Samsung and Google versus Apple?

Samsung: slipping and sliding

In 2013, it looked like Samsung Electronics could challenge Apple’s hegemony at the high-end of the handset market. The Korean giant’s flagship Galaxy smartphones were selling well and were equipped with features, such as large high definition displays and NFC, which Apple’s iPhones lacked.

But in 2014, Samsung’s Galaxy range lost some of is lustre – the latest flagship model, the S5, amounts to a fairly modest evolution of its predecessor, the S4. The Galaxy S5 underwhelmed some reviewers who criticised its look and feel, hefty price tag and erratic fingerprint sensor. Meanwhile, Apple launched two new high-spec handsets – the iPhone 6 and iPhone 6 Plus. These phones markedly close the hardware gap and fill a significant hole in Apple’s portfolio by venturing into the so-called phablet market, which sits between smartphones and tablets. Now that Apple has grasped consumers’ desire for larger form factors and bigger displays, Samsung may struggle to hold on to high-end buyers.

After out-innovating Apple in some respects in recent years, Samsung is now on the back foot again. While Apple is broadly back to parity in terms of hardware, Samsung continues to trail the Californian company in terms of software and services. Most reviewers still regard the iPhone as the gold standard when it comes to user experience.

It is now well understood that the iPhone’s lead is largely down to Apple’s absolute control over hardware and software. Samsung and other vendors selling handsets running Google’s Android operating system have struggled to achieve the slick integration between hardware and software exemplified by Apple’s iPhones. Samsung has often exacerbated this issue by presenting customers with a confusing mix of overlapping Google and Samsung apps on its Galaxy handsets.

Samsung’s Annus Miserablis

In the second quarter of 2014, research firm IDC estimates that Samsung shipped more than 18 million Galaxy S5s, along with nine million S3 and S4 units. That implies Samsung shipped 27 million models in its flagship Galaxy S range, compared with 35 million iPhones distributed by Apple. For the third quarter, IDC didn’t break out Galaxy sales, but the research firm flagged “cooling demand for [Samsung’s] high-end devices,” adding: “Although Samsung has long relied on its high-end devices, its mid-range and low-end models drove volume for the quarter and subsequently drove down average selling prices.”

But Samsung can’t afford to cede more of the high end of the market to Apple. The Korean giant is facing increasingly intense competition from low cost Chinese manufacturers in the low end and the mid-range segments of the handset market. The net result has been a marked decline in Samsung’s market share and falling revenues. As the global smartphone market has expanded to serve people in lower income groups, both Samsung and Apple have lost market share to the likes of Xiaomi, Lenovo and Huawei. But Samsung is suffering far more than Apple, whose devices are squarely aimed at the affluent (see Figure 3).

Figure 3: Samsung’s share of the global smartphone market share is sliding

Figure 3 Samsung's share of the global smartphone market share is sliding

source: IDC research

Worse still for Samsung, the decline in average selling prices is hitting its top line, damaging profitability and its ability to realise economies of scale. In terms of revenues, Apple is now almost as large as Samsung Electronics’ three divisions combined  and is much bigger than Samsung’s information technology and mobile (IM) division, which competes directly with Apple (see Figure 4).

Figure 4: Apple is now generating almost as much revenue as Samsung Electronics

Figure 4 Apple is now generating almost as much revenue as Samsung Electronics
Source: Financial results, Apple guidance and analyst estimates captured by www.4-traders.com

The declining performance of Samsung’s IM division has had a major impact on Samsung Electronics’ profitability. The Korean group’s operating margin is slipping back towards 10%, whereas Apple’s operating margin has stabilised at about 28%, after sliding in 2013, when it faced particularly intense competition from Samsung and the broader Android ecosystem (see Figure 5).

Figure 5: Samsung’s margins are low and going lower

Figure 5 Samsung's margins are low and going lower

Source: Financial results, Apple guidance and analyst estimates captured by www.4-traders.com

Although Samsung Electronics still generates slightly more revenue than Apple, the U.S. company is likely to make more than double the operating profit of its Korean rival in 2014 (see Figure 6).

Figure 6: Apple’s operating profits are set to be more than double those of Samsung

Figure 6 Apple's operating profits are set to be more than double those of Samsung

Source: Financial results, Apple guidance and analyst estimates captured by www.4-traders.com

Naturally, declining operating profits mean lower net profits and a less attractive proposition for investors. Samsung clearly needs to avoid slipping into a downward spiral where low profitability prevents it from investing in the research and development and the manufacturing capacity it will need to compete effectively with Apple at the high end. Apple is now generating about $20 billion more in net income than Samsung each year, meaning it has far more financial firepower than its main rival, together with a virtual blank cheque from investors (see Figure 7).

Figure 7: The gap between Apple and Samsung’s financial firepower is widening

Figure 7: The gap between Apple and Samsungs financial firepower is widening

Source: Financial results, Apple guidance and analyst estimates captured by www.4-traders.com

Samsung should also be concerned about competition from Microsoft at the high-end of the market. Another company with a surplus of cash, Microsoft has a strong strategic interest in creating compelling smartphones and tablets to shore up its position in the business software market. Now that it is developing both software and hardware in house, Microsoft may yet be able to create smartphones that provide a better user experience than many Android handsets.

In summary, Samsung’s flagging performance in the smartphone market is having a major impact on the financial performance of the group. There could be worse to come. If Samsung concedes more of the premium end of the smartphone market to Apple and possibly Microsoft, it risks competing solely on price in the low and mid segments, where its expertise in display technology and semiconductors won’t enable it to add significant value. Samsung’s margins would erode further and it would be in danger of going into the terminal decline experienced by the likes of Nokia and Motorola, which have also both led the mobile phone market in the past.

An implosion by Samsung would have grave consequences for telcos and their primary suppliers. Aside from Microsoft, the Korean conglomerate is the only company in the smartphone and tablet markets that has the resources to provide credible global competition for Apple. Although the leading Chinese smartphone makers are strong in emerging markets, they lack the brand cachet and the marketing skills to mount a serious challenge to Apple in North America and Western Europe.

 

  • Internet-Driven Disruption
  • Introduction
  • Executive Summary
  • Samsung: slipping and sliding
  • How will Samsung respond? 
  • The opportunities for Samsung in the smartphone market
  • The threats to Samsung in the smartphone market
  • Samsung’s next steps
  • Apple isn’t impregnable
  • Conclusions and implications for telcos
  • About STL Partners

 

  • Figure 1 – Apple financial firepower far outstrips that of Samsung Electronics
  • Figure 2 – How Samsung could shore up its position in the smartphone market
  • Figure 3 – Samsung’s share of the global smartphone market share is sliding
  • Figure 4 – Apple is now generating almost as much revenue as Samsung Electronics
  • Figure 5 – Samsung’s margins are low and going lower
  • Figure 6 – Apple’s operating profits are set to be more than double those of Samsung
  • Figure 7 – The gap between Apple and Samsung’s financial firepower is widening
  • Figure 8 – SWOT analysis of Samsung at the high end of the smartphone market
  • Figure 9 – Samsung Electronics is the largest investor in tech R&D worldwide
  • Figure 10 – Apple’s expanding portfolio is making life tougher for Samsung
  • Figure 11 – Potential strategic actions for Samsung in the smartphone market
  • Figure 12 – SWOT analysis of Apple in the smartphone market
  • Figure 13 – Potential strategic actions for Apple in the smartphone market

 

Smartphones: when will Huawei be No.1?

Summary: We were surprised to hear Huawei’s objective of becoming the world’s No.1 Smartphone maker at last year’s Mobile World Congress, and somewhat dubious whether it would achieve that goal. However, at this year’s show Huawei demonstrated impressive progress, and we consider it is no longer a question of if, but when it will achieve its goal. In this analysis we explore industry scenarios and their consequences.(March 2013, Executive Briefiing Service).

Huawei Ascend P2 Smartphone

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Huawei’s position

A brief history of Huawei

Huawei is no minnow. Revenues in 2012 were US$35bn, profits were US$2.5bn, R&D spend was US$4.8bn, and it employs 125k people of whom 75k are in R&D and have relationships with nearly every mobile operator on the planet. 

In network equipment Huawei has grown from market entrant to market leadership in fifteen years. The first overseas order was for fixed line products to Hutchison Whampoa in Hong Kong in 1997. The first major overseas wireless order was to build the Dutch operator Telfort’s 3G network in 2003. The initial primary reason for many operators choosing Huawei network equipment was their low price. Many people have claimed the price was below cost. No-one would argue that the decade that followed resulted in a torrent of red ink on most network equipment vendors profit and loss accounts and market share gains by Huawei.

In consumer equipment, Huawei initially focussed upon the dongle market introducing its first datacard in 2007. Within three years, Huawei achieved market leadership and today has a market share in excess of 50% around the globe. At Mobile World Congress 2013 (MWC13), the Huawei stand had by far the most impressive range of dongles: USB, MiFi and embedded. Again, Huawei was the price leader and competitors claimed below-cost selling to establish market leadership. In 2011, Huawei settled a lawsuit with the previous EU market leader, Option, about anti-dumping practices. 

In 2012, Huawei devices had revenues of US$7.5m and sold over 120m units: including 50m dongles and 52m handsets, of which 32m were smartphones. Today, Huawei is the world’s number three Smartphone maker according to data released by IDC.

 Figure 1 – Smartphone Manufacturer – Units and Growth Q4 2011/12

Manufacturer

Units 4Q12

Units 4Q11

Growth

Samsung

63.7

36.2

76.0%

Apple

47.8

37.0

29.2%

Huawei

10.8

5.7

89.5%

Others

97.1

81.9

18.6%

 

219.4

160.8

36.4%

 

 

 

 

All Phone

 

 

 

Samsung

111.2

99

12.3%

Apple

47.8

37

29.2%

Huawei

15.8

13.9

13.7%

Others

307.7

323.5

-4.9%

 

482.5

473.4

1.9%

Source: IDC

Price – Huawei’s usual weapon of choice

Given Huawei’s history, it is highly likely that in trying to achieve its Smartphone goal the primary weapon will be price. This will have a profound effect in the Smartphone market in the medium term. Our view is that the Smartphone profit pool will be severely reduced for nearly all manufacturers, Apple being the exception, at least until Huawei achieves its goal.

In Q4 2012, Smartphone shipments were 45% of total phones compared to 34% in the same period in 2011. Our view is that this growth in penetration will continue over the coming years peaking at approximately 80% in 2015. This growth will mean a lot of new smartphone users which will be extremely price conscious especially compared to the early smartphone adopters.

Our view is that in this growing market of price conscious users across the globe, Huawei is in the prime position to capture a significant portion of the market. In an optimistic case where the existing Smartphone manufacturers allow Huawei a price advantage, we believe it will take Huawei three years (i.e. Q4 2016) to achieve leadership. In a pessimistic case, we believe it will take Huawei five years (i.e. Q4 2018). 

Promotion – how can money help solve this problem?

The Huawei brand is not well known outside of China and many of the manufacturers see this is a major weakness. Our view is slightly contrarian – if Huawei can achieve #3 position with a brand that has such limited customer awareness, imagine what they could achieve if the brand was well known? 

The key Huawei announcement was in our opinion a commitment to brand building in 2013. While it is impossible to build the brand strength of an Apple in the short term, it is possible to create brand awareness with a huge spend on promotion and advertising. We can envisage that all the world’s top branding agencies are current descending on Shenzchen offering to help Huawei with their branding campaigns across the globe. We believe that in three years time the Huawei brand will be as well know as the other Smartphone makers.

Product – Huawei ascendant

Figure 2 – Huawei Ascend P2 Flagship Smartphone

Huawei Ascend P2 Smartphone 

At MWC13, Huawei launched the Ascend P2 as its new flagship product for 2013. Our view is that the build quality is extremely good with a lovely Corning Gorilla Glass screen. Perhaps the quality is not quite as high as the new Sony Xperia, but at least comparable with all the other new models in the show. The differentiator that Huawei is promoting is that it is the fastest handset in the world supporting 4G speeds of up to 150Mbps. This is a bit unrealistic in our view as no networks are yet built to support those speeds. However, it highlights that Huawei do have excellence in radio engineering and will use its vast R&D army to create differentiation. Huawei have already a commitment from the Orange group to sell the Ascend P2. The Ascend P2 will retail at a highly competitive €400 before operator subisidies.

Flagship products are important to show capabilities, but will not create the huge volumes required to achieve leadership. Huawei had a full range of handsets on display across the whole range of price points.

To read the note in full, including the following additional sections detailing support for the analysis…
  • Place – money talks and distributors will listen
  • The Marketing Mix
  • Five Smartphone Market Scenarios
  • Conclusion

…and the following figures…

  • Figure 1 – Smartphone Manufacturer – Units and Growth Q4 2011/12
  • Figure 2 – Huawei Ascend P2 Flagship Smartphone
  • Figure 3 – Smartphone market scenarios

Members of the Telco 2.0 Executive Briefing Subscription Service can download the full 11 page report in PDF format hereNon-Members, please subscribe here. For this or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Dealing with the ‘Disruptors’: Google, Apple, Facebook, Microsoft/Skype and Amazon (Updated Extract)

Executive Summary (Extract)

This report analyses the strategies behind the success of Amazon, Apple, Facebook, Google and Skype, before going on to consider the key risks they face and how telcos and their partners should deal with these highly-disruptive Internet giants.

As the global economy increasingly goes digital, these five companies are using the Internet to create global brands with much broader followings than those of the traditional telecoms elite, such as Vodafone, AT&T and Nokia. However, the five have markedly different business models that offer important insights into how to create world-beating companies in the digital economy:

  • Amazon: Amazon’s business-to-business Marketplace and Cloud offerings are text-book examples of how to repurpose assets and infrastructure developed to serve consumers to open up new upstream markets. As the digital economy goes mobile, Amazon’s highly-efficient two-sided commerce platform is enabling it to compete effectively with rivals that control the leading smartphone and tablet platforms – Apple and Google.
  • Apple: Apple has demonstrated that, with enough vision and staying power, an individual company can single-handedly build an entire ecosystem. By combining intuitive and very desirable products, with a highly-standardised platform for software developers, Apple has managed to create an overall customer experience that is significantly better than that offered by more open ecosystems. But Apple’s strategy depends heavily on it continuing to produce the very best devices on the market, which will be difficult to sustain over the long-term.
  • Facebook: A compelling example of how to build a business on network effects. It took Facebook four years of hard work to reach a tipping point of 100 million users, but the social networking service has been growing easily and rapidly ever since. Facebook has the potential to attract 1.4 billion users worldwide, but only if it continues to sidestep rising privacy concerns, consumer fatigue or a sudden shift to a more fashionable service.
  • Google: The search giant’s virtuous circle keeps on spinning to great effect – Google develops scores of free, and often-compelling, Internet services, software platforms and apps, which attract consumers and advertisers, enabling it to create yet more free services. But Google’s acquisition of Motorola Mobility risks destabilising the Android ecosystem on which a big chunk of its future growth depends.
  • Skype: Like Facebook and Google, Skype sought users first and revenues second. By creating a low-cost, yet feature-rich, product, Skype has attracted more than 660 million users and created sufficient strategic value to persuade Microsoft to hand over $8.5bn. Skype’s share of telephony traffic is rising inexorably, but Google and Apple may go to great lengths to prevent a Microsoft asset gaining a dominant position in peer-to-peer communications.

The strategic challenge

There is a clear and growing risk that consumers’ fixation on the products and services provided by the five leading disruptors could leave telcos providing commoditised connectivity and struggling to make a respectable return on their massive investment in network infrastructure and spectrum.

In developed countries, telcos’ longstanding cash-cows – mobile voice calls and SMS – are already being undermined by Internet-based alternatives offered by Skype, Google, Facebook and others. Competition from these services could see telcos lose as much as one third of their messaging and voice revenues within five years (see Figure 1) based on projections from our global survey, carried out in September 2011.

Figure 1 – The potential combined impact of the disruptors on telcos’ core services

Impact of Google, Apple, Facebook, Microsoft/Skype, Amaxon on telco services

Source: Telco 2.0 online survey, September 2011, 301 respondents

Moreover, most individual telcos lack the scale and the software savvy to compete effectively in other key emerging mobile Internet segments, such as local search, location-based services, digital content, apps distribution/retailing and social-networking.

The challenge for telecoms and media companies is to figure out how to deal with the Internet giants in a strategic manner that both protects their core revenues and enables them to expand into new markets. Realistically, that means a complex, and sometimes nuanced, co-opetition strategy, which we characterise as the “Great Game”.

In Figure 3 below, we’ve mapped the players’ roles and objectives against the markets they operate in, giving an indication of the potential market revenue at stake, and telcos’ generic strategies.

Figure 3- The Great Game – Positions, Roles and Strategies

The Great Game - Telcos, Amazon, Apple, Google, Facebook, Skype/Microsoft

Our in-depth analysis, presented in this report, describes the ‘Great Game’ and the strategies that we recommend telcos and others can adopt in summary and in detail. [END OF FIRST EXTRACT]

Report contents

  • Executive Summary [5 pages – including partial extract above]
  • Key Recommendations for telcos and others [20 pages]
  • Introduction [10 pages – including further extract below]


The report then contains c.50 page sections with detailed analysis of objectives, business model, strategy, and options for co-opetition for:

  • Google
  • Apple
  • Facebook
  • Microsoft/Skype
  • Amazon

Followed by:

  • Conclusions and recommendations [10 pages]
  • Index

The report includes 124 charts and tables.

The rest of this page comprises an extract from the report’s introduction, covering the ‘new world order’, investor views, the impact of disruptors on telcos, and how telcos are currently fighting back (including pricing, RCS and WAC), and further details of the report’s contents. 

 

Introduction

The new world order

The onward march of the Internet into daily life, aided and abetted by the phenomenal demand for smartphones since the launch of the first iPhone in 2007, has created a new world order in the telecoms, media and technology (TMT) industry.

Apple, Google and Facebook are making their way to the top of that order, pushing aside some of the world’s biggest telcos, equipment makers and media companies. This trio, together with Amazon and Skype (soon to be a unit of Microsoft), are fundamentally changing consumers’ behaviour and dismantling longstanding TMT value chains, while opening up new markets and building new ecosystems.

Supported by hundreds of thousands of software developers, Apple, Google and Facebook’s platforms are fuelling innovation in consumer and, increasingly, business services on both the fixed and mobile Internet. Amazon has set the benchmark for online retailing and cloud computing services, while Skype is reinventing telephony, using IP technology to provide compelling new functionality and features, as well as low-cost calls.

On their current trajectory, these five companies are set to suck much of the value out of the telecoms services market, substituting relatively expensive and traditional voice and messaging services with low-cost, feature-rich alternatives and leaving telcos simply providing data connectivity. At the same time, Apple, Amazon, Google and Facebook have become major conduits for software applications, games, music and other digital content, rewriting the rules of engagement for the media industry.

In a Telco2.0 online survey of industry executives conducted in September 2011, respondents said they expect Apple, Google, Facebook and Skype together to have a major impact on telcos’ voice and messaging revenues in the next three to five years . Although these declines will be partially compensated for by rising revenues from mobile data services, the respondents in the survey anticipate that telcos will see a major rise in data carriage costs (see Figure 1 – The potential combined impact of the disruptors on telcos’ core services).

In essence, we consider Amazon, Apple, Facebook, Google and Skype-Microsoft to be the most disruptive players in the TMT ecosystem right now and, to keep this report manageable, we have focused on these five giants. Still, we acknowledge that other companies, such as RIM, Twitter and Baidu, are also shaping consumers’ online behaviour and we will cover these players in more depth in future research.

The Internet is, of course, evolving rapidly and we fully expect new disruptors to emerge, taking advantage of the so-called Social, Local, Mobile (SoLoMo) forces, sweeping through the TMT landscape. At the same time, the big five will surely disrupt each other. Google is increasingly in head-to-head competition with Facebook, as well as Microsoft, in the online advertising market, while squaring up to Apple and Microsoft in the smartphone platform segment. In the digital entertainment space, Amazon and Google are trying to challenge Apple’s supremacy, while also attacking the cloud services market.

Investor trust

Unlike telcos, the disruptors are generally growing quickly and are under little, or no, pressure from shareholders to pay dividends. That means they can accumulate large war chests and reinvest their profits in new staff, R&D, more data centres and acquisitions without any major constraints. Investors’ confidence and trust enables the disruptors to spend money freely, keep innovating and outflank dividend-paying telcos, media companies and telecoms equipment suppliers.

By contrast, investors generally don’t expect telcos to reinvest all their profits in their businesses, as they don’t believe telcos can earn a sufficiently high return on capital. Figure 16 shows the dividend yields of the leading telcos (marked in blue). Of the disruptors, only Microsoft (marked in green) pays a dividend to shareholders.

Figure 16: Investors expect dividends, not growth, from telcos

Figure 1 Chart Google Apple Facebook Microsoft Skype Amazon Sep 2011 Telco 2.0

Source: Google Finance 2/9/2011

The top telcos’ turnover and net income is comparable, or superior, to that of the leading disruptors, but this isn’t reflected in their respective market capitalisations. AT&T’s turnover is approximately four times that of Google and its net income twice as great, yet their market cap is similar. Even accounting for their different capital structures, investors clearly expect Google to grow much faster than AT&T and syphon off more of the value in the TMT sector.

More broadly, the disparity in the market value between the leading disruptors and the leading telcos’ market capitalisations suggest that investors expect Apple, Microsoft and Google’s revenues and profits to keep rising, while they believe telcos’ will be stable or go into decline. Figure 17 shows how the market capitalisation of the disruptors (marked in green) compares with that of the most valuable telcos (marked in blue) at the beginning of September 2011.

Figure 17: Investors value the disruptors highly

Figure 2 Chart Google Apple Facebook Microsoft Skype Amazon Market Capitalisation Sep 2011 Telco 2.0

Source: Google Finance 2/9/2011 (Facebook valued at Facebook $66bn based on IPG sale in August 2011)

Impact of disruptors on telcos

It has taken longer than many commentators expected, but Internet-based messaging and social networking services are finally eroding telcos’ SMS revenues in developed markets. KPN, for example, has admitted that smartphones, equipped with data communications apps (and Whatsapp in particular), are impacting its voice and SMS revenues in its consumer wireless business in its home market of The Netherlands (see Figure 18). Reporting its Q2 2011 results, KPN said that changing consumer behaviour cut its consumer wireless service revenues in Holland by 2% year-on-year.

Figure 18: KPN reveals falling SMS usage

Figure 3 Chart Google Apple Facebook Microsoft Skype Amazon KPN Trends Sep 2011 Telco 2.0

Source: KPN Q2 results

In the second quarter, Vodafone also reported a fall in messaging revenue in Spain and southern Africa, while Orange saw its average revenue per user from data and SMS services fall in Poland.

How telcos are fighting back

Big bundles

Carefully-designed bundles are the most common tactic telcos are using to try and protect their voice and messaging business. Most postpaid monthly contracts now come with hundreds of SMS messages and voice minutes, along with a limited volume of data, bundled into the overall tariff package. This mix encourages consumers to keep using the telcos’ voice and SMS services, which they are paying for anyway, rather than having Skype or another VOIP service soak up their precious data allowance.

To further deter usage of VOIP services, KPN and some other telcos are also creating tiered data tariffs offering different throughput speeds. The lower-priced tariffs tend to have slow uplink speeds, making them unsuitable for VOIP (see Figure 19 below). If consumers want to use VOIP, they will need to purchase a higher-priced data tariff, earning the telco back the lost voice revenue.

Figure 19: How KPN is trying to defend its revenues

Figure 4 Chart Google Apple Facebook Microsoft Skype Amazon KPN Defence Sep 2011 Telco 2.0

Source: KPN’s Q2 results presentation

Of course, such tactics can be undermined by competition – if one mobile operator in a market begins offering generous data-only tariffs, consumers may well gravitate towards that operator, forcing the others to adjust their tariff plans.

Moreover, bundling voice, SMS and data will generally only work for contract customers. Prepaid customers, who only want to pay for what they are use, are naturally charged for each minute of calls they make and each message they send. These customers, therefore, have a stronger financial incentive to find a free WiFi network and use that to send messages via Facebook or make calls via Skype.

The Rich Communications Suite (RCS)

To fend off the threat posed by Skype, Facebook, Google and Apple’s multimedia communications services, telcos are also trying to improve their own voice and messaging offerings. Overseen by mobile operator trade association the GSMA, the Rich Communications Suite is a set of standards and protocols designed to enable mobile phones to exchange presence information, instant messages, live video footage and files across any mobile network.

In an echo of social networks, the GSMA says RCS will enable consumers to create their own personal community and share content in real time using their mobile device.

From a technical perspective, RCS uses the Session Initiation Protocol (SIP) to manage presence information and relay real-time information to the consumer about which service features they can use with a specific contact. The actual RCS services are carried over an IP-Multimedia Subsystem (IMS), which telcos are using to support a shift to all-IP fixed and mobile networks.

Deutsche Telekom, Orange, Telecom Italia, Telefonica and Vodafone have publically committed to deploy RCS services, indicating that the concept has momentum in Europe, in particular. The GSMA says that interoperable RCS services will initially be launched by these operators in Spain, Germany, France and Italy in late 2011 and 2012. [NB We’ll be discussing RCSe with some of the operators at our EMEA event in London in November 2011.]

In theory, at least, RCS will have some advantages over many of the communications services offered by the disruptors. Firstly, it will be interoperable across networks, so you’ll be able to reach people using different service providers. Secondly, the GSMA says RCS service features will be automatically available on mobile devices from late 2011 without the need to download and install software or create an account (by contrast, Apple’s iMessage service, for example, will only be installed on Apple devices).

But questions remain over whether RCS devices will arrive in commercial quantities fast enough, whether RCS services will be priced in an attractive way and will be packaged and marketed effectively. Moreover, it isn’t yet clear whether IMS will be able to handle the huge signalling load that would arise from widespread usage of RCS.

Internet messaging protocols, such as XMPP, require the data channel to remain active continuously. Tearing down and reconnecting generates lots of signalling traffic, but the alternative – maintaining a packet data session – will quickly drain the device’s battery.
By 2012, Facebook and Skype may be even more entrenched than they are today and their fans may see no need to use telcos’ RCS services.

Competing head-on

Some of the largest mobile operators have tried, and mostly failed, to take on the disruptors at their own game. Vodafone 360, for example, was Vodafone’s much-promoted, but ultimately, unsuccessful €500 million attempt to insert itself between its customers and social networking and messaging services from the likes of Facebook, Windows Live, Google and Twitter.

As well as aggregating contacts and feeds from several social networks, Vodafone 360 also served as a gateway to the telco’s app and music store. But most Vodafone customers didn’t appear to see the need to have an aggregator sit between them and their Facebook feed. During 2011, the service was stripped back to be just the app and music store. In essence, Vodafone 360 didn’t add enough value to what the disruptors are already offering. We understand, from discussions with executives at Vodafone, that the service is now being mothballed.

A small number of large telcos, mostly in emerging markets where smartphones are not yet commonplace, have successfully built up a portfolio of value-added consumer services that go far beyond voice and messaging. One of the best examples is China Mobile, which claims more than 82 million users for its Fetion instant messaging service, for example (see Figure 20 – China Mobile’s Internet Services).

Figure 20 – China Mobile’s Internet Services

China Mobile Services, Google, Apple, Facebook Report, Telco 2.0

Source: China Mobile’s Q2 2011 results

However, it remains to be seen whether China Mobile will be able to continue to attract so many customers for its (mostly paid-for) Internet services once smartphones with full web access go mass-market in China, making it easier for consumers to access third-parties’ services, such as the popular QQ social network.

Some telcos have tried to compete with the disruptors by buying innovative start-ups. A good example is Telefonica’s acquisition of VOIP provider Jajah for US$207 million in January 2010. Telefonica has since used Jajah’s systems and expertise to launch low-cost international calling services in competition with Skype and companies offering calling cards. Telefonica expects Jajah’s products to generate $280 million of revenue in 2011, primarily from low-cost international calls offered by its German and UK mobile businesses, according to a report in the FT.

The Wholesale Applications Community (WAC)

Concerned about their growing dependence on the leading smartphone platforms, such as Android and Apple’s iOS, many of the world’s leading telcos have banded together to form the Wholesale Applications Community (WAC).

WAC’s goal is to create a platform developers can use to create apps that will run across different device operating systems, while tapping the capabilities of telcos’ networks and messaging and billing systems.

At the Mobile World Congress in February 2011, WAC said that China Mobile, MTS, Orange, Smart, Telefónica, Telenor, Verizon and Vodafone are “connected to the WAC platform”, while adding that Samsung and LG will ensure “that all devices produced by the two companies that are capable of supporting the WAC runtime will do so.”

It also announced the availability of the WAC 2.0 specification, which supports HTML5 web applications, while WAC 3.0, which is designed to enable developers to tap network assets, such as in-app billing and user authentication, is scheduled to be available in September 2011.

Ericsson, the leading supplier of mobile networks, is a particularly active supporter of WAC, which also counts leading Alcatel-Lucent, Huawei, LG Electronics, Qualcomm, Research in Motion, Samsung and ZTE, among its members.

In theory, at least, apps developers should also throw their weight behind WAC, which promises the so far unrealised dream of “write once, run anywhere.” But, in reality, games developers, in particular, will probably still want to build specific apps for specific platforms, to give their software a performance and functionality edge over rivals.

Still, the ultimate success or failure of WAC will likely depend on how enthusiastically Apple and Google, in particular, embrace HTML5 and actively support it in their respective smartphone platforms. We discuss this question further in the Apple and Google chapters of this report.

Summarising current telcos’ response to disruptors

 

Telcos, and their close allies in the equipment market, are clearly alert to the threat posed by the major disruptors, but they have yet to develop a comprehensive game plan that will enable them to protect their voice and messaging revenue, while expanding into new markets.

Collective activities, such as RCS and WAC, are certainly necessary and worthwhile, but are not enough. Telcos, and companies across the broader TMT ecosystem, need to also adapt their individual strategies to the rise of Amazon, Apple, Facebook, Google and Skype-Microsoft. This report is designed to help them do that.

[END OF EXTRACT]

 

Apple iCloud/iOS: Killing SMS Softly?

Summary: Our analysis of how Apple’s iCloud, iOS5, and MacOS developments build value and control for Apple’s digital platform, and their consequences on other parts of the digital ecosystem, including the impact of iMessage on text messaging. (June 2011, Executive Briefing Service)

Apple iCloud logo in analysis of impact of iCloud/iOS on digital ecosystem

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Below is an extract from this 32 page Telco 2.0 Executive Briefing that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service here. Non-members can buy a Single User license for this report online here for £995 (+VAT) or subscribe here. For multiple user licenses or other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Creating effective commercial strategies in the digital ecosystem, including learning from and dealing with major players like Apple and Google, is a key theme of Telco 2.0’s ‘Best Practice Live!, a free global online event on 28-29 June 2011, as well as of other Telco 2.0 research and analysis.

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Introduction

icloudious 1 - WWDC June 2011.pngApple provided a glimpse into some of the upcoming new features of its key software platforms iOS and MacOS at its WorldWide Developer Conference (WWDC) in June 2011. It also announced its much anticipated move into providing cloud based services and away from using the PC as the controlling hub.

iOS and MacOS are Apple’s key software assets – the assets which add soul to Apple’s key money spinning devices (iPhone, iPad and Mac). iCloud is the first iteration of the missing third leg – the software that ties all the devices together seamlessly. Together iOS, MacOS and iCloud are both the differentiator for the consumer and the barrier-to-entry for competitors. They are the soul of the Apple overall platform.

The Apple platform is evolving, and its new features will impact on many players in the value chain: namely the various distributors including mobile operators, aggregators, content creators and of course end consumers.

Nearly every main feature launched seems to support our general theory that Apple is squeezing value from the aggregators and distributors and pushing that value into the device manufacturers (i.e. them). 

Contents

The rest of this webpage covers:

  • iMessage – killing SMS softly? [NB There is additional analysis of this in the full Briefing]
  • iTunes in the Cloud – getting one up on Amazon
  • Notifications – Apple robs Windows Phone and Android advantage 


The full Briefing, which contains the complete section on iMessage, also includes the following sections:

  • The impact of iMessage on SMS revenues, and telco defence strategies
  • MacOS Software – Apple shuts out other retailers
  • Newsstand – Appeasing Publishers (to a degree)
  • MobileMe – just ‘making it work’ …and building the moat
  • iCloud and Video Services – holding fire for now
  • Activation – Cutting the PC cord
  • Photo Stream – yes, but why?
  • Data Centre Economics – making a start
  • Conclusions – Lessons from Apple’s Strategy


1. iMessage – killing SMS softly?

icloudious 1a - iMessage iCloud June 2011.png iMessage, which is the primary mechanism for SMS and MMS features, has been radically reengineered with messages between Apple platform consumers no longer being carried on the mobile network SMS and MMS infrastructure. All of this happens transparently to the consumer and they don’t need to know if their recipients are also using Apple devices – the message routing is determined by the Apple platform.

iMessage is great for consumers as these onnet messages are free, but dreadful for MNOs as they all will probably take a hit on messaging revenues. Apple is competing with the MNO’s core services, and they have even made it easier for consumers to see the value proposition by colouring the bubbles for onnet and offnet messages differently.

Apple has been quite clever in the timing of the release of this feature. Applications such as WhatsApp have already been blamed by some MNOs for declining messaging revenues – in particular KPN that has recently experienced a very significant impact on revenues. Apple effectively is doing nothing differently to them, just improving the consumer experience by making it easier to send and receive offnet messages.

In terms of platform economics, Apple is adding value to the consumer via the device and squeezing value from the mobile network distributors. We believe it is only a matter of time before Apple start offering voice features. This, together with their video conferencing application Facetime, leaves mobile operators staring into the future where they will only be selling data access services.

[NB There’s further analysis of these impacts and defences against them in the full Briefing.]

2. iTunes in the Cloud – getting one up on Amazon

 icloudious 2 - iTunes iCloud June 2011.png The key value proposition of “iTunes in the Cloud” is that all songs historically purchased through iTunes are available for download to any Apple device at no extra cost wirelessly either through a WiFi or 3G connection as long as the consumer remains within their data tier. The user has control over which songs he wants to download to what devices thus avoiding a situation where all storage on an iPhone or iPad is consumed by a vast collection.

The level of consumer control is such that a consumer can even download a previously purchased album for a specific journey and then remove it after listening to save space. New purchases can immediately downloaded to all devices or selectively as with the case of historical purchases. This feature definitely improves the Apple platform, and especially compared to alternate music retailers such as Amazon.

Currently, Apple users can purchase songs or albums from Amazon and they will be automatically added to iTunes on the laptop, then on synchronization the songs transfer to the iPhone or iPad. Previously, buying songs through the Amazon store on the PC was as simple as buying through the Apple iTunes store, and Amazon has been slowly gaining market share in music downloads, because it competes on price and often offers songs cheaper than in the Apple iTunes store. Now, with “iTunes in the Cloud”, Amazon may still be able to beat Apple iTunes Store on price, but the user experience is now deficient.

We seriously doubt that Apple will allow 3rd party retailers access to their iTunes in the Cloud service, and argue that Apple is using their platform to improve the position of their retail arm compared to 3rd parties.

iCloudios 4 - iTunes Match June 2011.jpgThe other service offered, iTunes Match, also adds incredible value to the platform. Apple has negotiated a deal with the major record labels to offer the opportunity to consumers to add tracks from their collections not purchased via the Apple store to the iTunes in the Cloud service for a cost of $25/year. Reputedly, Apple is sharing this revenue 70:30 with the record labels and as a paid a huge advance of US$100m-US$150m for the USA rights alone. Apple has set the benchmark price for cloud music licensing and has set the bar so high that it is hard to see new entrants having sufficient funding to gain similar licenses. Even Amazon or Google will be questioning whether they can generate enough money from music to justify the price of the licenses.

At the launch event, Steve Jobs presented the use-case of customers who had ripped their physical CDs. The more discussed use-case in the media is those people who have obtained their songs from illegal means, either via P2P networks or friend sharing, who effectively now have a US$25/annum service which legitimizes not only their past behaviour, but potentially also their future behaviour. The third use-case is people who buy cheaper digital music from other digital retailers, e.g. Amazon, and now have an option to pay an ongoing fee to add the simplicity of the iTunes in the Cloud service. Effectively, the usability advantage of the Apple platform is priced at US$25/annum which means this use-case only makes sense to heavy ongoing purchasers of music.

Apple didn’t face the same licensing issue from the publishers and has added a very similar service for all Books bought from the iBookstore with the added feature of bookmarks are synchronized and shared across devices. Overall, Apple has built very compelling cloud services for music, books and magazines and erected larger barriers for its competitors. If iMessage show Apple leveraging interconnected with other networks when it suits them, iTunes and iBookstore show Apple adding features which not only make interconnect more difficult for other companies, but firmly closing previously open doors.

3. Notifications – Apple robs Windows Phone and Android advantage

 

iCloudios 5 - notifications June 2011.pngA notification is the mechanism that consumers are alerted to events – for instance, an incoming email or sms. It is the key mechanism that 3rd party developers communicate with their users – for instance, in a sports application a notification can alert the user that their football team has scored a goal. Apple has completely revamped their notifications user experience with the addition of a notifications centre.

Apple have pushed over 100 billion notifications to iPhone and iPad which presumably partly accounts for the high consumption of signaling capacity which many mobile operators have been complaining about.

It also shows that Apple is quick to address deficiencies in their platform compared to others. This is a key feature of platform economics; you have to invest sometimes to play catch-up. It also highlights the risks for developers of building solutions which address platform weaknesses – yesterday’s successful application is tomorrow inbuilt into the platform.

Interestingly, an alternate notification application was never approved by Apple in their AppStore and instead went into the wilds of only being available on jailbroken iPhones. Apple new notification centre bears a striking resemblance to the non-approved one. iCloudios 6 - notifications June 2011.png Another example of this approach is with the feature for reminders, where a plethora of applications were already being sold in the Application store. Apple added a feature called Reminders which is part of the initial application load, and which effectively destroys the market for 3rd party applications. This in some ways looks like a repeat of the Microsoft strategy with Windows and Internet Explorer which got them in such trouble with regulators across the globe.

To read the full Briefing, members of the Telco 2.0 Executive Briefing Subscription Service can download the full 32 page report in PDF format here. Non-Members, please see here for how to subscribe, here to buy a single user license for for £995, or for multi-user licenses and any other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Organisations, company types, areas, people and industry models referenced: Apple, platform, Amazon, Cloud, Google, strategy, Vodafone, WhatsApp, O2, Orange, publishers, Steve Jobs, WWDC, ARPU, Blackberry, Carphone Warehouse, Everything Everywhere, MNO, Prepay, record labels, Telefonica, T-Mobile, Viber.

Technologies and products referenced: iPad, iPhone, PC, Windows, iCloud, iTunes, iMessage, Android, iOS, messaging, MMS, MobileMe, SMS, voice, WiFi, Windows Phone, 3G, Activation, AppStore, Data Centre, NewsStand, Notifications, Photo Stream, Video, BlackBerry Messenger, Facetime, Freebee, Gmail, GSM, HTML5, iBookstore, Internet Explorer, Microsoft Live, P2P, Photostream, RCS-e, Snow Leopard, UltraViolet, VoIP, Windows7.

iPad2: how Apple plans to dominate the ‘post PC era’

Summary: Apple’s new ‘PC-killer’ tablet is intended to significantly expand the Apple ecosystem, with long-term impacts on many players including telcos, giving Apple an even stronger hold on the market. What strategies should telcos adopt?

This is an extract from this 14 page Telco 2.0 Analyst Note, 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 using the links below.

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‘Lessons from Apple: Fostering vibrant content ecosystems’ is also a key session theme at our upcoming ‘New Digital Economics’ Brainstorms (Palo Alto, 4-7 April, London, 11-13 May, and Singapore 22-23 June). Please use the links or email contact@telco2.net or call +44 (0) 207 247 5003 to find out more.

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Introduction

While Apple’s new tablet has some interesting developments to its content and software ecosystems, the key business model move is that by extremely aggressive market positioning on price, weight and design, it will establish a new dominant platform position for Apple in the ‘post PC era’.

How far should telcos go in supporting Apple’s latest innovation? In this article we outline:

  • the iPad’s significantly enhanced features and consumer positioning;
  • important upcoming developments in the ‘upstream’ content publishing ecosystems;
  • market forecasts and our view of the impact of the new iPad;
  • and explore strategic alternatives for industry players, especially telcos.

It’s Faster, Lighter, Smaller…

At the heart of the iPad2 is a new dual-core processor internally developed by the Apple chip team. Apple claims the new A5 is twice as fast the A4 processor in the original iPad for normal tasks. Graphic intensive tasks are now up to nine times faster. The nullifies an advantage of other tablets which are due to come onto the market during 2011, the majority of which are based on dual processors from either Qualcomm (Snapdragon) or Nvidia (Tegra 2)

The iPad2 is also 33% thinner and 15% lighter which is a significant improvement that Apple sees as having an important impact on the overall user experience. The Telco 2.0 team agrees: the original iPad was already of a higher build quality and ergonomically feels much better than the competition. We also suspect that the iPad2 battery life of 10 hours will also be a big differentiator.

…with more built-in hardware…

The addition of a front and rear camera not only catches up with competition but offers a brand new set of capabilities for third parties developers to build into their applications (see below).

Other notable hardware features are: the additional of a gyroscope, which is already in the iPhone and IPod touch, which gives extra location features especially to the games developer community; and a multi-mode modem, supporting both EVDO and GSM networks. The incremental cost for the dual core modem is retained at US$130, which seems high and the Telco 2.0 team feels shows Apple’s inclination to promote public WiFi over mobile operators 3G networks.

…better accessories…

Apple showcased two new accessories – a new cover and a new cable.

Apple iPad Smartcover

The Smartcover is an intriguing piece of design which relies on magnets to align itself to the iPad and snap into place. It is a radical improvement on the cover for original iPad. The Smartcover comes in multiple colours and in polyurethane (US$39) or leather (US$79). The potential profit from this accessory is worth considering: we would be surprised if the margin is less than 100% for what is after all a piece of plastic with some magnets in.

The other accessory is a HDMI cable which allows the iPad2 to hook up to HDTV’s and play the media contained, whether music, films or TV shows. Apple claimed in the launch presentation that this was a feature requested by the educational sector to aide classroom teaching. But, it obviously has a far more wide reaching application in the hands of the mass market in the living room. 

For non-wired connections to the TV, Apple has upgraded its Airplay protocol to include synching of photo’s and video via an AppleTV box. It is rumoured that Apple is currently offering licensing of the Airplay technology to TV and Audio manufacturers which obviously presents a threat to the alternative, which is DNLA technology.

…and cheaper!

Apple iPad Price

Despite the extra hardware, Apple has retained the existing pricing structure – US$499 for the basic model. Apple is pursuing a very aggressive pricing strategy and obviously is planning to capture a huge share of tablet market.
In comparison, the Motorola Xoom with a similar hardware specification is priced at US$799. Even subsidized, the Xoom is priced at US$599 with a two-year, minimum 1GB data contract for US$20/month from Verizon.

This aggressive price will be a major problem for tablet competitors. It is also noticeable that contained within the Apple Q4 2010 results, the ASP for the iPhone was US$626 compared to an ASP for the iPad of US$667. Given the larger form factor of the iPad, we suspectthat Apple aretaking a lower margin on the iPad than the iPhone.

FaceTime – another move into communications

Apple iPad FaceTime

We think the iPad2 is a much better form factor for videoconferencing that the iPhone. Apple has bundled their FaceTime application with the operating system. FaceTime on the iPad2 highlights how Apple continually increases the value of their overall platform with incremental features. iPad users can now video conference with iPhone, iPod Touch and Mac users – all for free over WiFi connections. This immediately threatens not only Skype, but other social networking tools that are keen to add voice and messaging features and usage, such as Facebook and Google. More importantly for the mobile operators, FaceTime represents a clear and present danger to their voice and messaging revenues.

No MobileMe – yet

Before the launch event, there was a lot of speculation that Apple would be offering an upgrade to its MobileMe cloud services. The speculation was that Apple would allow synchronizing of content, whether audio, video or pictures to an Apple cloud which could then be accessed on any device – whether computer, phone or tablet. These rumours have been around since Apple acquired the LaLa team which had built a similar product for music digital lockers.

We did not expect an announcement at this point, mainly because Apple and the rest of the industry are awaiting a key legal ruling which could enable digital lockers without the need for the licences from the rights holders. This case is MP3tunes v EMI and is currently under consideration by a judge in New York and a decision is due within six months.

Michael Robertson is behind mp3tunes and has been a perennial thorn in rights holders’ paws since the days of mp3.com. He is adopting the DCMA defence, so successfully used by Google/YouTube in their case against Viacom, which is essentially that the web service is not responsible for content uploaded by a 3rd party to their service as long as they take it down when notified by copyright holders of infringement. If Michael Robertson wins, we expect a raft of digital locker services to be launched by the major internet players in the second half of 2011 which will not only be cheap, but also ruin many start-ups, such as Spotify, which have built a premium paid-for model around streaming of content on multiple devices.

Important Changes in the Publishing Model

Apple iPad Publishers

The other big news related to the publishing industry and eBooks in general. Random House wasn’t originally sure about the whole Apple agency pricing agreement and that left them as the holdout at the original iPad launch among the so-called “big six” publishers (including HarperCollins, Penguin Group, Simon & Schuster, Hachette, and Macmillian), but it seems that Apple has managed to convince them to join.

The ‘agency model’, where the publisher sets the retail price of the eBook, and in Apple’s case reaps 70% of the final selling price, is still to be tested in the courts. This model is different to the typical publishing arrangement where the publisher sets a wholesale price and the retailer prices at whatever they feel with whatever margin it yields them. This has allowed retailers, such as Amazon and the Supermarkets, to aggressively price bestsellers earning money on other items in the shopping basket.

The validity of the agency model will be tested throughout 2011 with the EU and several USA states already looking into price fixing. The outcomes of which will have a fundamental effect on the way digital content is brought to market and retailed.

The Post PC Era

Apple iPad Evolution

At the launch event Steve Jobs proudly proclaimed the birth of a new ‘Post PC era’. An era where people are not obsessed with GB and MHz of a single machine, but instead the overall customer experience across a range of devices. We would argue that Apple products have always attracted people that valued overall user experience as superior to the cheaper Wintel computer experience – even in the dark days when the Apple share of the PC market was shrinking and seemingly restricted to content creators, whether desktop publishers or audiovisual creators.

In the recent past, the iPod introduced Apple products to a whole new generation of users – with upside for its computer business. Similar waves of knock-on benefits can be seen with the introduction of the iPhone and iPad – more and more people are joining the Apple platform and there are significant benefits across the whole range of products.

Whatever consumers want, there is a range of products to suit their tastes, from the entertainment focused iPods through to the complete range of work-horse Mac products. It is also noticeable that iOS features such as the Appstore are also being added to the more industrial MacOS.

So we think the strategic message carried in Jobs’ words is that Apple wants to dominate the Post PC era, and it’s means of doing so is to continue to build out and interlink its ecosystem.

‘Apple DNA’ and the ‘Apple Platform’

Apple iPad DNA

Steve Jobs most memorable quote at the launch event was “It’s in Apple’s DNA that technology alone is not enough, that it is technology married with liberal arts, married with the humanities that yield us the result that makes our hearts sing.”

The demo of the iMovie and GarageBand iPad2 applications highlighted Apple tools for video-editing and music creation at unbelievable price points of US$5 for each. It stretches the imagination to see Samsung, Nokia, RIM, Microsoft or even Google to launch similar products. These are perfect tools for someone to experiment with. The professional content creators might need to upgrade to Mac’s and professional grade software: the Coen Brothers used Final Cut Studio is edit their latest movie, True Grit.

Apple’s strategy in the ‘Post PC era’ is an attempt to corner the market in content creation and consumption across a range of devices – again something that individual OEMS even with the software magic of Google and Microsoft will find difficult to beat.

To read the rest of the article, including…

  • Market Forecasts
  • Conclusions – what should mobile operators do?

Members of the Telco 2.0TM Executive Briefing Subscription Service and the Telco 2.0 Dealing with Disruption Stream can download the full 14 page report in PDF format here. Non-Members, please see here for how to subscribe. Alternatively, please email contact@telco2.net or call +44 (0) 207 247 5003 for further details. There’s also more on ‘Lessons from Apple: Fostering vibrant content ecosystems’ at our AMERICAS, EMEA and APAC Executive Brainstorms and Best Practice Live! virtual events.

 

Full Article: Mobile Broadband: Urgent need for new business models

Summary: While the market for mobile broadband services (3G/WiMax/Dongles/Netbooks etc.) is growing explosively, today’s telco propositions are based on out-moded business models which threaten profitability. Telco 2.0 proposes innovative retail and wholesale approaches to improve returns.

This 30+ page article can be downloaded in PDF format here.The Executive Summary is reproduced below.

Executive summary & recommendations

At present, the majority of mobile broadband subscribers are engaged through traditional monthly contracts, typically over 12-24 month periods. This is true for both standalone modems and especially embedded-3G notebooks. There are also some popular prepaid offerings, especially in markets outside North America.

However, further evolution is necessary. Many consumers will not want another monthly commitment, especially if they are infrequent users. Operators will be wary of subsidising generic computing devices for the non-creditworthy.

We expect a variety of new business models to emerge and take a significant share of the overall user base, including:

  • Session-based access, similar to the familiar WiFi hotspot model;
  • Bundling of mobile broadband with other services, for example as an adjunct to fixed broadband or mobile voice services;
  • Free, guest or “sponsored” mobile broadband, paid for by venue owners or event organisers;
  • “Comes-with-data-included” models, where the upfront device purchase price includes connectivity, perhaps for a year;
  • Two-sided business models, with mobile access subsidised by “upstream” parties like advertisers or governments, rather than direct end-user payment.

Transition to these models will not be easy. There are question marks about the convenience of using physical SIM cards, especially for temporary access. Distribution, billing and support models will need re-evaluation. Definitions and metrics will need re-evaluation. Terms like ARPU and “subscription” will have less relevance as conventional “subscribers” drop to perhaps 40% of the overall mobile broadband user base. Operators and vendors need to face up to these challenges as soon as possible.

Figure 3: Mobile broadband can support both subscription & transient models

[Figure]

Source: Telco 2.0

Recommendations for mobile operators & retailers

Business models and business planning

  • Calculate your production cost per GB of data based on the real cost of adding extra new capacity, rather than just using up the “sunk costs” of current radio assets;
  • Reinterpret mobile broadband business plans based on potential capex reductions and delayed capacity upgrades during recession;
  • Develop a broad range of business models / payment options, including long-term contracts, prepaid accounts, session-based services, bundles and mechanisms for enabling “free” or “sponsored” connections. Do not think solely in terms of “subscribers” as most future users will not have “subscriptions”;
  • Examine “two-sided” Telco 2.0 business models as mechanisms for gaining mobile broadband revenue streams, for example through advertisers and governments.

Marketing and distribution

  • Be extremely careful about marketing mobile broadband as a direct alternative to DSL / cable. You may also need those wired broadband lines for future femtocells or WiFi offload;
  • Be realistic about the future mix of dongles vs. embedded modules. Customers (and salespeople) like dongles, so despite the theoretical attractions of embedded, don’t kill the golden goose. Instead, look at ways to add value to the dongle proposition;
  • Partner with large IT services and integration firms to deliver mobile broadband solutions to the enterprise, rather than point products.

Network planning

  • In dense areas, spectrum and network capacity is generally too valuable to waste on those users who are not “truly mobile”;
  • Only use application-specific traffic management if you are prepared to openly publish details of your network policies. Vague terms on “fair usage” are likely to be counter-productive and challenged by law and the Internet community;
  • Consider potential scenarios around new high-bandwidth applications appearing across the user base (e.g. high-definition video, enhanced always-on social networking etc). Put in place strong links between your device, web application and radio network departments to anticipate effects.

Technology planning

  • Look at the evolution of devices and software to understand likely opportunities & threats in the way they use the network (e.g. always-on connection whilst “off”, background applications pulling down traffic in “quiet” periods, new browser types or video codecs etc);
  • Push vendors and standards bodies towards mechanisms for enabling session-based access for mobile broadband. This may need compromises on SIMs or roaming / multi-operator partnerships.

Organisation

  • Develop a separate, arm-length, wholesale division able to offer mobile broadband to MVNOs, Internet players, device/content vendors or vertical-market specialists on a non-discriminatory basis.

Recommendations for network equipment suppliers

Business models and business planning

  • Better understand the mix of traffic by device type on operator customers’ networks, as this will drive their future upgrade / enhancement plans. A move to PC-dominated networks may need very different architecture to phone-oriented designs;
  • Develop network-upgrade business cases against realistic growth in device types, application consumption and changing usage patterns.

Product Development

  • Look at new managed service opportunities arising around the MID and “mobilised” broadband consumer electronics device ecosystems, for example in content or application management, service and support etc;
  • Look at mechanisms for supporting non-SIM or multi-SIM models for mobile broadband, especially for users with multiple devices;
  • Optimise backhaul and network-offload solutions to cope with expected trends in mobile broadband. Integrate WiFi or femtocells with “split tunnel” architectures to “dump traffic onto the Internet”;
  • Develop data-mining and analytics solutions to help operators better understand the usage models for mobile broadband, and customise their networks and offerings to target end users more effectively.

Marketing and distribution

  • Be wary of over-hyping network peak speeds in marketing material, rather than increasing overall aggregate network capacity;
  • Position WiMAX networks as ideal platforms for innovative end-to-end device, connectivity and application concepts.

Recommendations for device & component vendors

Business models and business planning

  • Consider issues around macro-network offload, specifically the ability to easily recognise and preferentially connect via femtocells or WiFi;
  • Expect the MID, consumer electronics and M2M markets for mobile broadband to be fragmented and possibly delayed by recession. Focus on partner programmes, tools and consulting/integration services to enable the creation of new device types and business models;
  • Do not expect markets with a heavy prepay bias for mobile phones to be enthusiastic about long-term contracts for notebook-based mobile broadband;
  • Be very wary about operator software acting as a “control point” on the notebook, especially in terms of application monitoring / blocking / advertising. As handsets become more open, there are few arguments for PCs to become closed;
  • Anticipate support questions around issues like network coverage, signal strength etc. and have processes in place to deal with these;
  • Consider new business models for WWAN-enabled notebooks supported by advertisers, content or Internet companies, governments etc;
  • Support WiMAX as well as 3G / LTE in new device platforms – it seems likely that some WiMAX operators will be more open to experimentation with new business models, as they have less legacy to protect from cannibalisation.

Product Development

  • Add value to dongles by supporting other functions like GPS, video, memory, WiFi, MP3 etc. Also use physical design to differentiate and make external modems seen as “cool”;
  • Encourage the development of “free” / 3rd-party paid models for mobile broadband to drive modem adoption among users unwilling to pay for access themselves;
  • Consider developing your own portfolio of value-added services that can exploit the WWAN connection – e.g. managed security and backup;
  • Everyone with a WWAN-enabled notebook or MID will have a mobile phone as well. Endeavour to make them work well together and exploit each other’s capabilities;

Marketing and distribution

  • Encourage operator partners to support a broader range of business models to extend the addressable market to customers unwilling to sign 24-month contracts for mobile data;
  • Look at channels for temporary modem rentals / provision to venue or event delegates;
  • Examine non-operator routes to market for “vanilla” modules and modems, and support this usage model. For example, set up a web portal with methods highlighting how to acquire temporary SIM+data plans in different countries;
  • Push OS suppliers towards richer APIs in connection managers that can tell applications various characteristics about the network being used, signal strength, macro vs. femtocell, maybe even measured latencies and packet loss. Maybe also expose details of alternative radio bearers;
  • Push module vendors towards pricing models that are geared into future service uptake / expenditure;
  • Work closely with software vendors to ensure optimised performance of connection managers, browsers and other application environments;
  • Look at bundling opportunities via operators, for example phone + netbook combinations.

© Copyright 2009. STL Partners. All rights reserved.
STL Partners published this content for the sole use of STL Partners’ customers and Telco 2.0™ subscribers. It may not be duplicated, reproduced or retransmitted in whole or in part without the express permission of STL Partners, Elmwood Road, London SE24 9NU (UK). Phone: +44 (0) 20 3239 7530. E-mail: contact@telco2.net. All rights reserved. All opinions and estimates herein constitute our judgment as of this date and are subject to change without notice.

Mobile Broadband: Urgent need for new business models

Summary: While the market for mobile broadband services (3G/WiMax/Dongles/Netbooks etc.) is growing explosively, today’s telco propositions are based on out-moded business models which threaten profitability. Telco 2.0 proposes innovative retail and wholesale approaches to improve returns in a new Briefing report, an edited extract of which is shown below.

[Members of the Telco 2.0TM Executive Briefing Subscription Service and the Future of the Networks Stream, please see here for the full Briefing report. Non-Members, please see here for how to subscribe, here to buy the individual Briefing report, or email contact@telco2.net or call +44 (0) 207 247 5003.]

Mobile broadband – a reason to be cheerful?

The last 18 months have seen a huge upswing in the adoption of mobile broadband (MBB) globally, especially relating to PC connectivity through 3G USB “dongles”, as well as high-end smartphones like the Apple iPhone. For the mobile industry, MBB has been one of the few bright spots, especially in mature markets where the recession (and regulation) has impacted voice and SMS revenues. For many operators, PC-based data revenues have eclipsed lacklustre growth of content and data services on handsets.

Figure 1: Global mobile broadband computing users

[Figure]

Source: Telco 2.0, Disruptive Analysis

Looking forward, many in the mobile industry are now expecting other MBB products and user scenarios to drive revenues further – netbooks (mini-laptops), smaller “mobile Internet devices” (MIDs) and embedded-3G notebooks are all being advocated. Further out, there is the potential for a vast array of other devices from the realm of consumer electronics or M2M (machine-to-machine) sectors.

A victim of its own success?

But there is a dark side of current MBB business models, despite the success. PC users generate so much data traffic that networks that were empty just two years ago are now congested. Originally designed (“dimensioned”) to cope with small-screen devices used occasionally, HSPA networks are having to cope with laptop-sized video downloads, hours-long social networking sessions and rich Web 2.0 sites which download content “in the background”. Extra iPhone usage compounds the problem.

In some cases, the revenues from MBB services are not even covering the costs of delivering data to the users. The current business models are broken – especially if they also need to provide enough cash flow for further network upgrades and expansion. Despite the wishes of marketing departments, it seems like expensive “mobile” broadband capacity is being wasted at giveaway prices, in an attempt to compete head-on with fixed broadband services.

Figure 2: Global 3G data traffic by device type

[Figure]

Source: Telco 2.0, Disruptive Analysis estimates

This report is not going to rehash the basic market forecasts for MBB and devices, which are well-covered elsewhere. Instead, this document looks at the need for a set of new business models around mobile broadband. This partly reflects the cornucopia of new devices, partly the impact of the insatiable demand for more bandwidth – but also methods for operators to innovate and seek out revenue streams beyond the normal monthly contract. MNOs need to squeeze more cash from their network and spectrum investments – but it needs to be profitable traffic.

There is clearly a demand for basic, vanilla, mobile Internet access from laptops or netbooks. But even that can be packaged in many different ways, rather than unimaginative and undifferentiated data plans, that just encourage constant price erosion amongst competing operators.

An overview of the new business models needed

At present, the majority of mobile broadband subscribers are engaged through traditional monthly contracts, typically over 12-24 month periods. This is true for both standalone modems and especially embedded-3G notebooks. There are also some popular prepaid offerings, especially in markets outside North America.

However, further evolution is necessary. Many consumers will not want another monthly commitment, especially if they are infrequent users. Operators will be wary of subsidising generic computing devices for the non-creditworthy.

We expect a variety of new business models to emerge and take a significant share of the overall user base, including:

  • Session-based access, similar to the familiar WiFi hotspot model;
  • Bundling of mobile broadband with other services, for example as an adjunct to fixed broadband or mobile voice services;
  • Free, guest or “sponsored” mobile broadband, paid for by venue owners or event organisers;
  • “Comes-with-data-included” models, where the upfront device purchase price includes connectivity, perhaps for a year;
  • Two-sided business models, with mobile access subsidised by “upstream” parties like advertisers or governments, rather than direct end-user payment.

Transition to these models will not be easy. There are question marks about the convenience of using physical SIM cards, especially for temporary access. Distribution, billing and support models will need re-evaluation. Definitions and metrics will need re-evaluation. Terms like ARPU and “subscription” will have less relevance as conventional “subscribers” drop to perhaps 40% of the overall mobile broadband user base. Operators and vendors need to face up to these challenges as soon as possible.

Figure 3: Mobile broadband can support both subscription & transient models

[Figure]

Source: Telco 2.0

Who is this briefing for?

Strategists, network planners, mobile data marketing executives, radio network vendor strategy & marketing staff, laptop and mobile device suppliers.

Contents

  • Executive summary & recommendations
  • Recommendations for mobile operators & retailers
  • Recommendations for network equipment suppliers
  • Recommendations for device & component vendors
  • What is a business model?
  • Defining the marketplace
  • The past and present – how did we get here?
  • Notebook bundling
  • Rolling contracts
  • Pre-paid / “Pay as you go” subscriptions
  • Do revenues reflect underlying cost per GB?
  • Can WiMAX fill the “capacity gap” & offer new business models?
  • Beyond basic subs: domains of innovation
  • Advanced retail models
  • Broadband bundled into device purchase price
  • Fixed & mobile combined broadband models
  • Multi-device business models
  • Rental models
  • Wholesale mobile broadband and MVNOs
  • Wholesale Beyond MVNOs: slice’n’dice
  • “Two-sided” models in mobile broadband
  • Sponsored / Advertiser-funded / “Free” mobile broadband
  • Future innovative roaming models
  • Enablers of the new MBB models
  • Embedded-3G/WiMAX notebooks – core to a new model?
  • MIDs and new device categories
  • Mobile broadband and APIs
  • Intelligent wireless broadband
  • The role of femtocells
  • The role of LTE
  • The role of WiMAX
  • Conclusion & recommendations
  • Glossary

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Full Article: Nokia’s Strange Services Strategy – Lessons from Apple iPhone and RIM

The profuse proliferation of poorly integrated projects suggests either – if we’re being charitable – a deliberate policy of experimenting with many different ideas, or else – if we’re not – the absence of a coherent strategy.

Clearly Nokia is aware of the secular tendency in all information technology fields that value migrates towards software and specifically towards applications. Equally clearly, they have the money, scale, and competence to deliver major projects in this field. However, so far they have failed to make services into a meaningful line of business, and even the well developed software ecosystem hasn’t seen a major hit like the iPhone and its associated app store.

Nokia Services: project proliferator

So far, the Services division in its various incarnations has brought forward Club Nokia, the Nokia Game, Forum Nokia, Symbian Developer Network, WidSets, Nokia Download!, MOSH, Nokia Comes With Music, Nokia Music Store, N-Gage, Ovi, Mail on Ovi, Contacts on Ovi, Ovi Store…it’s a lot of brands for one company, and that’s not even an exhaustive list. They’ve further acquired Intellisync, Sega.com, Loudeye, Twango, Enpocket, Oz Communications, Gate5, Starfish Software, Navteq and Avvenu since 2005 – that makes an average of just over two services acquisitions a year. Further, despite the decision to integrate all (or most) services into Ovi, there are still five different functional silos inside the Services division.

The great bulk of applications or services available or proposed for mobile devices fall into two categories – social or media. Under social we’re grouping anything that is primarily about communications; under media we’re grouping video, music, games, and content in general. Obviously there is a significant overlap. This is driven by fundamentals; no-one is likely to want to do computationally intensive graphics editing, CAD, or heavy data analysis on a mobile, run a database server on one, or play high-grade full-3D games. Batteries, CPU limitations, and most of all, form factor limitations see to that. And on the other side, communication is a fundamental human need, so there is demand pull as well as constraint push. As we pointed out back in the autumn of 2007, communication, not content, is king.

Aims

In trying to get user adoption of its applications and services, Nokia is pursuing two aims – one is to create products that will help to ship more Nokia devices, and to ship higher-value N- or E- series devices rather than featurephones, and the other is a longer-range hope to create a new business in its own right, which will probably be monetised through subscriptions, advertising,or transactions. This latter aim is much further off that the first, and is affected by the operators’ suspicion of any activity that seems to rival their treasured billing relationship. For example, although quick signup and data import are crucial to deploying a social application, Nokia probably wouldn’t get away with automatically enrolling all users in its services – the operators likely wouldn’t wear it.

Historical lessons

There have been several historical examples of similar business models, in which sales of devices are driven by a social network. However, the common factor is that success has always come from facilitating existing social networks rather than trying to create new ones. This is also true of the networks themselves; if new ones emerge, it’s usually as an epi-phenomenon of generally reduced friction. Some examples:

  1. Telephony itself: nobody subscribed in order to join the telephone community, they subscribed to talk to the people they wanted to talk to anyway.
  2. GSM: the unique selling point was that the people who might want to talk to you could reach you anywhere, and PSTN interworking was crucial.
  3. RIM’s BlackBerry: early BlackBerries weren’t that impressive as such, but they provided access to the social value of your e-mail workflow and groupware anywhere. Remember, the only really valuable IM user base is the 17 million Lotus Notes Sametime users.
  4. 3’s INQ: the Global Mobile Award-winning handset is really a hardware representation of the user’s virtual presence . Hutchison isn’t interested in trying to make people join Club Hutch or use 3Book; they’re interested in helping their users manage their social networks and charging for the privilege.

So it’s unlikely that trying to recruit users into Nokia-specific communities is at all sensible. Nobody likes vendor lock-in. And, if your product is really good, why restrict it to Nokia hardware users? As far as Web applications go, of course, there’s absolutely no reason why other devices shouldn’t be allowed to play. But this fundamental issue – that no-one organises their lives around their friends’ or the friends’ mobile operators’ choices of device vendor – would tend to explain why there have been so many service launches, mergers, and shutdowns. Nokia is trying to find the answer by trial and error, but it’s looking in the wrong place. There is some evidence, however, that they are looking more at facilitating other social applications, but this is subject to negotiation with the operators.

The operator relationship – root of the problem

One of the reasons why is the conflict with operators mentioned above. Nokia’s efforts to build a Nokia-only community mirror the telco fascination with the billing relationship. Telcos tend to imagine that being a customer of Telco X is enough to constitute a substantial social and emotional link; Nokia is apparently working on the assumption that being a customer of Nokia is sufficient to make you more like other Nokia customers than everyone else. So both parties are trying to “own the customer”, when in fact this is probably pointless, and they are succeeding in spoiling each others’ plans. Although telcos like to imagine they have a unique relationship with their subscribers, they in fact know surprisingly little about them, and carriers tend to be very unpopular with the public. Who wants to have a relationship with the Big Expensive Phone Company anyway? Both parties need to rethink their approach to sociability.

What would a Telco 2.0 take on this look like?

First of all, the operator needs to realise that the subscribers don’t love them for themselves; it was the connectivity they were after all along! Tears! Secondly, Nokia needs to drop the fantasy of recruiting users into a vendor-specific Nokiasphere. It won’t work. Instead, both ought to be looking at how they can contribute to other people’s processes. If Nokia can come up with a better service offering, very well – let them use the telco API suite. In fact, perhaps the model should be flipped, and instead of telcos marketing Nokia devices as a bundled add-in with their service, Nokia ought to be marketing its devices (and services) with connectivity and much else bundled into the upfront price, with the telcos getting their share through richer wholesale mechanisms and platform services.

Consider the iPhone. Looking aside from the industrial design and GUI for a moment – I dare you! you can do it! – its key features were integration with iTunes (i.e. with content), a developer platform that offered good APIs and documentation, but also a route to market for the developers and an easy way for users to discover, buy, and install their products, and an internal business model that sweetened the deal for the operators, by offering them exclusivity and a share of the revenue. Everyone still loves the iPhone, everyone still hates AT&T, but would AT&T ever consider not renewing the contract with Apple? They’re stealing our customers’ hearts! Of course not.

Apple succeeded in improving the following processes for two out of three key customer groups:

  1. Users: Acquiring and managing music and video across multiple devices.
  2. Users: Discovering, installing, and sharing mobile applications
  3. Developers: Deploying and selling mobile applications

And as two-sidedness would suggest, they offered the remaining group a share of revenue. The rest is history; the iPhone has become the main driver of growth and profitability at Apple, more than one billion applications downloads have been shipped from the App Store, etc, etc.

Conclusions: turn to small business?

So far, however, Nokia’s approach has mirrored the worst aspects of telcos’ attitude to their subscribers; a combination of possessiveness and indifference. They want to own the customer; they don’t know how or why. It might be more defensible if there was any sign that Nokia is serious about making money from services; that, of course, is poison to the operators and is therefore permanently delayed. Similarly, Nokia would like to have the sort of brand loyalty Apple enjoys and to build the sort of integrated user experience Apple specialises in, but it is paranoid about the operators. The result is essentially an Apple strategy, but not quite.

What else could they try? Consider Nokia Life Tools, the package of information services for farmers and small businesses they are building for the developing world. One thing that Nokia’s services strategy has so far lacked is engagement with enterprises; it’s all been about swapping photos and music and status updates. Although Nokia makes great business-class gadgets, and they provide a lot of useful enablers (multiple e-mail boxes, support for different push e-mail systems, VPN clients, screen output, printer support), there’s a hole shaped like work in their services offering. RIM has been much better here, working together with IBM and Salesforce.com to expand the range of enterprise applications they can mobilise.

Life Tools, however, shows a possible opportunity – it’s all right catering to companies who already have complex workflow systems, but who’s serving the ones that don’t have the scale to invest there? None of the vendors are addressing this, and neither are the telcos. It fits a whole succession of Telco 2.0 principles – focus on enterprises, look for areas where there’s a big difference between the value of bits and their quantity, and work hard at improving wholesale.

It’s almost certainly a better idea than trying to be Apple, but not quite.

Next Steps for Nokia and telcos

  • It is unlikely that ”Nokia users” are a valid community

  • Really successful social hardware facilitates existing social networks

  • Nokia’s problems are significantly explained by their difficult relationship with operators

  • Nokia’s emerging-market Life Tools package might be more of an example than they think

  • A Telco 2.0 approach would emphasise small businesses, offer bundled connectivity, and deal with the operators through better wholesale

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

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

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

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

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

The elements of traffic generation

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

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

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

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

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

From receiving to sending

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

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

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

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

Faster adaptation: considered helpful

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

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

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

Conclusions

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