, is their oligopoly of access networking. In fact, it’s more like a group of regional monopolies, and the same goes for cable-TV operators. Throughout Internet history, and indeed telecoms history, long lines has been more competitive than local; the reason being that value is geographically concentrated in long distance and bulk IP, but dispersed in local, and that therefore the capital required to build an alternative local loop is prohibitively large. If AT&T did go through with Ed Whitacre and Randall Stephenson’s bloodcurdling threats of last spring, there’s always Level 3, Savvis, and GoogleNet itself for the backbone – but at the local level, there’s no substitute for tubes.

Should the Bells gang up on Google, there’s also another option; apply YouTube tactics to the infrastructure. Having a big long lines fibre network gives Google the option of becoming a backbone operator itself, and announcing that it will peer with independent ISPs. These, of course, rely on leasing telco lines to reach their customers; at this point, Big Telecom would be faced with a choice of pulling the plug on millions of customers (and probably getting involved in a mass of antitrust litigation) or backing down.

But they might still be vicious enough to go through with it. What then? In the absence of anything like local-loop unbundling, British-style, you might think Google (and the wider Internet community) would run out of options. This is where radio comes in. The CAPEX to deploy a radio network is considerably less than digging up the roads, especially if you already have spectrum. And technological change is making it more so; WiMAX equipment looks likely to be dramatically cheaper than cellular. Better yet, Google doesn’t have to pay; sublicensing the spectrum would mean that independents, municipal networks, and others could finance their own radio-access network. Alternatively, Google’s interest in Wi-Fi sharing (Fon), femtocells (Ubiquisys), and metro-WLAN (Google’s project in Mountain View) suggests they might be thinking in terms of user-provided infrastructure.

Perhaps such a system would offer free connectivity to GoogleNet, but charge for anything further? That would match with the cost base – anything on your own network is cheap relative to anything you have to pay for in kind (peering) or cash (transit). And it would – dare we say it – be rather Telco 2.0? It is worth noting, though, that Google itself has so far been far keener on HovisNet (Internet with nowt taken out) access than anything like that.

Balance of TerrorTelco

Put another way, securing access to the radio spectrum is the remaining chunk of Google’s strategic triad; rather than land-based missiles, submarine-based missiles, and aircraft, though, it consists of dark fibre, peering with the dark fibre, and radio.

There’s a long way to go before this is tested. It’s possible that regulatory action, Net Neutrality legislation, or simply a realisation that IMS everywhere costs too much, will render the whole thing moot. And there’s also a counter-strategy before using the deterrent; Google has just announced a partnership with Sprint-Nextel to develop services on its big WiMAX network. S/N hasn’t been anywhere near as keen on building a neo-Bell world as the neo-Bells; after all, it is itself a product of the competitive era in telecoms. So we might want to include Sprintlink in the backbone section of Google’s deterrent, and its various radio systems in the access side.