Growing the Digital Economy: Lessons from Brazil, Mexico, and Iran

Introduction

Recent data on the growth of the Internet shows that different public policies have dramatically different impacts. In Latin America, two nations following very similar policies are achieving spectacular success, both in terms of raw quantity and in terms of deeper qualitative improvement, while other countries, sometimes with higher per-capita GDP, pursue different policies and see radically worse results.

In the Middle East, there is evidence of a similar breakout to development in some surprising countries, which turn out to be adopting key elements of the policy mix that has been successful in Latin America.

Renesys, a US company which provides software tools to monitor Border Gateway Protocol BGP routing activity, also collects large amounts of data on the structure of the Internet as a by-product of this activity. In May 2013, they issued a fascinating blog post, which drew attention to the dramatic development gap emerging between – for example – Brazil and Argentina on one hand, and Mexico on the other.

AS numbers: a key metric for Internet participation

What Renesys was looking at was the count of ASNs (Autonomous System Numbers) over time, a measure that we believe gives an excellent and profound indication of the development of the internet.

ASNs identify networks that control their own routing policy and IP address block. The voluntary interconnection of autonomous systems through BGP routing, which is based on AS numbers, makes up the fundamental structure of the Internet. In this sense, counting ASNs is a better metric than counting subscribers, domain names, Web sites, or IP addresses, because it is a measurement of participation in the Internet, not just consumption of cat videos and Google adverts. The creation of new ASNs is evidence that new businesses, organisations, content providers, hosting and cloud computing providers, and ISPs are emerging. It is evidence that technical competence is diffusing through society.

Because an ASN is the entry ticket to Internet peering, it’s also evidence of growing direct interconnection between networks, the fundamental purpose of the Internet, and the source of reliable, resilient, and high-performance service. In important ways, more AS numbers shows not just quantitative growth, but also qualitative improvement.

So how does the scoreboard look?

Figure 1: Brazil & Argentina Lead The Way
Latin America: New ASNs Feb 2014

Source: Renesys data, STL Partners visualisation

Argentina is doing well; Brazil is doing incredibly well; Mexico is either stable, or stagnant. We’ve labelled the chart selectively, so you can also see that among the poorer and smaller Latin American nations, Costa Rica is doing very well while Venezuela is doing poorly.

Mexico’s per-capita GDP at purchasing-power parity was calculated at $15,312 in 2012 dollars by the IMF, whereas Argentina’s was $18,112. But this gap doesn’t explain what’s going on here. Brazil’s was $11,875, and the Brazilian Internet is doing even better. Clearly, money is not enough. Every year, Brazil adds as many ASNs as there are in the whole of Mexico. This is a reflection of vastly different government policy and market structure. Similarly, there doesn’t seem to be any reliable link between population, ASN growth, or how many citizens there are for each ASN, as the following chart shows. Even GDP is a very weak predictor.

Figure 2: Policy, not population or GDP, drives Internet growth
It's not population nor GDP Feb 2014

Source: STL, IMF data, ANATEL

 

  • Executive Summary
  • What did Brazil get right?
  • A More Democratic Internet: Understanding the Problem from a Latin American Viewpoint
  • A Policy Mix That Supports Innovators
  • What did Mexico and others do wrong?
  • Monopolies lead to inertia
  • State Telecoms: not a great strategy either
  • Taking A Similar View On The Middle East
  • Censorship and Internet Development
  • Wholesale Transit as a Weapon
  • Conclusions
  • About STL Partners

 

  • Figure 1: Brazil & Argentina Lead The Way
  • Figure 2: Policy, not population or GDP, drives Internet growth
  • Figure 3: Brazil has been adding 700+ new local ISPs a year
  • Figure 4: The Middle East by ASN count
  • Figure 5: Iran’s Internet Flourishes Behind the Firewall
  • Figure 6: In the Middle East, it’s policy that matters too

Digital Commerce 2.0: New $50bn Disruptive Opportunities for Telcos, Banks and Technology Players

Introduction – Digital Commerce 2.0

Digital commerce is centred on the better use of the vast amounts of data created and captured in the digital world. Businesses want to use this data to make better strategic and operational decisions, and to trade more efficiently and effectively, while consumers want more convenience, better service, greater value and personalised offerings. To address these needs, Internet and technology players, payment networks, banks and telcos are vying to become digital commerce intermediaries and win a share of the tens of billions of dollars that merchants and brands spend finding and serving customers.

Mobile commerce is frequently considered in isolation from other aspects of digital commerce, yet it should be seen as a springboard to a wider digital commerce proposition based on an enduring and trusted relationship with consumers. Moreover, there are major potential benefits to giving individuals direct control over the vast amount of personal data their smartphones are generating.

We have been developing strategies in these fields for a number of years, including our engagement with the World Economic Forum’s (WEF) Rethinking Personal Data project, and ongoing research into user data and privacy, digital money and payments, and digital advertising and marketing.

This report brings all of these themes together and is the first comprehensive strategic playbook on how smartphones and authenticated personal data can be combined to deliver a compelling digital commerce proposition for both merchants and consumers. It will save customers valuable time, effort and money by providing a fast-track to developing and / or benchmarking a leading edge strategy and approach in the fast-evolving new world of digital commerce.

Benefits of the Report to Telcos, Other Players, Investors and Merchants


For telcos, this strategy report:

  • Shows how to evaluate and implement a comprehensive and successful digital commerce strategy worth up to c.$50bn (5% of core revenues in 5 years)
  • Saves time and money by providing a fast-track for decision making and an outline business case
  • Rapidly challenges / validates existing strategy and services against relevant ‘best in class’, including their peers, ‘OTT players’ and other leading edge players.


For other players including Internet companies, technology vendors, banks and payment networks:

  • The report provides independent market insight on how telcos and other players will be seeking to generate $ multi-billion revenues from digital commerce
  • As a potential partner, the report will provide a fast-track to guide product and business development decisions to meet the needs of telcos (and others) that will need to make commensurate investment in technologies and partnerships to achieve their value creation goals
  • As a potential competitor, the report will save time and improve the quality of competitor insight by giving a detailed and independent picture of the rationale and strategic approach you and your competitors will need to take


For merchants building digital commerce strategies, it will:

 

  • Help to improve revenue outlook, return on investment and shareholder value by improving the quality of insight to strategic decisions, opportunities and threats lying ahead in digital commerce
  • Save vital time and effort by accelerating internal decision making and speed to market


For investors, it will:

  • Improve investment decisions and strategies returning shareholder value by improving the quality of insight on the outlook of telcos and other digital commerce players
  • Save vital time and effort by accelerating decision making and investment decisions
  • Help them better understand and evaluate the needs, goals and key strategies of key telcos and their partners / competitors

Digital Commerce 2.0: Report Content Summary

  • Executive Summary. (9 pages outlining the opportunity and key strategic options)
  • Strategy. The shape and scope of the opportunities, the convergence of personal data, mobile, digital payments and advertising, and personal cloud. The importance of giving consumers control. and the nature of the opportunity, including Amazon and Vodafone case studies.
  • The Marketplace. Cultural, commercial and regulatory factors, and strategies of the market leading players. Further analysis of Google, Facebook, Apple, eBay and PayPal, telco and financial services market plays.
  • The Value Proposition. How to build attractive customer propositions in mobile commerce and personal cloud. Solutions for banked and unbanked markets, including how to address consumers and merchants.
  • The Internal Value Network. The need for change in organisational structure in telcos and banks, including an analysis of Telefonica and Vodafone case studies.
  • The External Value Network. Where to collaborate, partner and compete in the value chain – working with telcos, retailers, banks and payment networks. Building platforms and relationships with Internet players. Case studies include Weve, Isis, and the Merchant Customer Exchange.
  • Technology. Making appropriate use of personal data in different contexts. Tools for merchants and point-of-sale transactions. Building a flexible, user-friendly digital wallet.
  • Finance. Potential revenue streams from mobile commerce, personal cloud, raw big data, professional services, and internal use.
  • Appendix – the cutting edge. An analysis of fourteen best practice and potentially disruptive plays in various areas of the market.

 

The Internet of Things (IoT): What’s Hot, and How?

Summary: ‘The Internet of Things’ (IoT) is one of the big ideas of the moment. But what are the areas in which value is being created now, and what is still technological hype? A summary of the findings of the Digital Things session at the 2013 Silicon Valley Brainstorm. (April 2013)

Building Blocks Urgently Needed for IoT April 2013

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Below are the high-level analysis and detailed contents from a 47 page Telco 2.0 Briefing Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service here. The Internet of Things will also be explored further at the EMEA Executive Brainstorm in London, 5-6 June, 2013, and we also run dedicated IoT Strategy Workshops. Non-members can find out more about subscriptions here or to find out more about any of these services, please email contact@telco2.net or call +44 (0) 207 247 5003.

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Introduction

Part of the New Digital Economics Executive Brainstorm series, the 19th Telco 2.0 event took place at the InterContinental Hotel in San Francisco on the 19th and 20th of March, 2013. This report covers the Digital Things track on the second day, which was developed in partnership between STL Partners and Beecham Research.

Analysis: What’s Hot in the IoT?

‘The Internet of Things’ (IoT) or ‘The Internet of Everything’ is one of the big ideas of the moment. But how much is technological hype and how much is value-creating reality?

Its close relative and precursor ‘Machine-To-Machine’ (M2M) had until relatively recently evolved as a telco-centric concept. Unlike the personality, publicity and hype driven world of smartphones and the Internet, M2M has been deeply embedded in industry processes, and generally siloed in industry verticals. ‘Industrial M2M’ is not going away: indeed it’s gathering pace and taking on new directions.

But recently the idea of ‘The Internet of Things’ has become something of a meme. It is certainly a hot topic amongst Silicon Valley technologists and investors, and this was reflected in the enthusiasm shown by the participants at our Executive Brainstorm in March 2013.

Definitions of the IoT vs. M2M are not yet standardised, although some of the common themes that are emerging are that the IoT is frequently cited as:

  • More consumer-oriented than M2M. IoT is often B2B2C, and with the second ‘B’ sometimes meaning ‘Government’;
  • Dependent on cross-application data (data generated by or for one application being repurposed for another);
  • More like the Web – discoverable, ‘mashable’, self-registering… with all the potential hazards associated with the Web;
  • Bringing added value through revenue growth and/or enhanced customer experiences as well as reduced costs.

Some of the wider excitement has also been underpinned by futuristic predictions of 50bn connected devices, an idea which appeals to chip manufacturers, vendors, and telcos alike as they seek new avenues of growth. However, the questions of ‘but what will they be used for, why, and who will pay for it?’ have to date stood their ground, mostly unanswered.

Economic necessity: the mother of innovation

Now, though, a combination of pressing economic necessities, improving economics of delivery, and increasing technical capabilities is forcing these questions up the agenda. In the North American market, the areas that are progressing fastest have clear economic rationales:

  • In US healthcare, which spends 17% of GDP on health and accounts for 47% of the world’s total healthcare spending) there is the urgent need to make healthcare more efficient before it literally bankrupts the economy;
  • In the automotive industry, car makers desperately need new sources of differentiation and revenues (from in-life servicing) to survive, and this is driving widespread innovation;
  • In heavy Industries, it is estimated that a 1% improvement in productivity equals a 20-30% improvement in profitability, so there are clear incentives in what GE CEO Jeffrey Immelt calls the “Industrial Internet” too.

New blocks means new enablers are needed

With new opportunities come new challenges, and one of the biggest new challenges, arising from healthcare applications in particular, is how to manage the complexities of collecting, transmitting, storing and analysing highly personal and personalised health data safely, securely, and legitimately. The safety-critical control systems of the “Industrial Internet” are no less sensitive.

Evidently, effective security and trust networks are urgently required if the IoT’s potential is to be achieved, as the following chart shows.

Building Blocks Urgently Needed for IoT April 2013

In a world where people (and also jet engines) are having their health monitored automatically by numerous connected sensors, a lot of data is being amassed and needs to be monitored and analysed. Hence ‘Big Data’ is also a closely related topic to the IoT.

Hope, spectacle and speculation

There are several other areas that are sometimes included under the banner of the ‘IoT’, for example:

  • Clothing / ‘wearables’ – this covers a rapidly developing set of application areas, enabling technologies and related devices, including as Google Glass, Pebble Watch, Nike Fuel band and Adidas connected shoes.
  • Connected Media. There is a growing field of experimentation into and practice with connected signage that can show different messages and adverts, etc.
  • Experiments connecting virtually anything. Someone, somewhere is experimenting with a connected version of almost every object available. As just one example, in the Silicon Valley session, Centurylink said that they had asked school children to brainstorm what might be connected and why, and examples the students came up with included a connected tooth that senses the amount of sugar eaten. Another example, launched as a final product at CES, is the connected fork.
  • Tracking items. An example was given of the idea that many objects, including say a pothole in the road, could be given an identity and tracked thereafter so the fact that the pothole had been reported, and that work was scheduled, could be reviewed by anyone. Related ideas of the usefulness of being able to track goods of one sort or another, from understanding the road-miles of recycling individual objects through to tracking the whereabouts of virtually any object, have also been discussed.

There may indeed be opportunities in many of these areas, but the pressing economic, practical or social needs are not yet clear.

It is also not clear whether the definition of the ‘Internet of Things’ encompasses all of these ideas – although at present it would seem that anything that can be covered by this idea will be in someone’s world view.

What is clear is that the pace and diversity is increasing, and that new areas will continue to cross over from experiment to trial to mainstream development.

Next steps for STL Partners

We will continue to research and explore the ‘Internet of Things’ at our Executive Brainstorms, with particular emphasis on the areas that are most likely to ‘flip over’ from speculation to application.

We will also look further into the needs and applications of ‘Big Data’ into the field, as well as continuing our involvement in the World Economic Forum’s (WEF) work on Trust Networks for personal data.

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

  • Session 1: Market Evolution towards Internet of Things – Strategies and Business Models
  • Stimulus presentations
  • Voting, feedback, discussions
  • Brainstorm Output: IoT Opportunities
  • Session 2: IOT Platform Requirements
  • Stimulus Speakers and Panellists
  • Stimulus presentations
  • Voting, feedback, and discussions
  • Brainstorm: building blocks for IoT
  • Panel Discussion
  • Session 3: Big Data – Exploiting the New Oil for the New Economy
  • Stimulus Speakers and Panellists
  • Stimulus presentations
  • Voting, feedback, discussions

…and the following figures…

  • Figure 1 – Key considerations in M2M projects
  • Figure 2 – Vendor priorities in M2M/IoT
  • Figure 3 – From “M2M Now” to “Industrial Internet” and “IoT”
  • Figure 4 – The future M2M value chain
  • Figure 5 – Connected device growth forecast
  • Figure 6 – SmartThings.com
  • Figure 7 – M2M 1.0 = “save money”, M2M 2.0 = “make money”
  • Figure 8 – The Gap – What Else is Out There?
  • Figure 9 – Focus areas for M2M initiatives
  • Figure 10 – Focus areas in the M2M value chain
  • Figure 11 – The key questions in IoT
  • Figure 12 – Elements of IoT
  • Figure 13 – The challenges – power, IPv6, and privacy
  • Figure 14 – The US is enormous, but also very unusual
  • Figure 15 – Health – the ultimate channel business
  • Figure 16 – What is the scale of the IoT opportunity?
  • Figure 17 – IoT: what type of business models?
  • Figure 18 – Panasonic’s innovation priorities
  • Figure 19 – Panasonic’s new businesses in the US
  • Figure 20 – “Content mobility” is crucial to the connected car
  • Figure 21 – Cisco – focus on the industrial potential of IoT
  • Figure 22 – How this relates to service providers
  • Figure 23 – Which technical building blocks are most needed?
  • Figure 24 – Which business infrastructure components are most needed?
  • Figure 25 – Why personal data isn’t like oil
  • Figure 26 – A strawman process for personal data
  • Figure 27 – A decentralised architecture for the Internet of My Things
  • Figure 28 – Kynetx: companies can connect through ‘things’

Members of the Telco 2.0 Executive Briefing Subscription Service can download the full 47 page report in PDF format here. Non-Members, please subscribe here. The Internet of Things will also be explored in depth at the EMEA Executive Brainstorm in London, 5-6 June, 2013. For this or any other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Background & Further Information

Produced and facilitated by business innovation firm STL Partners, the 2013 Silicon Valley event overall brought together 150 specially-invited senior executives from across the communications, media, retail, banking and technology sectors, including:

  • Apigee, Arete Research, AT&T,ATG, Bain & Co, Beecham Research, Blend Digital Group, Bloomberg, Blumberg Capital, BMW, Brandforce, Buongiorno, Cablelabs, CenturyLink, Cisco, CITI Group, Concours Ventures, Cordys, Cox Communications, Cox Mobile, CSG International, Cycle Gear, Discovery, DoSomething.Org, Electronic Transactions Association, EMC Corporation, Epic, Ericsson, Experian, Fraun Hofer USA, GE, GI Partners, Group M, GSMA, Hawaiian Telecom, Huge Inc, IBM, ILS Technology, IMI Mobile Europe, Insight Enterprises, Intel, Ketchum Digital, Kore Telematics, Kynetx, MADE Holdings, MAGNA Global, Merchant Advisory Group, Message Systems, Microsoft, Milestone Group, Mimecast, MIT Media Lab, Motorola, MTV, Nagra, Nokia, Oracle, Orange, Panasonic, Placecast, Qualcomm, Rainmaker Capital, ReinCloud, Reputation.com, SalesForce, Samsung, SAP, Sasktel, Searls Group, Sesame Communications, SK Telecom Americas, Sprint, Steadfast Financial, STL Partners/Telco 2.0, SystemicLogic Ltd., Telephone & Data Systems, Telus, The Weather Channel, TheFind Inc, T-Mobile USA, Trujillo Group LLC, UnboundID, University of California Davis, US Cellular Corp, USC Entertainment Technology Center, Verizon, Virtustream, Visa, Vodafone, Wavefront, WindRiver, Xtreme Labs.

Around 50 of these executives participated in the ‘Internet of Things’ session.

The Brainstorm used STL’s unique ‘Mindshare’ interactive format, including cutting-edge new research, case studies, use cases and a showcase of innovators, structured small group discussion on round-tables, panel debates and instant voting using on-site collaborative technology.

We’d like to thank the sponsors of the Brainstorm:
Silicon Valley 2013 Sponsors

Strategy 2.0: Google’s Strategic Identity Crisis

Summary: Google’s shares have made little headway recently despite its dominance in search and advertising, and it faces increasing regulatory threats in this area. It either needs to find new sources of value growth or start paying out dividends, like Microsoft, Apple (or indeed, a telco). Overall, this is resulting in something of a strategic identity crisis. A review of Google’s strategy and implications for Telcos. (March 2012, Executive Briefing Service, Dealing with Disruption Stream).

Google's Advertising Revenues Cascade

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Below is an extract from this 24 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and the Telco 2.0 Dealing with Disruption Stream here. Non-members can subscribe here, buy a Single User license for this report online here for £595 (+VAT for UK buyers), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003. We’ll also be discussing our findings and more on Google at the Silicon Valley (27-28 March) and London (12-13 June) New Digital Economics Brainstorms.

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Executive Summary

Google appears to be suffering from a strategic identity crisis. It is the giant of search advertising but it also now owns a handset maker, fibre projects, an increasingly fragmented mobile operating system, a social network of questionable success, and a driverless car programme (among other things). It has a great reputation for innovation and creativity, but risks losing direction and value by trying to focus on too many strategies and initiatives.

We believe that Google needs to stop trying to copy what Apple and Facebook are doing, de-prioritise its ‘Hail Mary’ hunt for a strategy (e.g. driverless cars), and continue to build new solutions that serve better the customers who are already willing to pay – namely, advertisers.

It is our view that the companies who have created most value in the market have done so by solving a customer problem really well. Apple’s recent success derives from creating a simpler and more beautiful way (platform + products) for people to manage their digital lives. People pay because it’s appealing and it works.

Google initially solved how people could find relevant information online and then, critically, how to use this to help advertisers get more customers. They do this so well that Google’s $37bn revenues continue to grow at double digit pace, and there’s plenty of headroom in the market for now. While the TV strategy may not yet be paying off, it would seem sensible to keep working at it to try to keep extending the reach of Google’s platform. 

While Android keeps Google in the mobile game to a degree, and has certainly helped to constrain certain rivals, we think Google should cast a hard eye over its other competing and distracting activities: Motorola, Payments, Google +, Driverless Cars etc. Its management team should look at the size of the opportunity, the strength of the competition, and their ability to execute in each. 

Pruning the projects might also lose Google an adversary or two, and it might also afford some reward to shareholders too. After all, even Apple has recently decided to pay back some cash to investors.

This may be very difficult for Google’s current leadership. Larry Page seems to have the restless instincts of the stereotypical Valley venture capitalist, hunting the latest ideas, and constantly trying to create the next big beautiful thing. The trouble is that this is Google in 2012, not 1995, and it looks to us at least that a degree of ‘sticking to the knitting’ within Google’s huge, profitable and growing search advertising business may be a better bet than the highly speculative (and expensive) ‘Hail Mary’ strategy route. 

This may sound surprising coming from us, the inveterate fans of innovation at Telco 2.0, so we’d like to point out some important differences between the situations that Google and the telcos are in:

  • Google’s core markets are growing, not flat or shrinking, and are at a different life-stage to the telecoms market;
  • Google is global, rather than being confined to any given geography. There are many opportunities still out there.
  • We are not saying that Google should stop innovating, but we are saying it should focus its innovative energy more clearly on activities that grow the core business.

Introduction

In January this year, Google achieved a first – it missed the consensus forecast for its quarterly earnings. There is of course no magic in the consensus, which is an average of highly conventionalised guesses from a bunch of City analysts, but it is as good a moment as ever to review Google’s strategic position. If you bought Google stock at the beginning, you may not need to read this, as you’re probably very rich (the return since then is of the order of 400%). The entirety of this return, however, is accounted for by the 2004-2007 bull run. On a five-year basis, Google stock is ahead 30%, which sounds pretty impressive (a 6% annual return), but again, all the growth is accounted for by the last surge upwards over the summer of 2007. The peak was achieved on the 2nd of November, 2007. 

As this chart shows, Google stock is still down about 9% from the peak, and perhaps more importantly, its path tracks Microsoft very closely indeed. Plus Microsoft investors get a dividend, whereas Google investors do not.

Figure 1: Google, Microsoft 2.0?

Google, Microsoft 2.0?
Source: Google Finance

Larry Page is reported to have said that “Google is no longer a “search company.” He says its model is now 

“invent wild things that will help humanity, get them adopted by users, profit, and then use the corporate structure to keep inventing new things.”

No longer a search company? Take a look at the revenues. Out of Google’s $37.9bn in revenues in 2011, $36bn came from advertising, aka the flip side of Google Search. Despite a whole string of mammoth product launches since 2007, Google’s business is essentially what it was in 2007 – a massive search-based advertising machine.

Google’s Challenges

Our last Google coverage – Android: An Anti-Apple Virus ? and the Dealing with the Disruptors Strategy Report   suggested that the search giant was suffering from a lack of direction, although some of this was accounted for by a deliberate policy of experimenting and shutting down failed initiatives.

Since then, Google has launched Google +, closed Google Buzz, and closed Google Wave while releasing it into a second life as an open-source project. It has been involved in major litigation over patents and in regulatory inquiries. It has seen an enormous boom in Android shipments but not necessarily much revenue. It is about to become a major hardware manufacturer by acquiring Motorola. And it has embarked on extensive changes to the core search product and to company-wide UI design.

In this note, we will explore Google’s activities since our last note, summarise key threats to the business and strategies to counter them, and consider if a bearish view of the company is appropriate.

We’ve found it convenient to organise Google’s business  into several themed groups as follows:

1: Questionable Victories

Pyrrhic victory is defined as a victory so costly it is indistinguishable from defeat. Although there is nothing so bad at Google, it seems to have a knack of creating products that are hugely successful without necessarily generating cash. Android is exhibit A. 

The obvious point here is surging, soaring growth – forecasts for Android shipments have repeatedly been made, beaten on the upside, adjusted upwards, and then beaten again. Android has hugely expanded the market for smartphones overall, caused seismic change in the vendor industry, and triggered an intellectual property war. It has found its way into an awe-inspiring variety of devices and device classes.

But questions are still hanging over how much actual money is involved. During the Q4 results call, a figure for “mobile” revenues of $2.5bn was quoted. This turns out to consist of advertising served to browsers that present a mobile device user-agent string. However, Google lawyer Susan Creighton is on record as saying  that 66% of Google mobile web traffic originates from Apple iOS devices. It is hard to see how this can be accounted for as Android revenue.

Further, the much-trailed “fragmentation” began in 2011 with a vengeance. “Forkdroids”, devices using an operating system based on Android but extensively adapted (“forked” from the main development line), appeared in China and elsewhere. Amazon’s Kindle Fire tablet is an example closer to home.

And the intellectual property fights with Oracle, Apple, and others are a constant source of disruption and a potentially sizable leakage of revenue. In so far as Google’s motivation in acquiring Motorola Mobility was to get hold of its patent portfolio, this has already involved very large sums of money. Another counter-strategy is the partnership with Intel and Lenovo to produce x86-based Android devices, which cannot be cheap either and will probably mean even more fragmentation.

This is not the only example, though – think of Google Books, an extremely expensive product which caused a great deal of litigation, eventually got its way (although not all the issues are resolved), and is now an excellent free tool for searching in old books but no kind of profit centre. Further, Google’s patented automatic scanning has the unfortunate feature of pulling in marginalia, etc. from the original text that its rivals (such as Amazon Kindle) don’t.
Further, Google has recently been trying to monetise one of its classic products, the Google Maps API that essentially started the Web 2.0 phenomenon, with the result that several heavy users (notably Apple and Foursquare)  have migrated to the free OpenStreetMap project and its OpenLayers API.

2: Telco-isation

Like a telco, Google is dependent on one key source of revenue that cross-subsidises the rest of the company – search-based advertising. 

Figure 2: Google’s advertising revenues cascade into all other divisions

Google's Advertising Revenues Cascade

[NB TAC = Traffic Acquisition Cost, CoNR = Cost of Net Revenues]

Having proven to be a category killer for search and advertising across the  whole of the Internet, the twins (search and ads) are hugely critical for Google and also for millions of web sites, content creators, and applications developers. As a result, just like a telco, they are increasingly subject to regulation and political risk. 

Google search rankings have always been subject to an arms race between the black art of search-engine optimisation and Google engineers’ efforts to ensure the integrity of their results, but the whole issue has taken a more serious twist with the arrival of a Federal Trade Commission inquiry into Google’s business practices. The potential problems were dramatised by the so-called “white lady from Google”  incident at Google Kenya, where Google employees scraped a rival directory website’s customers and cold-called them, misrepresenting their competitors’ services, and further by the $500 million online pharmacy settlement. Similarly, the case of the Spanish camp site that wants to be disassociated from horrific photographs of a disaster demonstrates both that there is a demand for regulation and that sooner or later, a regulator or legislator will be tempted to supply it.

The decision to stream Google search quality meetings online should be seen in this light, as an effort to cover this political flank.

As well as the FTC, there is also substantial regulatory risk in the EU. The European Commission, in giving permission for the Motorola acquisition, also stated that it would consider further transactions involving Google and Motorola’s intellectual property on a case-by-case basis. To put it another way, after the Motorola deal, the Commission has set up a Google Alert for M&A activity involving Google.

3: Look & Feel Problems

Google is in the process of a far-reaching refresh of its user interfaces, graphic design, and core search product. The new look affects Search, GMail, and Google + so far, but is presumably going to roll out across the entire company. At the same time, they have begun to integrate Google + content into the search results.

This is, unsurprisingly, controversial and has attracted much criticism, so far only from the early adopter crowd. There is a need for real data to evaluate it. However, there are some reasons to think that Search is looking in the wrong place.

Since the major release codenamed Caffeine in 2008, Google Search engineers have been optimising the system for speed and for first-hit relevance, while also indexing rapidly-changing content faster by redesigning the process of “spidering” web sites to work in parallel. Since then, Google Instant has further concentrated on speed to the first result. In the Q4 results, it was suggested that mobile users are less valuable to Google than desktop ones. One reason for this may be that “obvious” search – Wikipedia in the first two hits – is well served by mobile apps. Some users find that Google’s “deep web” search has suffered.

Under “Google and your world”, recommendations drawn from Google + are being injected into search results. This is especially controversial for a mixture of privacy and user-experience reasons. Danny Sullivan’s SearchEngineLand, for example, argues that it harms relevance without adding enough private results to be of value. Further, doubt has been cast on Google’s numbers regarding the new policy of integrating Google accounts into G+ and G+ content into search.

Another, cogent criticism is that it introduces an element of personality that will render regulatory issues more troublesome. When Google’s results were visibly the output of an algorithm, it was easier for Google to claim that they were the work of impartial machines. If they are given agency and associated with individuals, it may be harder to deny that there is an element of editorial judgment and hence the possibility of bias involved.

Social search has been repeatedly mooted since the mid-2000s as the next-big-thing, but it seems hard to implement. Yahoo!, Facebook, and several others have tried and failed.

Figure 3: Google + on Google Trends: fading into the noise?

 Google + on Google Trends: Fading Into the Noise?
Source: Google Trends

It is possible that Google may have a structural weakness in design as opposed to engineering (which is as excellent as ever). This may explain why a succession of design-focused initiatives have failed – Wave and Buzz have been shut down, Google TV hasn’t gained traction (there are less than one million active devices), and feedback on the developer APIs is poor.

4: Palpable Project Proliferation

Google’s tendency to launch new products is as intimidating as ever. However, there is a strong argument that its tireless creativity lacks focus, and the hit-rate is worrying low. Does Google really need two cut-down OSs for ultra-mobile devices? It has both Android, and ChromeOS, and if the first was intended for mobile phones and the second for netbooks, you can now buy a netbook-like (but rather more powerful) Asus PC that runs Android. Further, Google supports a third operating system for its own internal purposes – the highly customised version of Linux that powers the Google Platform – and could be said to support a fourth, as it pays the Mozilla Foundation substantial amounts of money under the terms of their distribution agreement and their Boot to Gecko project is essentially a mobile OS. IBM also supported four operating systems at its historic peak in the 1980s.  

Also, does Google really need to operate an FTTH network, or own a smartphone vendor? The Larry Page quote we opened with tends to suggest that Google’s historical tendency to do experiments is at work, but both Google’s revenue raisers (Ads and YouTube, which from an economic point of view is part of the advertising business) date from the first three years as a public company. The only real hit Google has had for some time is Android, and as we have seen, it’s not clear that it makes serious money.

Google Wallet, for example, was launched with a blaze of publicity, but failed to attract support from either the financial or the telecoms industry, rather like its predecessor Google Checkout. It also failed to gain user adoption, but it has this in common with all NFC-based payments initiatives. Recently, a major security bug was discovered, and key staff have been leaving steadily, including the head of consumer payments. Another shutdown is probably on the cards. 

Meanwhile, a whole range of minor applications have been shuttered

Another heavily hyped project which does not seem to be gaining traction is the Chromebook, the hardware-as-a-service IT offering aimed at enterprises. This has been criticised on the basis that its $28/seat/month pricing is actually rather high. Over a typical 3 year depreciation cycle for IT equipment, it’s on a par with Apple laptops, and has the restriction that all the applications must work in a Web browser on netbook-class hardware. Google management has been promoting small contract wins in US school districts . Meanwhile, it is frequently observed that Google’s own PC fleet consists mostly of Apple hardware. If Google won’t use them itself, why should any other enterprise IT shop do so? The Google Search meeting linked above contains 2 Lenovo ThinkPads and 13 Apple MacBooks of various models and zero Chromebooks, while none other than Eric Schmidt used a Mac for his MWC 2012 keynote. Traditionally, Google insisted on “dogfooding” its products by using them internally.

The Google Fibre project in Kansas City, for its part, has been struggling with regulatory problems related to its access to city-owned civil infrastructure. Kansas City’s utility poles have reserved areas for different services, for example telecoms and electrical power. Google was given the concession to string the fibre in the more spacious electrical section – however, this requires high voltage electricians rather than telecoms installers to do the job and costs substantially more. Google has been trying to change the terms, and use the telecoms section, but (unsurprisingly) local cable and Bell operators are objecting. As with the muni-WLAN projects of the mid-2000s, the abortive attempt to market the Nexus One without the carriers, and Google Voice, Google has had to learn the hard way that telecoms is difficult.

And while all this has been going on, you might wonder where Google Enterprise 2.0 or Google Ads 2.0 are.

5. Google Play – a Collection of Challenges?

Google recently announced its “new ecosystem”, Google Play. This consists of what was historically known as the Android Market, plus Google Books, Google Music, and the web-based elements of Google Wallet (aka Google Checkout). All of these products are more or less challenged. Although the Android Market has been a success in distributing apps to the growing fleets of Android devices, it continues to contain an unusually high percentage of free apps, developer payouts tend to be lower than on its rivals, and it has had repeated problems with malware. Google Books has been an expensive hobby, involving substantial engineering work and litigation, and seems unlikely to be a profit centre. Google Music – as opposed to YouTube – is also no great success, and it is worth asking why both projects continue.

However, it will be the existing manager of Google Music who takes charge, with Android Market management moving out. It is worth noting that in fact there were two heads of the Android Market – Eric Chu for developer relations and David Conway for product management. This is not ideal in itself.

Further, an effort is being made to force app developers to use the ex-Google Checkout system for in-app billing. This obviously reflects an increased concern for monetisation, but it also suggests a degree of “arguing with the customers”.

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

  • On the Other Hand…
  • Strengths of the Core Business
  • “Apple vs. Google”
  • Content acquisition
  • Summary Key Product Review
  • Search & Advertising
  • YouTube and Google TV
  • Communications Products
  • Android
  • Enterprise
  • Developer Products
  • Summary: Google Dashboard
  • Conclusion
  • Recommendations for Operators
  • The Telco 2.0™ Initiative
  • Index

…and the following figures…

  • Figure 1: Google, Microsoft 2.0?
  • Figure 2: Google’s advertising revenues cascade into all other divisions
  • Figure 3: Google + on Google Trends: fading into the noise?
  • Figure 4: Google’s Diverse Advertiser Base
  • Figure 5: Google’s Content Acquisition. 2008-2009, the missing data point
  • Figure 6: Google Product Dashboard

Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Dealing with Disruption Stream can download the full 24 page report in PDF format hereNon-Members, please subscribe here, buy a Single User license for this report online here for £595 (+VAT for UK buyers), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Organisations, geographies, people and products referenced: AdSense, AdWords, Amazon, Android, Apple, Asus, AT&T, Australia, BBVA, Bell Labs, Boot to Gecko, Caffeine, CES, China, Chromebook, ChromeOS, ContentID, David Conway, Eric Chu, Eric Schmidt, European Commission, Facebook, Federal Trade Commission, GMail, Google, Google +, Google Books, Google Buzz, Google Checkout, Google Maps, Google Music, Google Play, Google TV, Google Voice, Google Wave, GSM, IBM, Intel, Kenya, Keyhole Software, Kindle Fire, Larry Page, Lenovo, Linux, MacBooks, Microsoft, Motorola, Mozilla Foundation, Netflix, Nexus, Office 365, OneNet, OpenLayers API, OpenStreetMap, Oracle, Susan Creighton, ThinkPads, VMWare, Vodafone, Western Electric, Wikipedia, Yahoo!, Your World, YouTube, Zynga

Technologies and industry terms referenced: advertisers, API, content acquisition costs, driverless car, Fibre, Forkdroids, M&A, mobile apps, muni-WLAN, NFC, Search, smart TV, spectrum, UI, VoIP, Wallet

Online Video Distribution Market Study

Options and Opportunities for Distributors in a time of massive disruption


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

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

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

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

Key Points

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

Who is this report for?

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

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

Key Questions Answered

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

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

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

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

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

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

The New Distribution is disruptive and no longer centrally controlled

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

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

More Growth + Less Control = More Unpredictability

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

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

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

How & why is the current model broken?

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

How can it be fixed?

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

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

Case Studies: Apple, Hulu, Phreadz, YouTube.

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

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

Markets Covered and Forecasts Included

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

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

Summary of Contents

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

The Research Process

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

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

Research Format
  • 130+ page manuscript document

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

Full Article: Device evolution: More power at the edge

The battle for the edge

This document examines the role of “edge” devices that sit at the periphery of a telco’s network – products like mobile phones or broadband gateways that live in the user’s hand or home. Formerly called “terminals”, with the inclusion of ever-better chips and software, such devices are now getting “smarter”. In particular, they are capable of absorbing many new functions and applications – and permit the user or operator to install additional software at a later point in time.

In fact, there is fairly incontrovertible evidence that “intelligence” always moves towards the edge of telecom networks, particularly when it can exploit the Internet and IP data connections. This has already been seen in PCs connected to fixed broadband, or in the shift from mainframes to client/server architectures in the enterprise. The trend is now becoming clearer in mobile, with the advent of the iPhone and other smartphones, as well as 3G-connected notebooks. Home networking boxes like set-tops, gaming consoles and gateways are further examples, which also get progressively more powerful.

This is all a consequence of Moore’s Law: as processors get faster and cheaper, there is a tendency for simple massmarket devices to gain more computing capability and take on new roles. Unsurprisingly, we therefore see a continued focus on the “edge” as a key battleground – who controls and harnesses that intelligence? Is it device vendors, operators, end users themselves, or 3rd-party application providers (“over-the-top players”, to use the derogatory slang term)? Is the control at a software, application or hardware level? Can operators deploy a device strategy that complements their network capabilities, to strengthen their position within the digital value chain and foster two-sided business models? Do developments like Android and femtocells help? Should the focus be on dedicated single-application devices, or continued attempts to control the design, OS or browser of multi-purpose products like PCs and smartphones?

Where’s the horsepower?

First, an illustration of the power of the edge.

If we go back five years, the average mobile phone had a single processor, probably an ARM7, clocking perhaps 30MHz. Much of this was used for the underlying radio and telephony functions, with a little “left over” for some basic applications and UI tools, like Java games.

Today, many the higher-end devices have separate applications processors, and often graphics and other accelerators too. An iPhone has a 600MHz+ chip, and Toshiba recently announced one of the first devices with a 1GHz Qualcomm Snapdragon. Even midrange featurephones can have 200MHz+ to play with, most of which is actually usable for “cool stuff” rather than the radio. [note: 1,000,000,000,000MHz (Megahertz) = 1,000,000,000GHz (Gigahertz) = 1,000,000THz (Terahertz) = 1,000PHz (Petahertz) = 1EHz (Exahertz)] Now project forward another five years. The average device (in developed markets at least) will have 500MHz, with top-end devices at 2GHz+, especially if they are not phones but 3G-connected PCs or MIDs. (These numbers are simplified – in the real world there’s lots of complexity because of different sorts of chips like digital signal processors, graphics accelerators or multicore processors). Set-top boxes, PVRs, game consoles and other CPE devices are growing smarter in parallel.

Now multiply by (say) 8 billion endpoints – mobile handsets, connected PCs, broadband modems, smart consumer electronics and so forth. In developed markets, people may well have 2-4 such devices each. That’s 4 Exahertz (EHz, 1018) of application-capable computing power in people’s hands or home networks, without even considering ordinary PCs and “smart TVs” as well. And much – probably most – of that power will be uncontrolled by the operators, instead being the playground of user- or vendor-installed applications.

Even smart pipes are dumb in comparison

It’s tricky to calculate an equivalent figure for “the network”, but let’s take an approximation of 10 million network nodes (datapoint: there are 3 million cell sites worldwide), at a generous 5GHz each. That means there would be 50 Petahertz (PHz, 1015) in the carrier cloud. In other words, about an 80th of the collective compute power of the edge.

bubley-device-1.png

Now clearly, it’s not quite as bad as that makes it sound – the network can obviously leverage intelligence in a few big control points in the core like DPI boxes, as traffic funnels through them. But at the other end of the pipe is the Internet, with Google and Amazon’s and countless other companies’ servers and “cloud computing” infrastructures. Trying to calculate the aggregate computing power of the web isn’t easy either, but it’s likely to be in the Exahertz range too. Google is thought to have 0.5-1.0 million servers on its own, for example.

bubley-device-2.png

So one thing is certain – the word “terminal” is obsolete. Whatever else happens, the pipe will inevitably become “dumber” (OK, less smart) than the edge, irrespective of smart Telco 2.0 platforms and 4G/NGN networks.

Now, add in all the cool new “web telco” companies (eComm 2009 was full of them) like BT/Ribbit, Voxeo, Jaduka, IfByPhone, Adhearsion and the Telco 2.0 wings of longtime infrastructure players like Broadsoft and Metaswitch (not to mention Skype and Google Voice), and the legacy carrier network platforms look even further disadvantaged.

Intelligent mobile devices tend to be especially hard to control, because they can typically connect to multiple networks – the operator cellular domain, public or private WiFi, Bluetooth, USB and so forth – which makes it easier for applications to “arbitrage” between them for access, content and services – and price.

Controlling device software vs. hardware

The answer is for telcos to try to take control of more of this enormous “edge intelligence”, and exploit it for their own benefit and inhouse services or two-sided strategies. There are three main strategies for operators wanting to exert influence on edge devices:

  1. Provide dedicated and fully-controlled and customised hardware and software end-points which are “locked down” – such as cable set-top boxes, or operator-developed phones in Japan. This is essentially an evolution of the old approach of providing “terminals” that exist solely to act as access points for network-based services. This concept is being reinvented with new Telco-developed consumer electronic products like digital picture frames, but is a struggle for variants of multi-function devices like PCs and smartphones.
  2. Provide separate hardware products that sit “at the edge” between the user’s own smart device and the network, such as cable modems, femtocells, or 3G modems for PCs. These can act as hosts for certain new services, and may also exert policy and QoS control on the connection. Arguably the SIM card fits into this category as well.
  3. Develop control points, in hardware or software, that live inside otherwise notionally “open” devices. This includes Telco-customised UI and OS layers, “policy-capable” connection manager software for notebooks, application certification for smartphones, or secured APIs for handset browsers.

bubley-device-3.png Controlling mobile is even harder than fixed

Fixed operators have long known what their mobile peers are now learning – as intelligence increases in the devices at the edge, it becomes far more difficult to control how they are used. And as control ebbs away, it becomes progressively easier for those devices to be used in conjunction with services or software provided by third parties, often competitive or substitutive to the operators’ own-brand offerings.

But there is a difference between fixed and mobile worlds – fixed broadband operators have been able to employ the second strategy outlined above – pushing out their own fully-controlled edge devices closer to the customer. Smart home gateways, set-top boxes and similar devices are able to sit “in front” of the TV and PC, and can therefore perform a number of valuable roles. IPTV, operator VoIP, online backups and various other “branded” services can exploit the home gateways, in parallel with Internet applications resident on the PC.

Conversely, mobile operators are still finding it extremely hard to control handset software at the OS level. Initiatives like SavaJe have failed, while more recently LiMO is struggling outside Japan. Endless complexities outside of Telcos’ main competence, such as software integration and device power management, are to blame. Meanwhile, other smartphone OS’s from firms like Nokia, Apple, RIM and Microsoft have continually evolved – albeit given huge investments. But most of the “smarts” are not controlled by the operators, most of the time. Further, low-end devices continue to be dominated by closed and embedded “RTOSs” (realtime operating systems), which tend to be incapable of supporting much carrier control either.

In fact, operators are continually facing a “one step forward, two steps back” battle for handset application and UI control . For every new Telco-controlled initiative like branded on-device portals, customised/locked smartphone OS’s, BONDI-type web security, or managed “policy” engines, there is another new source of “control leakage” – Apple’s device management, Nokia’s Ovi client, or even just open OS’s and usable appstores enabling easy download of competing (and often better/free) software apps.

The growing use of mobile broadband computing devices – mostly bought through non-operator channels – makes things worse. Even when sold by Telcos, most end users will not accept onerous operator control-points in their PCs’ application or operating systems, even where those computers are subsidised. There may be 300m+ mobile-connected computers by 2014.

Conclusions

Telcos need to face the inevitable – in most cases, they will not be able to control more than a fraction of the total computing and application power of the network edge, especially in mobile or for “contested” general-purpose devices. But that does not mean they should give up trying to exert influence wherever possible. Single-application “locked” mobile devices, perhaps optimised for gaming or navigation or similar functions have a lot of potential as true “terminals”, albeit used in parallel with users’ other smart devices.

It is far easier for the operator to exert its control at the edge with a wholly-owned and managed device, than via a software agent on a general computing device like a smartphone or notebook PC. Femtocells may turn out to be critical application control points for mobile operators in future. Telcos should look to exploit home networking gateways and other CPE with added-value software and services as soon as possible. Otherwise, consumer electronic devices like TVs and HiFi’s will adopt “smarts” themselves and start to work around the carrier core, perhaps accessing YouTube or Facebook directly from the remote control.

For handsets, controlling smartphone OS’s looks like a lost battle. But certain tactical or upper layers of the stack – browser, UI and connection-manager in particular – are perhaps still winnable. Even where the edge lies outside Telcos’ spheres of control, there are still many network-side capabilities that could be exploited and offered to those that do control the edge intelligence. Telco 2.0 platforms can manage security, QoS, billing, provide context data on location or roaming and so forth. However, carriers need to push hard and fast, before these are disintermediated as well. Google’s clever mapping and location capabilities should be seen as a warning sign that there will be work-arounds for “exposable” network capabilities, if Telcos’ offerings are too slow or too expensive.

Overall, the battle for control of the edge is multi-dimensional, and outcomes are highly uncertain, particularly given the economy and wide national variations in areas like device subsidy and brand preference. But Telcos need to focus on winnable battles – and exploit Moore’s Law rather than beat against it with futility.

We’ll be drilling into this area in much more depth during the Devices panel session at the upcoming Telco 2.0 Brainstorm in Nice in early May 2009.

Full Article: Voice telephony, death or glory?

At our November Telco 2.0 brainstorm, the second session concentrated on the business opportunity in the core voice and messaging business. Here we review the key messages, and explore some of the future business model scenarios.

Telcos have consistently abandoned their core product, and are ignoring new business models, whilst pursuing fools’ gold in media content. The timing of this discussion is rather apposite. Despite our belief in Vodafone’s long-term strength, they have just announced that their core voice business has stagnated:

The performance of the company’s European operations suffered from the tough economic climate with margins decreasing from 38.2% to 36.2% on revenues that were down 1.1% on an organic basis. The company blamed ongoing price pressure on core voice and messaging services.

As we said before, if you don’t improve your core product at all since launching digital networks, and assume two-sided Internet business models won’t have any effect on you, you get all you deserve. Please see our Voice & Messaging 2.0 report?]

Re-thinking dialling, voicemail and freephone for 2-sided markets

The lead-in to the session was by Chief Analyst of STL Partners, Martin Geddes. His thesis is a simple one: telcos have consistently abandoned their core product, and are ignoring new business models, whilst pursuing fools’ gold in media content. The old model — charging users for software services that have no marginal cost or barriers to entry — is dying. That doesn’t stop initiatives like Rich Communications Suite (RCS) from trying.


Martin Geddes, Chief Analyst, STL Partners

To illustrate future business models he gave three examples of how money could be made in future. Each of these focused on different aspects of the consumer to call centre interaction. As you may remember, customer care is one of the key B2B2C value-added services in a Telco 2.0 platform. [For full details, see our report The 2-Sided Telecoms Market Opportunity.]

The first of these was from a Canadian start-up we’ve profiled before, called Fonolo. It exquisitely demonstrates that the value is in integration of telephony and the Web, as well as moving from the call itself to the set-up of the interaction. We asked their CEO, Shai Berger, to tell us more in this video clip:


Shai Berger, CEO, Fonolo

Note that their current business model is a mixture of advertising and end-user premium fees. This is being positioned as a traditional consumer VAS, with a sprinkling of two-sided markets via advertising. The question, however, is who benefits more: the consumer, or the call centre? We think that it’s the latter, and the consumer is the price-sensitive side. The call centre wants the maximum rate of self-care, high customer satisfaction, and the web site offers the ability to do all kinds of enhanced multi-modal interactions that a 0-9*# keypad can’t do well. Even basic things like showing where you are in the queue, and a picture of the person you’re talking to, would make for a far better user experience.

Therefore in our two-sided market world, we’d get telcos to distribute and promote this tool (on their fixed, mobile and on-device portals). They would then sell these enhanced capabilities to call centres.

The second example Martin gave was around outbound calling from call centres. Today the typical experience is something like the following. The call centre operator has to wait for the phone to ring, finds it goes to voicemail (up to 80% of calls to business users go to voicemail), and then leaves a message asking the user to call back to complete the business process. By the time the user gets the message, the call centre may be closed. Or the user simply never responds. So you’re burning labour on leaving these messages, in a process that is both ineffective and inefficient. According to Oracle, customer service representatives making outbound calls typically spend 20-30 minutes per hour talking to customers. The rest is wasted.

A better experience would be simply to deposit a VoiceXML document directly into the user’s voicemail system. “The product you have requested is now in stock. Press one to have it shipped immediately, two to reschedule your delivery, three to cancel.��? The business process completes right their inside your voicemail system. And the telco collects and order of magnitude more revenue than they would get from a few cents of termination fee.

The third and final example was more futuristic, looking at how Paypal-like services could be brought from the Internet to telephony, taking out the errors, cost and fraud on today’s information and transactional exchanges to call centres.

These were just a few examples on how to re-imaging telephony to service the needs of call centres. There are many more such examples, and many more business processes to integrate. Telephony could easily become a growth engine again for telecoms, if only telcos would wake up to the new two-sided business model.

BT: From phone company to business communications platform

The next speaker was JP Rangaswami from BT. Excluding the (important) access line revenue, BT only makes a small fraction of its revenue from telephony. Nonetheless, it has embarked on a multi-billion pound programme to create the ultimate voice and communications platform with its 21CN network initiative. Under JP’s guidance, BT has also recently bought Ribbit, a platform that extends telephony integration to Web developers. Clearly BT understands there’s life in being a “phone company��? yet (as long as you’ve a two-sided business model, naturally).


JP Rangaswami, Managing Director, BT Design

What JP proposed is that voice is a very much a feature, not the product. Using a Dali image to emphasise the strangeness and difference of the world we find ourselves in, he told his story through the history of two other media: the printed word, and photography.

In both of these cases, we’ve seen a mass democratisation and de-centralisation of the technology. Printing presses were centralised, and printing became an industry unto itself. It was a tool of control. For a while, there was a central printing shop in every company to do reprographics. Now, we see a “Print this page��? icon on your screen, and the printing press under your desk can smudge some ink on paper fibre for you in a moment, at a cost low enough you don’t even think about it. “Print��?, therefore, has simply been embedded into every other application. Likewise, imaging has gone from an industry into a feature. You don’t need to go twice to the photo shop, once to drop off your films, and again to pick up your prints. “Upload image��? is a standard feature of many web applications. It’s two clicks to share one from your photostream.

The message is that the model is undergoing fundamental change, and voice is following the same trajectory. Calls will increasingly be launched from within Web applications. Whoever can capture that context, enrich those interactions, and (particularly) ensure business processes complete will make the money. Carrying the data from A to B and counting minutes is not the model.

BT therefore clearly understands the nature of future business models, even if they are keeping their cards close to their chest in terms of execution. If their CEO can explain this to investors in a way they can grasp, and they can demonstrate some real revenues, then BT is seriously onto something.

Voice as a spice, not the meal

Our third presenter, Thomas Howe, is an independent consultant and blogger, and brings a hands-on perspective to using telco voice and messaging APIs to build a business.


Thomas Howe. (Apparently Barack wears a Thomas Howe tie.)

Thomas spoke about the new business model he sees for telcos. He sees the value is increasingly in knowing things about the customer, not doing things like moving bits around. Doing has become cheap and easy due to continued exponential improvements in technology. It’s hard-to-replicate data that provides business advantage, and telcos have that by the bucket load. In particular, telcos can combine the data with the network to offer new capabilities. It’s not particularly useful to know someone’s latitude and longitude. It is very useful to know if someone is at home, for example to take a delivery. That means understanding “someone��?, “at��? and “home��? — i.e. who are you, where are you, and what is “home��?? (This reflects our analysis on the seven questions any telco platform must answer.)

Going to market

In the attendee feedback, there were three clear messages:

  • People like the ideas, and see the value in these new capabilities that telcos can offer businesses who want to take friction out of interacting with their customers.
  • Everyone wants to know pricing, volume and revenue models.
  • There are concerns over privacy, brand positioning, and ability of telcos to execute co-operatively.

For readers interested in getting answers to these questions, and how to execute these ideas, we’ll be diving into these issues in our research in the run-up to the next Telco 2.0 brainstorm in the spring.

To summarise, existing voice platform initiatives like Parlay/OSA are network-centric, and what is needed is a business process centric approach. There are a few global commerce platform emerging, and none of them are from telcos. Yet there are already great telco successes in two-sided markets, such as SMS short codes and premium SMS. Telcos have to continue to build on these to service a wider range of business processes and upstream customers.

Meanwhile, astute attendees will have picked up the protestations of earlier keynote speaker Werner Vogels, CTO of Amazon. “And finally — our telecoms platform. Don’t worry, this is no threat to you.��? But he would say that, wouldn’t he?

Beyond Bundling: Growth Strategies for Fixed and Mobile Broadband – “Winning the $250Bn delivery game”

Summary: This report examines future retail and wholesale business models for fixed and mobile operators offering high speed packet data services. This includes – but is not limited to – providing Internet access.

The report charts the next 10 years for fixed and mobile telecoms network operators as the viability of the current broadband business model is threatened by intense competition and falling prices in maturing markets, changing usage patterns, and the adaptation of new technologies. The report identifies and profiles a new $250Bn content delivery market opportunity. (April 2008)


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

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

Future Broadband Business Models Series

This report examines future retail and wholesale business models for fixed and mobile operators offering high speed packet data services. This includes – but is not limited to – providing Internet access.

The report charts the next 10 years for fixed and mobile telecoms network operators as the viability of the current broadband business model is threatened by intense competition and falling prices in maturing markets, changing usage patterns, and the adaptation of new technologies. The report identifies and profiles a new $250Bn content delivery market opportunity.

  • Report Summary
  • Key Points
  • Who is this report for?
  • Business Context – The Changing Face of Broadband Distribution
  • Key Questions Answered
  • Case Studies, Companies, Services, Technologies & Applications Covered
  • Forecasts Included
  • Summary of Contents
  • Pricing and User Licenses
  • Customer Workshops
  • Team Biographies
  • Fit with other Broadband Reports
  • Other Reports

This study is supported by BT, GSM Association, the Broadband Stakeholder Group, the TeleManagement Forum, and Telecom TV.

Report Abstract

Intense competition and falling prices in maturing markets coupled with the challenges presented by changing usage patterns and the adaptation of new technologies are all starting to threaten the viability of the current broadband business model.

This report reviews the pain points in current operational scenarios, case studies of successful strategies and emerging new entrants, and profiles the key threats and future opportunities to the industry. It outlines a number of key steps to develop business models that can be viable in the evolving marketplace, and touches on the future of core Voice & Messaging revenues, Video Distribution, P2P technologies, the Next Generation Network, E-commerce Value Added Services, and more. The report identifies and profiles a new $250Bn market opportunity.

Key Points

  • Pain points in current operational scenarios.
  • Case studies of successful strategies and emerging new entrants.
  • Threats and future opportunities to the industry.
  • Steps to develop business models that can be viable in the evolving marketplace.
  • The future of Voice, Video Distribution, P2P technologies, the Next Generation Network, E-commerce Value Added Services, and more.
  • New propositions, channels and partners for telco operators, cablecos, ISPs, NEPs, Device Manufacturers, Investors, and Public Policy bodies.
  • Scopes an attractive new $250Bn market opportunity.
  • Short, medium and long term actions required.

 

Who is this report for?

The report is for senior (CxO) decision-makers and business strategists setting business strategy, and for product managers, technologists, and strategic sales, business development and marketing professionals acting in the broadband arena in the following types of organisations:

  • Fixed & Mobile Broadband Operators – to set and drive strategy.
  • Vendors & Business Partners – to understand customer need and develop winning customer propositions.
  • Regulators & Industry Standards bodies – to inform policy making and strategy.

 

Strategists and CxOs in Media and Investment Companies may also find this report useful to understand the future landscape of the broadband industry, and to help to spot likely winning and losing investment and operational strategies in the market.

Business Context – The Changing Face of Broadband Distribution

The chart below shows how the telecoms industry today offers two dominant types of distribution systems for content and services.

  1. Vertically integrated networks, like the Public Switched Telephony Network, its mobile equivalent, Next Generation Network replacements for these, and SMS messaging (“PSTN & SMSC”). Here, a dedicated network integrates connectivity, service and payment.

  2. Internet access, where connectivity, services and payment are all separate (“Broadband Internet”).

  3. In the future there will be a wide range of new business and payment models which assemble devices, applications, content and connectivity in new technical and economic ways (“Other”). Wholesale markets will evolve greatly to support this. This original hypothesis, affirmed by our proprietary market research, is explored in depth in this report.

This study looks at the impact of this significant change on the business models of those in the broadband value chain.

Key Questions Answered

This report uniquely answers 3 key questions:

  1. “What are the business models for fixed and mobile broadband voice, video and data access over the next 5-10 years” – how will these revenue streams evolve for telcos and cablecos?

  2. “What are the future wholesale and retail business models” – managing costs and revenues by learning from outside the telecoms industry.

  3. “How to rejuvenate broadband growth strategies” – what are the new propositions, channels and partners for telco operators, cablecos, ISPs, NEPs, Device Manufacturers, Investors, and Public Policy bodies.

In addition, to help operators and vendors maximise future opportunities from broadband-based services the following questions are also addressed:

  • What are the key pain points and problems in the current Broadband Service Provider (BSP) business model?

  • What are the limitations of reliance on voice and video cross-subsidy?

  • What are new potential upstream and downstream revenue models?

  • Who puts money into BSPs today, and how does it gets re-allocated?

  • Who makes the margins today and why?

  • What are the drivers of economic activity inside and outside the network?

  • What are the competing fixed and mobile distribution systems and their relationship to services?

  • What lessons about wholesale/network business models can we learn from outside of telecoms?

  • How long are vertically-integrated service models likely to survive? What are the opportunities for new entrants?

  • What are the most successful players doing to combine multiple distribution systems to support the customer experience?

  • What are the lessons from dead or dying distribution systems (ATM, ISDN, MMS)

  • How much value will flow through new broadband distribution channels?

  • How to improve core Voice and Video services?

  • Which network ownership models will be most effective?

  • What are the economics of QoS, and how to create better alternatives?

  • What are the trends in traffic shaping and throttling?

  • What is the potential for new wholesale intermediaries to grow beyond providing backbone and interconnect peering for access networks?

What are the practical issues in taking new business models to market in a highly regulated and politicised industry?

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

Case Studies: Akamai, BT 21CN, BT Vision, e-TopUps, Illiad, Janet(UK), Joost, Kontiki, Limelight, LINX, Sky Anytime.

Companies and Services Covered: 3 UK, Akamai, Amazon, Amazon Kindle, Apple, Apple iPhone, Apple iTV, ASUS, AT&T, AT&T/Bell Labs, BBC, Blackberry, Blockbuster, Blyk, BSkyB, Carphone Warehouse, Cinema Paradiso, Cisco, Dell, Deutsche Telekom, Direct Connect, Disney, DoCoMo, DoCoMo iMode, Easyjet, Ericsson, France Telecom, Freebox, Gillette, Google, Google Phone, Hutchison 3, Intel, Liberty Global, Link, Livebox, Lovefilm, Lucasfilms, Maxjet, Microsoft, Motorola, Motorola Tetra, Moviebank, MSN, My Moviestream, Myspace, Netflix, News Corp, Nextel, Nokia Ovi, Pixar, Qualcomm, Ryanair, Scientific Atlanta, Setanta, Sky+, Skype, Slingbox, Sprint PCS, Swedish Metro, Swisscom Hotspots, Tandberg, Tesco Mobile, The Economist, Tracfone, TV Perso, Verizon FIOS, Verizon Wireless, Virgin, Wall Street Journal, Walmart, Yahoo!, YouTube.

Technologies & Applications Covered: Broadband, Broadband Video, Broadband Voice, Cable, CDMA, CDNs, Deep Packet Inspection, DSL, Edge-Caching, Ethernet/ATM unbundling, Fax, Femtocell, FON, GSM, HDD, IMS, Internet Video, IP, IP Multicast, IP Stream, IPTV, ISDN, Linksys, Linux, MMS, Mobile TV, Muni Nets, MVNO, Mxit, Netgear, OpenID, OPLANs, P2P, PAN, Peak Shaving, PSMN, PSMs, PSTN, Telex, Traffic Shaping, VoD, VOIP, VPN, Wifi, WiMax, WLAN.

Forecasts Included

For 2006-2017: Wholesale and Retail BSP revenues by Fixed and Mobile Access, TV, Data, Voice & Messaging across 12 Western European and North American markets.

Summary of Contents

Introduction

Executive summary

Background to this Telco 2.0 research project

Part 1: The business model

  • A framework for business model innovation
  • Business model change in the airline industry
  • Applying the framework to telecoms business models


Part 2: Broadband service provider industry review

  • ISP industry
  • Entertainment market
  • Voice and messaging
  • Business model issues


Part 3: Wholesale and network business models beyond telecoms

  • Container shipping
  • Automatic teller machines in the UK
  • Power and energy distribution


Part 4: Competing distribution systems – theory and practice

  • Broadband as a distribution system
  • Drivers of vertical integration

Part 5: Emerging and declining distribution systems

  • CDNs: A freight service for the digital world
  • Vertical distribution systems
  • Hybrid distribution system case studies
  • Lessons from other delivery systems
  • Conclusions


Part 6: Survey results

  • Broadband video – is internet video a threat or an opportunity?
  • Broadband voice – which companies will prevail?
  • The network – what does the internet carry today?
  • E-Commerce value-added services
  • The wholesale market
  • The retail market
  • Case studies
  • Winners and losers

Part 7: Future broadband revenue models and scenarios

  • BSP market sizing
  • Wholesale market opportunity


Part 8: Conclusions

  • Beyond bundling: the quest for a new business model
  • Respondent views
  • Recommendations


Appendices

  • Research methodology and respondent profile
  • Glossary

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

 

Full Article: Beyond bundling, the future of broadband

This is an edited version of the keynote presentation of Martin Geddes, Chief Analyst at STL Partners, at the October 2007 Telco 2.0 Executive Brainstorm in London. It provides some initial findings from our research into future business models for broadband service providers (BSPs), including our online survey. (The summary results will be mailed out to respondents in the next few days.) Those wishing to find out more may want to take a look at our forthcoming report, Broadband Business Models 2.0.

To save you the suspense, here’s the headlines for what’s upcoming for the telecoms industry, based on what insiders are saying through our survey and research:

  1. Operators are going to face a slew of non-traditional voice service competition. To corrupt the words of Yogi Berra, “The phone network? Nobody goes there anymore, it’s too crowded.? The volume may linger on, but the margins in personal communication will move elsewhere.
  2. Content delivery is a logistics problem that spans many distribution systems. Those who can solve the delivery problem by sewing together many delivery services, rather than those focused on owning and controlling one channel, will win.
  3. Wholesale markets in telecoms are immature and need to evolve to support new business models.
  4. Investors aren’t up for more “loser takes nothing? facilities-based competition capex splurges. Time to look hard at network sharing models.

So, read on for the background and evidence:

Background to the survey and research

Our ingoing hypothesis is that telecoms – fixed or mobile — is a freight business for valuable bits. This could be via traditional voice networks. Broadband is another means of delivering those bits. It includes Internet ISP access, as well as other services such as private VPNs and IPTV.

Broadband competes with and complements other delivery systems like broadcast TV, circuit-switched phone calls and physical media.

Just as with physical goods, there are lots of delivery systems for information goods. These are based on the bulk, value and urgency of the product – from bicycle couriers to container lorries for atoms; phone calls to broadcast TV for bits.

As part of our research we’ve also been looking at how other communications and delivery systems have evolved commercially, and what the lessons are for the telecoms industry. After all, broadband as a mass-market business is barely a decade old, so we can expect considerable future change. In particular, the container industry has some strong parallels that may hold important lessons.

Physical goods and the telephone system have developed a wide range of payment methods and business models.

With physical goods we have “collect it yourself?, cash-on-delivery, pre-paid envelopes and packages, as well as express parcels, first and second class postage.

The phone system offers freephone, national, non-geographic and various premium-rate billing features. It offers the user a simple, packaged service that includes connectivity, value-added features, interoperability, support and a wide choice of devices.

Likewise, SMS packages together the service and its transport. It’s wildly popular, bringing in more money globally than games software, music and movies combined.

The problem is that this has come within closed systems that don’t enjoy the rich innovation that the open Internet brings.

Internet access, by contrast, offers an abundance of goods but is relatively immature in the commercial models on offer. Broadband service providers typically offer just one product: Internet access. And they generally only offers one payment mechanism for delivery of those online applications: one-size-fits-all metered or unlimited, paid independently of services used. (There are some important exceptions — you can read more here.)

As a small example of how the Internet under-serves its users, when a small non-commercial website suddenly gets a surge of traffic it typically falls over and is swamped. That is because there’s no commercial incentive for everyone to pay for a massively scalable hosting plan just in case of unexpected demand. The telephony system doesn’t suffer this because the termination fee for every call is designed to at least cover the technical cost of carrying the call.

Oh, and don’t expect Google to host it all for free for you either – the error message in the slide above is cut and pasted from a bandwidth-exceeded Google Blogger account.

There is also a lack of incentive for access providers to invest in capacity on behalf of Google to deliver richer, heavier content (where Google collects the revenues).

The question therefore is: How can BSPs find new business models inspired by more mature distribution systems?… whilst at the same time not killing off the innovation commons that is the Internet. BSPs must both create and capture new value in the delivery of online applications and content. Being an NGN or IPTV gatekeeper is not enough.

Fixed voice revenues are declining; mobile voice is peaking; and SMS is slowing down. The theory has always been that broadband ISP services will take up the slack, but in practise margins are thin.

Our research is testing out a wide variety of alternative commercial models. For example, would an advertiser like Google pay for not just the hosting of content (via YouTube, Picassa or Blogger), but also the end-user usage on a fixed or mobile device for receiving that content?

We believe that whilst these alternative models may individually be much smaller than traditional broadband Internet access, collectively they may add up to a larger amount of value.

Survey supporters and respondents

The research would not be possible without the active support of the above sponsoring and supporting organisations, and we thank them all.

We’ve had over 800 respondents, with roughly one third from operators & ISPs; a quarter from vendors; and the rest consultants, analysts, etc. The geographic split is Europe 40%, N America 30%, Emerging 20%, Developed Asia 10%. There is a ratio of around 60:40 fixed:mobile respondents, and mostly people from commercial (rather than technical) functions.

We asked about four main areas:

  • Today’s ISP model — is it sustainable.
  • Future of voice service in a broadband world
  • Future of video service, as the other leg of the “triple play? stool
  • Future business and distribution models

Rather than assault you with dozens of charts and statistical analyses, what follows is the gist of what we’ve discovered.

Furthermore, we’re looking 5-10 years out at macro trends. You might not be able to predict Google, Skype or Facebook; but you can foretell the rise of search, VoIP and socially-enhanced online services. Even in our own industry, there can be large structural changes, such as the creation of Openreach by BT. You could probably have foretold that as vertical integration weakens there would be such organisational upheavals, even if not who and when.

Sustainability of ISP business model

What’s the future business model for broadband?

Around 20% see the current stand-alone ISP business model as sustainable long-term. This includes many senior industry figures, who cite better segmentation, tiered price plans, cost-cutting and reduced competition in more consolidated markets. It may be a minority view, but cannot be dismissed out of hand.

Around a quarter of respondents thought that broadband works as part of a triple or quad-play bundle of voice, video and data – cross-subsidised by its higher-margin cousins. This is the current received wisdom.

However, a majority of respondents say that a new business model is required. These results hold broadly true across fixed and mobile; geographies and sectors.

Which brings us to our first lesson from the container industry. Old product and pricing structures die hard. The equivalent efforts at maintaining a “voice premium��? all failed. Trying to price traffic according to the value of what’s inside the container or packet doesn’t scale.

For BSPs, that means technologies like deep packet inspection might be used:

  • for law enforcement (“x-ray the containers?), or
  • to improve user experience (at the user’s request), for example by prioritising latency-sensitive traffic (“perishable goods?)

However, traffic shaping can’t be your only or main tool for the long-term; you can’t reverse-engineer a new business model onto the old structures. It doesn’t, ultimately, contain your costs or generate significant new revenues.

Broadband voice

One of the big surprises of the survey was how quickly respondents see alternative voice networks getting traction. We asked what proportion of voice minutes (volume – not value) will go over four different kinds of telephony in 5 and 10 years from now. Looking at just the growth areas of IP (i.e. non-circuit) voice, you get the following result.

It seems those WiFi phones we laugh at now are more dangerous than previously thought – maybe when 90% of your young customers are communicating via social networking sites, you’ve got some unexpected competition? (Indeed, we note that social network traffic is just overtaking the traditional email portals.)

We were also given a surprise in that respondents saw most of these changes happening over the next 5 years.

Insiders see the growth in voice traffic as being anchored on best-effort Internet delivery, which gets around 1/3 of the IP voice traffic. Using traffic shaping, offering tiered levels of priority, and using traditional end-to-end quality of service guarantees all got roughly equal share.

There are some small differences between fixed and mobile, and mobile operators might like to seriously consider offering tiered “fast dumb pipe? and “slow dumb pipe? that applications can intelligently choose between.

This all suggests that operators may be over-investing in complex NGN voice networks and services. They need to urgently work out how they can partner with Internet application providers to offer “voice ready? IP connectivity without the costly telco-specific baggage of telco protocols and platforms.

So what’s the lesson from container shipping for the broadband voice community?

At the same time as containers where being adopted, some ports doubled-down on the old business model and built better breakbulk facilities – and lost. Manhattan’s quays are gone, Newark has replaced it.

Others waited to become “fast followers?, and lost too. London went from being one of the world’s busiest ports, to zero activity. Dubai did the reverse by investing exclusively in the new model, with a low cost base and high volume. (Shades of Iliad’s approach in France.)

The winners were those who staked out the key nodes of the new value chain.

There are some clear lessons here for telcos and their NGN voice networks. The cost of broadband access technology is dropping, capacity is rising, and the voice component’s value is decaying towards zero. Furthermore, session control (the software part of the voice application) is just another IT function that runs inside a big server, and isn’t something you can charge for above hosting costs. It has the economics of email, and that’s mostly given away for free. So IP voice isn’t adding anything to your triple/quad play bundle, and can only be justified on the basis of reducing cost in the old business model. An IP NGN voice service that’s still selling metered minutes does not constitute a new business model.

Broadband video

The survey results for video are a little less dramatic than for voice and follows received wisdom more closely. Overall respondents endorsed Internet video as far more of an opportunity than a threat. (Only in telecoms can a significant proportion see more demand for their product as a problem! The potential issue is that video could drive up costs without sufficient compensating revenue.) A long slow decline for broadcast TV and DVDs is matched to a slow ramp-up in various forms of on-line delivery. Every form of Internet delivery, from multicast IP to peer-to-peer file sharing gets a roughly equal cut. There were some things to watch out for though…

The opportunity is to become as supplier of advertising, e-commerce, caching and delivery services for a variety of video portals, not just tied to your own. This isn’t surprising; can you imagine a Web where there were only two portals to choose from, both owned by the network owners? The same applies to video.

Economic migration, cultural fragmentation and user-created content ensure that we’ll need a diversity of aggregation, recommendation, filtering and presentation technologies.

Given a choice between building a closed IPTV solution, or an open content platform, the response was well in favour of the latter as the more profitable to run. (The slow ramp up of BT’s Vision service suggests its success is more likely to be based on the “push? of analogue switch-off than the “pull? of the telco brand as a TV provider. Why do no telco TV plans centre around external entrepreneurial talent and innovation?)

Both options beat the alternative of disinvestment in video delivery technology. So fixed and mobile operators are well positioned to help enable and market video, just not “TV over IP?. That’s the steam-hauled canal boat, when you’re supposed to be using IP to build a railroad. It seems telcos are over-investing in emulating broadcast TV and under-investing in the unique nature of the online medium.

P2P and “over the top? are here to stay. You deal with the costs by offering more profitable alternatives, not by punishing your most voracious customers. (See our article on Playlouder as an example of how to do it right.)

In music, Apple’s iTunes captured the key bottleneck in the distribution chain. Could the same happen for online video?

We gave respondents a choice of four scenarios:

  • Direct to user from the content author or publisher
  • A single dominant player
  • A fragmented market dominated by telecoms companies
  • A fragmented market dominated by non-telcos

Our respondents say that the market is likely to be fragmented with many aggregators and non-carriers will dominate. Again, “triple play? doesn’t capture the richness of the business-to-business model required with many partners in the distribution and retail value chain. How will Telco TV satisfy my wife’s taste in Lithuanian current affairs and my interest in gadgets and economics lectures? It can’t.

Our take-away from the shipping industry is that when it comes to shifting bulky stuff around, big is good and bigger is, err, gooder. Networked infrastructure businesses have strong increasing returns to scale. There’s no point in building a new port anywhere near Rotterdam because that’s not where the other ships go. There’s a good reason why Akamai takes the bulk of the profit pool from content delivery networks — their one is the biggest.

Network ownership models

Compared to today’s dominant models (facilities-based competition and structural separation), respondents rated a third ownership model – co-operatives of telcos – surprisingly highly. The two currently dominant models remain on top.

The issue is how to structure the vehicles for mutual or co-operative asset ownership. The financial industry has already created structures that allow shared operational businesses, either mutually owned or as private special entities. Furthermore, they’ve managed to preserve barriers to entry. To become a member of the VISA network, you need a banking license. That costs a lot of money.

Telecoms and the Internet business have some common structures around numbering and interconnect, but could emulate these other models from other industries.

The arrival of containers shifted the balance of profit away from the shipping lines and towards the ports.

In terms of telecoms, it’s where the content is originated or goes between delivery systems that matters – from CDN to broadband access, from broadcast to DVR. That means every Googleplex and content delivery network that gets built puts Google or Akamai at a massive advantage, since everyone wants to peer with them.

Traditionally it has been long distance and access networks that have dominated telecoms economics. AT&T’s early years found it the only owner of a long-distance network and thus able to negotiate very advantageous terms in buying up local carriers into the Bell system. It mistakenly help onto the long distance network just as the bottleneck shifted to the access network. At the moment the US sees a duopoly in access networks, and supernormal profits. Wireless carriers enjoy an oligopoly in most markets as a by-product of spectrum licensing.

However, Europe is moving towards structural separation or open access of fixed networks. Homes and offices offer WiFi or femtocell bypass options for cellular. Over time, local access ceases to be such a bottleneck. Furthermore, there are many physical paths and proliferating technologies and suppliers hauling data between the distant points that want to be connected up — be it transoceanic cables or competing wireless backhaul technologies. So the owners of the transmission networks don’t enjoy the benefits. It’s the owners of the places where traffic is exchanged between delivery systems that do, since those feature increasing returns to scale and dominant suppliers.

What is the product we are selling?

Today operators expect you to go out and buy yet another access plan for every device you touch or place you make your temporary home. They sell “lines��?, either physical, or virtual (via a SIM card). Is this really the right way for the future?

All I want to do is connect my phone and laptop to the Internet wherever I am – but I get different prices and plans depending on which combination of device and access technologies I use – yet all from a single vendor. (The first is using my phone as a 3G modem over a USB cable; second is a separate 3G USB modem; third is WiFi.) This creates the perverse incentive when I’m sat in Starbucks to use my phone as a modem for my laptop over the expensive 3G network.

Also, I might be a peer-to-peer download lover, and hopelessly unprofitable. Or I might just want to check my email and surf the web a little on my mobile. How can you rationally price this product? What are the alternatives?

We gave users a choice of 3 alternatives (above) as to how broadband connectivity is provisioned. Should we sell you “unlimited browsing?, but listening to Internet radio is a separate charge? Or should we price access according to the device, but not make the plan portable between devices? A data plan on a basic featurephone would differ in price from a smartphone, Internet tablet or laptop. Or should we just give the user a set of credentials that activates any device or network they touch and bills that usage back to them?

The preferred one was to offer users a connected lifestyle, regardless of devices, applications or prices.

BT’s deal with FON is an example of a step towards this goal. Picocells too have the potential to upend the access line model. In terms of immediate actions, mobile operators should recognise the trend towards divergence and users with multiple handsets. Don’t make me swap SIMs around when I go from my “day phone? to “out on the town phone?. Give them a common number and interface.

New, more liquid, ways of combining together devices and networks for sale would require wholesale markets to evolve.

We asked what impact it would have on BSP revenues if all the friction were taken out of the wholesale market. Anyone who wants to come along and build an application with connectivity included in the price would be able to source their wholesale data from any carrier. You don’t have to be Yahoo!, Google or RIM to negotiate a deal with every carrier in the world, or make one-off special billing integration.

The effect? A 50%+ boost in revenues, which has a commensurately greater effect on profit. How much value is the broadband industry leaving on the table because of its inability to package up and sell its product via multiple channels?

Even more profitable than the ports are the agents who arrange the end-to-end logistics and supply chains for their customers. In telecoms terms, it’s the operator who can assemble a multitude of fixed and mobile networks, content delivery systems and B2B parterships with the application providers that wins.

For telcos, the critical development to enable personalised packaging of connectivity, applications and devices is to build richer wholesale models. The hot activity will be in the B2B markets, not direct-to-user. The failure of most MVNOs has shown that you don’t just want to create “mini me? telcos, but to enable more granular offerings.

Conclusions and summary

Telecoms is going to move to a multi-sided business model. Google are as likely to be paying for the full delivery of the ad-supported YouTube video as the user is. The telco will also feed Google usage and relationship data to help target advertising. Google might use credit data from the operator to manage its own fraud and chargeback risk on its checkout product. Telcos are logistics companies for data, helping the right data to be at the right place at the right time. This is completely different from being a “dumb pipe��?, wannabe media company or end-user services provider.

When you buy a new electronic gizmo, it typically comes with batteries included. The battery makers have learnt to supply batteries wholesale to consumer electronics makers, as well as to end users. Broadband needs to evolve to add “connectivity included?, with the right quality and quantity packaged up with the application or content in ways that the user finds easy to buy. Today’s product is selling users a raw unprocessed commodity, which is serving neither the interests of the users, merchants or operators.