Winning Strategies: Differentiated Mobile Data Services

Introduction

Verizon’s performance in the US

Our work on the US cellular market – for example, in the Disruptive Strategy: “Uncarrier” T-Mobile vs VZW, AT&T, and Free.fr  and Free-T-Mobile: Disruptive Revolution or a Bridge Too Far?  Executive Briefings – has identified that US carrier strategies are diverging. The signature of a price-disruption event we identified with regard to France was that industry-wide ARPU was falling, subscriber growth was unexpectedly strong (amounting to a substantial increase in penetration), and there was a shakeout of minor operators and MVNOs.

Although there are strong signs of a price war – for example, falling ARPU industry-wide, resumed subscriber growth, minor operators exiting, and subscriber-acquisition initiatives such as those at T-Mobile USA, worth as much as $400-600 in handset subsidy and service credit – it seems that Verizon Wireless is succeeding while staying out of the mire, while T-Mobile, Sprint, and minor operators are plunged into it, and AT&T may be going that way too. Figure 1 shows monthly ARPU, converted to Euros for comparison purposes.

Figure 1: Strategic divergence in the US

Figure 1 Strategic Divergence in the US
Source: STL Partners, themobileworld.com

We can also look at this in terms of subscribers and in terms of profitability, bringing in the cost side. The following chart, Figure 2, plots margins against subscriber growth, with the bubbles set proportional to ARPU. The base year 2011 is set to 100 and the axes are set to the average values. We’ve named the four quadrants that result appropriately.

Figure 2: Four carriers, four fates

Figure 2 Four carriers four fate
Source: STL Partners

Clearly, you’d want to be in the top-right, top-performer quadrant, showing subscriber growth and growing profitability. Ideally, you’d also want to be growing ARPU. Verizon Wireless is achieving all three, moving steadily north-west and climbing the ARPU curve.

At the same time, AT&T is gradually being drawn into the price war, getting closer to the lower-right “volume first” quadrant. Deep within that one, we find T-Mobile, which slid from a defensive crouch in the upper-left into the hopeless lower-left zone and then escaped via its price-slashing strategy. (Note that the last lot of T-Mobile USA results were artificially improved by a one-off spectrum swap.) And Sprint is thrashing around, losing profitability and going nowhere fast.

The usual description for VZW’s success is “network differentiation”. They’re just better than the rest, and as a result they’re reaping the benefits. (ABI, for example, reckons that they’re the world’s second most profitable operator on a per-subscriber basis  and the world’s most profitable in absolute terms.) We can restate this in economic terms, saying that they are the most efficient producer of mobile service capacity. This productive capacity can be used either to cut prices and gain share, or to increase quality (for example, data rates, geographic coverage, and voice mean-opinion score) at higher prices. This leads us to an important conclusion: network differentiation is primarily a cost concept, not a price concept.

If there are technical or operational choices that make network differentiation possible, they can be deployed anywhere. It’s also possible, though, that VZW is benefiting from structural factors, perhaps its ex-incumbent status, or its strong position in the market for backbone and backhaul fibre, or perhaps just its scale (although in that case, why is AT&T doing so much worse?). And another possibility often mooted is that the US is somehow a better kind of mobile market. Less competitive (although this doesn’t necessarily show up in metrics like the Herfindahl index of concentration), supposedly less regulated, and undoubtedly more profitable, it’s often held up by European operators as an example. Give us the terms, they argue, and we will catch up to the US in LTE deployment.

As a result, it is often argued in lobbying circles that European markets are “too competitive” or in need of “market repair”, and therefore, the argument runs, the regulator ought to turn a blind eye to more consolidation or at least accept a hollowing out of national operating companies. More formally, the prices (i.e. ARPUs) prevailing do not provide a sufficient margin over operators’ fixed costs to fund discretionary investment. If this was true, we would expect to find little scope for successful differentiation in Europe.

Further, if the “incumbent advantage” story was true of VZW over and above the strategic moves that it has made, we might expect to find that ex-incumbent, converged operators were pulling into the lead across Europe, benefiting from their wealth of access and backhaul assets. In this note, we will try to test these statements, and then assess what the answer might be.

How do European Operators compare?

We selected a clutch of European mobile operators and applied the same screen to identify what might be happening. In doing so we chose to review the UK, German, French, Swedish, and Italian markets jointly with the US, in an effort to avoid a purely European crisis-driven comparison.

Figure 3: Applying the screen to European carriers

Figure 3 Applying the screen to European carriers

Source: STL Partners

Our first observation is that the difference between European and American carriers has been more about subscriber growth than about profitability. The axes are set to the same values as in Figure 2, and the data points are concentrated to their left (showing less subscriber growth in Europe) not below them (less profitability growth).

Our second observation is that yes, there certainly are operators who are delivering differentiated performance in the EU. But they’re not the ones you might expect. Although the big converged incumbents, like T-Mobile Germany, have strong margins, they’re not increasing them and on the whole their performance is average only. Nor is scale a panacea, which brings us to our next observation.

Our third observation is that something is visible at this level that isn’t in the US: major opcos that are shrinking. Vodafone, not a company that is short of scale, gets no fewer than three of its OpCos into the lower-left quadrant. We might say that Vodafone Italy was bound to suffer in the context of the Italian macro-economy, as was TIM, but Vodafone UK is in there, and Vodafone Germany is moving steadily further left and down.

And our fourth observation is the opposite, significant growth. Hutchison OpCo 3UK shows strong performance growth, despite being a fourth operator with no fixed assets and starting with LTE after first-mover EE. Their sibling 3 Sweden is also doing well, while even 3 Italy was climbing up until the last quarter and it remains a valid price warrior. They are joined in the power quadrant with VZW by Telenor’s Swedish OpCo, Telia Mobile, and O2 UK (in the last two cases, only marginally). EE, for its part, has only marginally gained subscribers, but it has strongly increased its margins, and it may yet make it.

But if you want really dramatic success, or if you doubt that Hutchison could do it, what about Free? The answer is that they’re literally off the chart. In Figure 4, we add Free Mobile, but we can only plot the first few quarters. (Interestingly, since then, Free seems to be targeting a mobile EBITDA margin of exactly 9%.)

The distinction here is between the pure-play, T-Mobile-like price warriors in the lower right quadrant, who are sacrificing profitability for growth, and the group we’ve identified, who are improving their margins even as they gain subscribers. This is the signature of significant operational improvement, an operator that can move traffic more efficiently than its competitors. Because the data traffic keeps coming, ever growing at the typical 40% annual clip, it is necessary for any operator to keep improving in order to survive. Therefore, the pace of improvement marks operational excellence, not just improvement.

Figure 4: Free Mobile, a disruptive force that’s literally off the charts

Figure 4 Free Mobile a disruptive force thats literally off the charts

Source: STL Partners

We can also look at this at the level of the major multinational groups. Again, Free’s very success presents a problem to clarity in this analysis – even as part of a virtual group of independents, the ‘Indies’ in Figure 5, it’s difficult to visualise. T-Mobile USA’s savage price cutting, though, gets averaged out and the inclusion of EE boosts the result for Orange and DTAG. It also becomes apparent that the “market repair” story has a problem in that there isn’t a major group committed to hard discounting. But Hutchison, Telenor, and Free’s excellence, and Vodafone’s pain, stand out.

Figure 5: The differences are if anything more pronounced within Europe at the level of the major multinationals

Figure 5 The differences are if anything more pronounced within Europe at the level of the major multinationals

Source: STL Partners

In the rest of this report we analyse why and how these operators (3UK, Telenor Sweden and Free Mobile) are managing to achieve such differentiated performance, identify the common themes in their strategic approaches and the lessons from comparison to their peers, and the important wider consequences for the market.

 

  • Executive Summary
  • Introduction
  • Applying the Screen to European Mobile
  • Case study 1: Vodafone vs. 3UK
  • 3UK has substantially more spectrum per subscriber than Vodafone
  • 3UK has much more fibre-optic backhaul than Vodafone
  • How 3UK prices its service
  • Case study 2: Sweden – Telenor and its competitors
  • The network sharing issue
  • Telenor Sweden: heavy on the 1800MHz
  • Telenor Sweden was an early adopter of Gigabit Ethernet backhaul
  • How Telenor prices its service
  • Case study 3: Free Mobile
  • Free: a narrow sliver of spectrum, or is it?
  • Free Mobile: backhaul excellence through extreme fixed-mobile integration
  • Free: the ultimate in simple pricing
  • Discussion
  • IP networking metrics: not yet predictive of operator performance
  • Network sharing does not obviate differentiation
  • What is Vodafone’s strategy for fibre in the backhaul?
  • Conclusions

 

  • Figure 1: Strategic divergence in the US
  • Figure 2: Four carriers, four fates
  • Figure 3: Applying the screen to European carriers
  • Figure 4: Free Mobile, a disruptive force that’s literally off the charts
  • Figure 5: The differences are if anything more pronounced within Europe at the level of the major multinationals
  • Figure 6: Although Vodafone UK and O2 UK share a physical network, O2 is heading for VZW-like territory while VF UK is going nowhere fast
  • Figure 7: Strategic divergence in the UK
  • Figure 8: 3UK, also something of an ARPU star
  • Figure 9: 3UK is very different from Hutchison in Italy or even Sweden
  • Figure 10: 3UK has more spectrum on a per-subscriber basis than Vodafone
  • Figure 11: Vodafone’s backhaul upgrades are essentially microwave; 3UK’s are fibre
  • Figure 12: 3 Europe is more than coping with surging data traffic
  • Figure 13: 3UK service pricing
  • Figure 14: The Swedish market shows a clear winner…
  • Figure 15: Telenor.se is leading on all measures
  • Figure 16: How Swedish network sharing works
  • Figure 17: Network sharing does not equal identical performance in the UK
  • Figure 18: Although extensive network sharing complicates the picture, Telenor Sweden has a strong position, especially in the key 1800MHz band
  • Figure 19: If the customers want more data, why not sell them more data?
  • Figure 20: Free Mobile, network differentiator?
  • Figure 21: Free Mobile, the price leader as always
  • Figure 22: Free Mobile succeeds with remarkably little spectrum, until you look at the allocations that are actually relevant to its network
  • Figure 23: Free’s fixed-line network plans
  • Figure 24: Free leverages its FTTH for outstanding backhaul density
  • Figure 25: Free: value on 3G, bumper bundler on 4G
  • Figure 26: The carrier with the most IPv4 addresses per subscriber is…
  • Figure 27: AS_PATH length – not particularly predictive either
  • Figure 28: The buzzword count. “Fibre” beats “backhaul” as a concern
  • Figure 29: Are Project Spring’s targets slipping?

 

Triple-Play in the USA: Infrastructure Pays Off

Introduction

In this note, we compare the recent performance of three US fixed operators who have adopted contrasting strategies and technology choices, AT&T, Verizon, and Comcast. We specifically focus on their NGA (Next-Generation Access) triple-play products, for the excellent reason that they themselves focus on these to the extent of increasingly abandoning the subscriber base outside their footprints. We characterise these strategies, attempt to estimate typical subscriber bundles, discuss their future options, and review the situation in the light of a “Deep Value” framework.

A Case Study in Deep Value: The Lessons from Apple and Samsung

Deep value strategies concentrate on developing assets that will be difficult for any plausible competitor to replicate, in as many layers of the value chain as possible. A current example is the way Apple and Samsung – rather than Nokia, HTC, or even Google – came to dominate the smartphone market.

It is now well known that Apple, despite its image as a design-focused company whose products are put together by outsourcers, has invested heavily in manufacturing throughout the iOS era. Although the first generation iPhone was largely assembled from proprietary parts, in many ways it should be considered as a large-scale pilot project. Starting with the iPhone 3GS, the proportion of Apple’s own content in the devices rose sharply, thanks to the acquisition of PA Semiconductor, but also to heavy investment in the supply chain.

Not only did Apple design and pilot-produce many of the components it wanted, it bought them from suppliers in advance to lock up the supply. It also bought machine tools the suppliers would need, often long in advance to lock up the supply. But this wasn’t just about a tactical effort to deny componentry to its competitors. It was also a strategic effort to create manufacturing capacity.

In pre-paying for large quantities of components, Apple provides its suppliers with the capital they need to build new facilities. In pre-paying for the machine tools that will go in them, they finance the machine tool manufacturers and enjoy a say in their development plans, thus ensuring the availability of the right machinery. They even invent tools themselves and then get them manufactured for the future use of their suppliers.

Samsung is of course both Apple’s biggest competitor and its biggest supplier. It combines these roles precisely because it is a huge manufacturer of electronic components. Concentrating on its manufacturing supply chain both enables it to produce excellent hardware, and also to hedge the success or failure of the devices by selling componentry to the competition. As with Apple, doing this is very expensive and demands skills that are both in short supply, and sometimes also hard to define. Much of the deep value embedded in Apple and Samsung’s supply chains will be the tacit knowledge gained from learning by doing that is now concentrated in their people.

The key insight for both companies is that industrial and user-experience design is highly replicable, and patent protection is relatively weak. The same is true of software. Apple had a deeply traumatic experience with the famous Look and Feel lawsuit against Microsoft, and some people have suggested that the supply-chain strategy was deliberately intended to prevent something similar happening again.

Certainly, the shift to this strategy coincides with the launch of Android, which Steve Jobs at least perceived as a “stolen product”. Arguably, Jobs repeated Apple’s response to Microsoft Windows, suing everyone in sight, with about as much success, whereas Tim Cook in his role as the hardware engineering and then supply-chain chief adopted a new strategy, developing an industrial capability that would be very hard to replicate, by design.

Three Operators, Three Strategies

AT&T

The biggest issue any fixed operator has faced since the great challenges of privatisation, divestment, and deregulation in the 1980s is that of managing the transition from a business that basically provides voice on a copper access network to one that basically provides Internet service on a co-ax, fibre, or possibly wireless access network. This, at least, has been clear for many years.

AT&T is the original telco – at least, AT&T likes to be seen that way, as shown by their decision to reclaim the iconic NYSE ticker symbol “T”. That obscures, however, how much has changed since the divestment and the extremely expensive process of mergers and acquisitions that patched the current version of the company together. The bit examined here is the AT&T Home Solutions division, which owns the fixed-line ex-incumbent business, also known as the merged BellSouth and SBC businesses.

AT&T, like all the world’s incumbents, deployed ADSL at the turn of the 2000s, thus getting into the ISP business. Unlike most world incumbents, in 2005 it got a huge regulatory boost in the form of the Martin FCC’s Comcast decision, which declared that broadband Internet service was not a telecommunications service for regulatory purposes. This permitted US fixed operators to take back the Internet business they had been losing to independent ISPs. As such, they were able to cope with the transition while concentrating on the big-glamour areas of M&A and wireless.

As the 2000s advanced, it became obvious that AT&T needed to look at the next move beyond DSL service. The option taken was what became U-Verse, a triple-play product which consists of:

  • Either ADSL, ADSL2+, or VDSL, depending on copper run length and line quality
  • Plus IPTV
  • And traditional telephony carried over IP.

This represents a minimal approach to the transition – the network upgrade requires new equipment in the local exchanges, or Central Offices in US terms, and in street cabinets, but it does not require the replacement of the access link, nor any trenching.

This minimisation of capital investment is especially important, as it was also decided that U-Verse would not deploy into areas where the copper might need investment to carry it. These networks would eventually, it was hoped, be either sold or closed and replaced by wireless service. U-Verse was therefore, for AT&T, in part a means of disposing of regulatory requirements.

It was also important that the system closely coupled the regulated domain of voice with the unregulated, or at least only potentially regulated, domain of Internet service and the either unregulated or differently regulated domain of content. In many ways, U-Verse can be seen as a content first strategy. It’s TV that is expected to be the primary replacement for the dwindling fixed voice revenues. Figure 1 shows the importance of content to AT&T vividly.

Figure 1: U-Verse TV sales account for the largest chunk of Telco 2.0 revenue at AT&T, although M2M is growing fast

Telco 2 UVerse TV sales account for the largest chunk of Telco 2 revenue at ATandT although M2M is growing fast.png

Source: Telco 2.0 Transformation Index

This sounds like one of the telecoms-as-media strategies of the late 1990s. However, it should be clearly distinguished from, say, BT’s drive to acquire exclusive sports content and to build up a brand identity as a “channel”. U-Verse does not market itself as a “TV channel” and does not buy exclusive content – rather, it is a channel in the literal sense, a distributor through which TV is sold. We will see why in the next section.

The US TV Market

It is well worth remembering that TV is a deeply national industry. Steve Jobs famously described it as “balkanised” and as a result didn’t want to take part. Most metrics vary dramatically across national borders, as do qualitative observations of structure. (Some countries have a big public sector broadcaster, like the BBC or indeed Al-Jazeera, to give a basic example.) Countries with low pay-TV penetration can be seen as ones that offer greater opportunities, it being usually easier to expand the customer base than to win share from the competition (a “blue ocean” versus a “red sea” strategy).

However, it is also true that pay-TV in general is an easier sell in a market where most TV viewers already pay for TV. It is very hard to convince people to pay for a product they can obtain free.

In the US, there is a long-standing culture of pay-TV, originally with cable operators and more recently with satellite (DISH and DirecTV), IPTV or telco-delivered TV (AT&T U-Verse and Verizon FiOS), and subscription OTT (Netflix and Hulu). It is also a market characterised by heavy TV usage (an average household has 2.8 TVs). Out of the 114.2 million homes (96.7% of all homes) receiving TV, according to Nielsen, there are some 97 million receiving pay-TV via cable, satellite, or IPTV, a penetration rate of 85%. This is the largest and richest pay-TV market in the world.

In this sense, it ought to be a good prospect for TV in general, with the caveat that a “Sky Sports” or “BT Sport” strategy based on content exclusive to a distributor is unlikely to work. This is because typically, US TV content is sold relatively openly in the wholesale market, and in many cases, there are regulatory requirements that it must be provided to any distributor (TV affiliate, cable operator, or telco) that asks for it, and even that distributors must carry certain channels.

Rightsholders have backed a strategy based on distribution over one based on exclusivity, on the principle that the customer should be given as many opportunities as possible to buy the content. This also serves the interests of advertisers, who by definition want access to as many consumers as possible. Hollywood has always aimed to open new releases on as many cinema screens as possible, and it is the movie industry’s skills, traditions, and prejudices that shaped this market.

As a result, it is relatively easy for distributors to acquire content, but difficult for them to generate differentiation by monopolising exclusive content. In this model, differentiation tends to accrue to rightsholders, not distributors. For example, although HBO maintains the status of being a premium provider of content, consumers can buy it from any of AT&T, Verizon, Comcast, any other cable operator, satellite, or direct from HBO via an OTT option.

However, pay-TV penetration is high enough that any new entrant (such as the two telcos) is committed to winning share from other providers, the hard way. It is worth pointing out that the US satellite operators DISH and DirecTV concentrated on rural customers who aren’t served by the cable MSOs. At the time, their TV needs weren’t served by the telcos either. As such, they were essentially greenfield deployments, the first pay-TV propositions in their markets.

The biggest change in US TV in recent times has been the emergence of major new distributors, the two RBOCs and a range of Web-based over-the-top independents. Figure 2 summarises the situation going into 2013.

Figure 2: OTT video providers beat telcos, cablecos, and satellite for subscriber growth, at scale

OTT video providers beat telcos cablecos and satellite for subscriber growth at scale

Source: Telco 2.0 Transformation Index

The two biggest classes of distributors saw either a marginal loss of subscribers (the cablecos) or a marginal gain (satellite). The two groups of (relatively) new entrants, as you’d expect, saw much more growth. However, the OTT players are both bigger and much faster growing than the two telco players. It is worth pointing out that this mostly represents additional TV consumption, typically, people who already buy pay-TV adding a Netflix subscription. “Cord cutting” – replacing a primary TV subscription entirely – remains rare. In some ways, U-Verse can be seen as an effort to do something similar, upselling content to existing subscribers.

Competing for the Whole Bundle – Comcast and the Cable Industry

So how is this option doing? The following chart, Figure 3, shows that in terms of overall service ARPU, AT&T’s fixed strategy is delivering inferior results than its main competitors.

Figure 3: Cable operators lead the way on ARPU. Verizon, with FiOS, is keeping up

Cable operators lead the way on ARPU. Verizon, with FiOS, is keeping up

Source: Telco 2.0 Transformation Index

The interesting point here is that Time Warner Cable is doing less well than some of its cable industry peers. Comcast, the biggest, claims a $159 monthly ARPU for triple-play customers, and it probably has a higher density of triple-players than the telcos. More representatively, they also quote a figure of $134 monthly average revenue per customer relationship, including single- and double-play customers. We have used this figure throughout this note. TWC, in general, is more content-focused and less broadband-focused than Comcast, having taken much longer to roll out DOCSIS 3.0. But is that important? After all, aren’t cable operators all about TV? Figure 4 shows clearly that broadband and voice are now just as important to cable operators as they are to telcos. The distinction is increasingly just a historical quirk.

Figure 4: Non-video revenues – i.e. Internet service and voice – are the driver of growth for US cable operators

Non video revenues ie Internet service and voice are the driver of growth for US cable operatorsSource: NCTA data, STL Partners

As we have seen, TV in the USA is not a differentiator because everyone’s got it. Further, it’s a product that doesn’t bring differentiation but does bring costs, as the rightsholders exact their share of the selling price. Broadband and voice are different – they are, in a sense, products the operator makes in-house. Most have to buy the tools (except Free.fr which has developed its own), but in any case the operator has to do that to carry the TV.

The differential growth rates in Figure 4 represent a substantial change in the ISP industry. Traditionally, the Internet engineering community tended to look down on cable operators as glorified TV distribution systems. This is no longer the case.

In the late 2000s, cable operators concentrated on improving their speeds and increasing their capacity. They also pressed their vendors and standardisation forums to practice continuous improvement, creating a regular upgrade cycle for DOCSIS firmware and silicon that lets them stay one (or more) jumps ahead of the DSL industry. Some of them also invested in their core IP networking and in providing a deeper and richer variety of connectivity products for SMB, enterprise, and wholesale customers.

Comcast is the classic example of this. It is a major supplier of mobile backhaul, high-speed Internet service (and also VoIP) for small businesses, and a major actor in the Internet peering ecosystem. An important metric of this change is that since 2009, it has transitioned from being a downlink-heavy eyeball network to being a balanced peer that serves about as much traffic outbound as it receives inbound.

The key insight here is that, especially in an environment like the US where xDSL unbundling isn’t available, if you win a customer for broadband, you generally also get the whole bundle. TV is a valuable bonus, but it’s not differentiating enough to win the whole of the subscriber’s fixed telecoms spend – or to retain it, in the presence of competitors with their own infrastructure. It’s also of relatively little interest to business customers, who tend to be high-value customers.

 

  • Executive Summary
  • Introduction
  • A Case Study in Deep Value: The Lessons from Apple and Samsung
  • Three Operators, Three Strategies
  • AT&T
  • The US TV Market
  • Competing for the Whole Bundle – Comcast and the Cable Industry
  • Competing for the Whole Bundle II: Verizon
  • Scoring the three strategies – who’s winning the whole bundles?
  • SMBs and the role of voice
  • Looking ahead
  • Planning for a Future: What’s Up Cable’s Sleeve?
  • Conclusions

 

  • Figure 1: U-Verse TV sales account for the largest chunk of Telco 2.0 revenue at AT&T, although M2M is growing fast
  • Figure 2: OTT video providers beat telcos, cablecos, and satellite for subscriber growth, at scale
  • Figure 3: Cable operators lead the way on ARPU. Verizon, with FiOS, is keeping up
  • Figure 4: Non-video revenues – i.e. Internet service and voice – are the driver of growth for US cable operators
  • Figure 5: Comcast has the best pricing per megabit at typical service levels
  • Figure 6: Verizon is ahead, but only marginally, on uplink pricing per megabit
  • Figure 7: FCC data shows that it’s the cablecos, and FiOS, who under-promise and over-deliver when it comes to broadband
  • Figure 7: Speed sells at Verizon
  • Figure 8: Comcast and Verizon at parity on price per megabit
  • Figure 9: Typical bundles for three operators. Verizon FiOS leads the way
  • Figure 12: The impact of learning by doing on FTTH deployment costs during the peak roll-out phase

CDNs 2.0: should telcos compete with Akamai?

Content Delivery Networks (CDNs) such as Akamai’s are used to improve the quality and reduce costs of delivering digital content at volume. What role should telcos now play in CDNs? (September 2011, Executive Briefing Service, Future of the Networks Stream).

Should telcos compete with Akamai?

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Introduction

We’ve written about Akamai’s technology strategy for global CDN before as a fine example of the best practice in online video distribution and a case study in two-sided business models, to say nothing of being a company that knows how to work with the grain of the Internet. Recently, Akamai published a paper which gives an overview of its network and how it works. It’s a great paper, if something of a serious read. Having ourselves read, enjoyed and digested it, we’ve distilled the main elements in the following analysis, and used that as a basis to look at telcos’ opportunities in the CDN market.

Related Telco 2.0 Research

In the strategy report Mobile, Fixed and Wholesale Broadband Business Models – Best Practice Innovation, ‘Telco 2.0′ Opportunities, Forecasts and Future Scenarios we examined a number of different options for telcos to reduce costs and improve the quality of content delivery, including Content Delivery Networks (CDNs).

This followed on from Future Broadband Business Models – Beyond Bundling: winning the new $250Bn delivery game in which we looked at long term trends in network architectures, including the continuing move of intelligence and storage towards the edge of the network. Most recently, in Broadband 2.0: Delivering Video and Mobile CDNs we looked at whether there is now a compelling need for Mobile CDNs, and if so, should operators partner with existing players or build / buy their own?

We’ll also be looking in depth at the opportunities in mobile CDNs at the EMEA Executive Brainstorm in London on 9-10th November 2011.

Why have a CDN anyway?

The basic CDN concept is simple. Rather than sending one copy of a video stream, software update or JavaScript library over the Internet to each user who wants it, the content is stored inside their service provider’s network, typically at the POP level in a fixed ISP.

That way, there are savings on interconnect traffic (whether in terms of paid-for transit, capex, or stress on peering relationships), and by locating the servers strategically, savings are also possible on internal backhaul traffic. Users and content providers benefit from lower latency, and therefore faster download times, snappier user interface response, and also from higher reliability because the content servers are no longer a single point of failure.

What can be done with content can also be done with code. As well as simple file servers and media streaming servers, applications servers can be deployed in a CDN in order to bring the same benefits to Web applications. Because the content providers are customers of the CDN, it is possible to also apply content optimisation with their agreement at the time it is uploaded to the CDN. This makes it possible to save further traffic, and to avoid nasty accidents like this one.

Once the CDN servers are deployed, to make the network efficient, they need to be filled up with content and located so they are used effectively – so they need to be located in the right places. An important point of a CDN, and one that may play to telcos’ strengths, is that location is important.

Figure 1: With higher speeds, geography starts to dominate download times

CDN Akamai table distance throughput time Oct 2011 Telco 2.0

Source: Akamai

CDN Player Strategies

Market Overview

CDNs are a diverse group of businesses, with several major players, notably Akamai, the market leader, EdgeCast, and Limelight Networks, all of which are pure-play CDNs, and also a number of players that are part of either carriers or Web 2.0 majors. Level(3), which is widely expected to acquire the LimeLight CDN, is better known as a massive Internet backbone operator. BT Group and Telefonica both have CDN products. On the other hand, Google, Amazon, and Microsoft operate their own, very substantial CDNs in support of their own businesses. Amazon also provides a basic CDN service to third parties. Beyond these, there are a substantial number of small players.

Akamai is by far the biggest; Arbor Networks estimated that it might account for as much as 15% of Internet traffic once the actual CDN traffic was counted in, while the top five CDNs accounted for 10% of inter-domain traffic. The distinction is itself a testament to the effectiveness of CDN as a methodology.

The impact of CDN

As an example of the benefits of their CDN, above and beyond ‘a better viewing experience’, Akamai claim that they can demonstrate a 15% increase in completed transactions on an e-commerce site by using their application acceleration product. This doesn’t seem out of court, as Amazon.com has cited similar numbers in the past, in their case by reducing the volume of data needed to deliver a given web page rather than by accelerating its delivery.

As a consequence of these benefits, and the predicted growth in internet traffic, Akamai expect traffic on their platform to reach levels equivalent to the throughput of a US national broadcast TV station within 2-5 years. In the fixed world, Akamai claims offload rates of as much as 90%. The Jetstream CDN  blog points out that mobile operators might be able to offload as much as 65% of their traffic into the CDN. These numbers refer only to traffic sources that are customers of the CDN, but it ought to be obvious that offloading 90% of the YouTube or BBC iPlayer traffic is worth having.

In Broadband 2.0: Mobile CDNs and video distribution we looked at the early prospects for Mobile CDN, and indeed, Akamai’s own move into the mobile industry is only beginning. However, Telefonica recently announced that its internal, group-wide CDN has reached an initial capability, with service available in Europe and in Argentina. They intend to expand across their entire footprint. We are aware of at least one other mobile operator which is actively investing in CDN capabilities. The degree to which CDN capabilities can be integrated into mobile networks is dependent on the operator’s choice of network architecture, which we discuss later in this note.

It’s also worth noting that one of Akamai’s unique selling points is that it is very much a global operator. As usual, there’s a problem for operators, especially mobile operators, in that the big Internet platforms are global and operators are regional. Content owners can deal with one CDN for their services all around the world – they can’t deal with one telco. Also, big video sources like national TV broadcasters can usually deal with one ex-incumbent fixed operator and cover much of the market, but must deal with several mobile operators.

Application Delivery: the frontier of CDN

Akamai is already doing a lot of what we call “ADN” (Application-Delivery Networking) by analogy to CDN. In a CDN, content is served up near the network edge. In an ADN, applications are hosted in the same way in order to deliver them faster and more reliably. (Of course, the media server in a CDN node is itself a software application.) And the numbers we cited above regarding improved transaction completion rates are compelling.

However, we were a little under-whelmed by the details given of their Edge Computing product. It is restricted to J2EE and XSLT applications, and it seems quite limited in the power and flexibility it offers compared to the state of the art in cloud computing. Google App Engine and Amazon EC2 look far more interesting from a developer point of view. Obviously, they’re going for a different market. But we heartily agree with Dan Rayburn that the future of CDN is applications acceleration, and that this goes double for mobile with its relatively higher background levels of latency.

Interestingly, some of Akamai’s ADN customers aren’t actually distributing their code out to the ADN servers, but only making use of Akamai’s overlay network to route their traffic. Relatively small optimisations to the transport network can have significant benefits in business terms even before app servers are physically forward-deployed.

Other industry developments to watch

There are some shifts underway in the CDN landscape. Notably, as we mentioned earlier, there are rumours that Limelight Networks wants to exit the packet-pushing element of it in favour of the media services side – ingestion, transcoding, reporting and analytics. The most likely route is probably a sale or joint venture with Level(3). Their massive network footprint gives them both the opportunity to do global CDNing, and also very good reasons to do so internally. Being a late entrant, they have been very aggressive on price in building up a customer base (you may remember their role in the great Comcast peering war). They will be a formidable competitor and will probably want to move from macro-CDN to a more Akamai-like forward deployed model.

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

  • Akamai’s technology strategy for a global CDN
  • Can Telcos compete with CDN Players?
  • Potential Telco Leverage Points
  • Global vs. local CDN strategies
  • The ‘fat head’ of content is local
  • The challenges of scale and experience
  • Strategic Options for Telcos
  • Cooperating with Akamai
  • Partnering with a Vendor Network
  • Part of the global IT operation?
  • National-TV-centred CDNs
  • A specialist, wholesale CDN role for challengers?
  • Federated CDN
  • Conclusion

…and the following charts…

  • Figure 1: With higher speeds, geography starts to dominate download times
  • Figure 2: Akamai’s network architecture
  • Figure 3: Architectural options for CDN in 3GPP networks
  • Figure 4: Mapping CDN strategic options

Members of the Telco 2.0 Executive Briefing Subscription Service and Future Networks Stream can download the full 19 page report in PDF format here. Non-Members, please subscribe here, buy a Single User license for this report online here for £795 (+VAT), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003.

Organisations, people and products referenced: 3UK, Akamai, Alcatel-Lucent, Amazon, Arbor Networks, BBC, BBC iPlayer, BitTorrent, BT, Cisco, Dan Rayburn, EC2, EdgeCast, Ericsson, Google, GSM, Internet HSPA, Jetstream, Level(3), Limelight Networks, MBNL, Microsoft, Motorola, MOVE, Nokia Siemens Networks, Orange, TalkTalk, Telefonica, T-Mobile, Velocix, YouTube.

Technologies and industry terms referenced: 3GPP, ADSL, App Engine, backhaul, Carrier-Ethernet, Content Delivery Networks (CDNs), DNS, DOCSIS 3, edge computing, FTTx, GGSN, Gi interface, HFC, HSPA+, interconnect, IT, JavaScript, latency, LTE, Mobile CDNs, online, peering, POPs (Points of Presence), RNC, SQL, UMTS, VPN, WLAN.

Mobile Broadband Economics: LTE ‘Not Enough’

Summary: Innovation appears to be flourishing in the delivery of mobile broadband. We saw applications that allow users to monitor and control their network usage and services, ‘dynamic pricing’, and other innovative pricing strategies at the EMEA Executive Brainstorm. Despite growing enthusiasm for LTE, delegates considered offloading traffic and network sharing at least as important commercial strategies for managing costs.

Members of the Telco 2.0 Subscrioption Service and Future Networks Stream can download a more comprehensive version of this report in PDF format here. Please email contact@telco2.net or call +44 (0) 207 247 5003 to contact Telco 2.0 or STL Partners for more details.

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Introduction

STL Partners’ New Digital Economics Executive Brainstorm & Developer Forum EMEA took place from 11-13 May in London. The event brought together 250 execs from across the telecoms, media and technology sectors to take part in 6 co-located interactive events: the Telco 2.0, Digital Entertainment 2.0, Mobile Apps 2.0, M2M 2.0 and Personal Data 2.0 Executive Brainstorms, and an evening AppCircus developer forum.

Building on output from the last Telco 2.0 events and new analysis from the Telco 2.0 Initiative – including the new strategy report ‘The Roadmap to New Telco 2.0 Business Models’ – the Telco 2.0 Executive Brainstorm explored latest thinking and practice in growing the value of telecoms in the evolving digital economy.

This document gives an overview of the output from the Mobile Broadband Economics session of the  Telco 2.0 stream.

Putting users in control

A key theme of the presentations in this session was putting users in more control of their mobile broadband service, by helping them to both understand what data they have used in an interactive environment, and giving them the option to choose to buy additional data capabilities on-demand when they need and can use it.

Delegates perceptions that key obstacles to building revenue were internal industry issues, and key cost issues involve better collaboration rather than technology (specifically, LTE) were both refreshing and surprising.

Ericsson presented a mobile Broadband Data ‘Fuel gauge’ app to show how users could be better informed of their usage and be interactively offered pricing and service offers.

Figure 1 – Ericsson’s Mobile Broadband ‘Fuel Gauge’

Telco 2.0 - Mobile Broadband Fuel Gauge

Source: Ericsson, 13th Telco 2.0 Executive Brainstorm, London, May 2011

Deutsche Telekom showed its new ‘self-care’ customer app, complete with WiFi finder, Facebook integration, and ad-funding options, and how they are changing from a focus on complex tariffs to essentially Small/Medium/Large options, with tiers of speed, caps, WiFi access, and varying levels of added-on bundled services.

While we admired the apparent simplicity of the UI design of many of the elements of the services shown, we retain doubts on the proposed use of RCS and various other operator-only “enablers”, and will be further examining the pros and cons of RCS in future analysis.

New pricing approaches

In addition to Ericsson’s concept of dynamic pricing, making offers to customers at times of most need and suitability, Openwave showed numerous innovative new approaches to charging by application, time/day, user group and event (e.g. ‘Movie Pass’), segmentation of plans by user type, and how to use data plan sales to sell other services.

Figure 2 – Innovative Mobile Broadband Offers

Telco 2.0 - Mobile Broadband Pricing Options

Source: Openwave, 13th Telco 2.0 Executive Brainstorm, London, May 2011

No single ‘Killer’ obstacle to growth – but lots of challenges

Delegates voted on the obstacles to mobile broadband revenues and the impact of various measures on the control of costs.

Figure 3 – Obstacles to growing Mobile Broadband Revenues

Telco 2.0 - Mobile Broadband Revenue Obstacles

Source: Delegate Vote, 13th Telco 2.0 Executive Brainstorm, London, May 2011

Our take on these results is that:

  • Overall, there appears to be no single ‘killer obstacle’ to growth;
  • Net Neutrality is increasingly seen as a lesser issue in EMEA, certainly than in the US;
  • Whilst securing the largest number of ’major issue’ votes, we are not certain that all delegates fully know the views, needs, expectations and knowledge of upstream customers, and although their expectations are seen as an issue, it does not particularly appear more challenging than organisational or technical ones;
  • Manageable technical and organisational issues (e.g. integration, organisational complexity) appear a bigger obstacle than unmanageable ones (e.g. inability to control devices), although;
  • Implementation issues vary by operator, as can be seen by the relatively large proportions who either do not see integration as an issue at all or see it as a major issue.

Managing Costs: Network Sharing, Offloads as important as LTE 

Figure 4 – Impact of Mobile Broadband Cost Reduction Strategies

Telco 2.0 - Mobile Broadband Cost Strategies

Source: Delegate Vote, 13th Telco 2.0 Executive Brainstorm, London, May 2011

Our take on these results is that the approaches fall into three groups:

  • Strategic, long-term solutions including network sharing, LTE and offloading;
  • Strategies with a potentially important but more moderate impact including pricing, network outsourcing, and video traffic optimisation;
  • And lower impact initiatives such as refreshing the 3G network.

It is interesting that network sharing deals were seen as a more strategic solution to long term cost issues than migration to LTE, although there is logic to this at the current stage of market development with the capital investments and longer time required to build out LTE networks. Similarly, data offload is currently an important cost management strategy.

We found it particularly interesting that network sharing (collaboration) deals are seen as significantly more effective than network outsourcing deals, and will be exploring this further in future analysis.

Next Steps

  • Further research and analysis in this area, including a report on the pros and cons of ‘Under the Floor’ (outsourced network) strategies.
  • More detailed Mobile Broadband sessions at upcoming Telco 2.0 Executive Brainstorms.

 

Public Wifi: Destroying LTE/Mobile Value?

Summary: By building or acquiring Public WiFi networks for tens of $Ms, highly innovative fixed players in the UK are stealthily removing $Bns of value from 3G and 4G mobile spectrum as smartphone and other data devices become increasingly carrier agnostic. What are the lessons globally?

Below is an extract from this 15 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 Future Networks Stream using the links below.

Read in Full (Members only)        To Subscribe

The mobile broadband landscape is a key session theme at our upcoming ‘New Digital Economics’ Brainstorm (London, 11-13 May). Please use the links or email contact@telco2.net or call +44 (0) 207 247 5003 to find out more.

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Two recent announcements have reignited interest in the UK Public WiFi space: Sky buying The Cloud for a reputed figure just short of £50m and Virgin Media announcing their intention to invest in building a metro WiFi network based around their significant outdoor real estate in the major conurbations.

These can be seen narrowly as competitive reactions to the success of the BT Openzone public WiFi product, which is a clear differentiator for the BT home broadband offer in the eyes of the consumer. The recent resurgence of BT market share in the home broadband market hints that public WiFi is an ingredient valued by consumers, especially when the price is bundled into the home access charges and therefore perceived as “free” by the consumer.

This trend is being accelerated by the new generation of Smartphones sensing whether private and public WiFi access or mobile operator network access offer the best connection for the end-user and then making the authentication process much easier. Furthermore, the case of the mobile operators is not helped by laptops and more importantly tablets and other connected devices such as e-readers offering WiFi as a default means of access with mobile operator 3G requiring extra investment in both equipment and access with a clumsy means of authentication.

In a wider context, the phenomena should be extremely concerning for the UK mobile operators. There has been a two decade trend of voice traffic inside the home moving from fixed to mobile networks with a clear revenue gain for the mobile operators. In the data world, it appears that the bulk of the heavy lifting appears to being served within the home by private WiFi and outside of the home in nomadic spots served by public WiFi.

With most of the public WiFi hotspots in the UK being offered by fixed operators, there is a potential value shift from mobile to fixed networks reversing that two decade trend. As the hotspots grow and critically, once they become interconnected, there is an increasing risk to mobile operators in terms of the value of investment in expensive ‘4G’ / LTE spectrum.

Beyond this, a major problem for mobile operators is that the current trend for multi-mode networking (i.e. combination of WiFi and 3G access) limits the ability of operators to provide VAS services and/or capture 2-sided business model revenues, since so much activity is off-network and outside of the operator’s control plane.

The history of WiFi presents reality lessons for Mobile Operators, namely:

  • With Innovation, it not always the innovators who gain the most;
  • Similarly, with Standards setting, it not always the people who set the standards who gain the most; and
  • WiFi is a classic case of Apple driving mass adoption and reaping the benefits – to this day, Apple still seems to prefer WiFi over 3G.

This analyst note explains the flurry of recent announcements in the context of:

  • The unique UK market structure;
  • Technology Adoption Cycles;
  • How intelligence at the edge of the network will drive both private and public WiFi use;
  • How public WiFi in the UK might evolve;
  • The longer term value threat to the mobile operators;
  • How O2 and Vodafone are taking different strategies to fight back; and
  • Lessons for other markets.

Unique Nature of the UK Market Structure

In May 2002, BT Cellnet, the mobile arm of BT, soon to be renamed O2, demerged from BT leaving the UK market as one of few markets in the world where the incumbent PTT did not have a mobile arm. Ever since BT has tried to get into the mobility game with varying degrees of success:

  • In the summer of 2002, it launched its public WiFi service called OpenZone;
  • In September 2003 it announced plans for WiFi in all public phone boxes ;
  • In May 2004, it launched an MVNO with Vodafone with plans for the doomed BT Fusion UMA (Bluetooth then WiFi ) phone;
  • In May 2006, with Metro WiFi plans in partnership with local authorities in 12 cities; and
  • In Oct 2007, in partnership with FON to put public WiFi in each and every BT home routers.

After trying out different angles in the mobility business for five years, BT finally discovered a workable business model with public WiFi around the FON partnership. BT now effectively bundle free public WiFi to its broadband users in return for establishing a public hotspot within their own home.

Huge Growth in UK Public Wifi Usage

Approximately 2.6m or 47% customers of a total of 5.5m BT broadband connections have taken this option. This creates the image of huge public WiFi coverage and clearly currently differentiates BT from other home broadband providers. And, the public WiFi network is being used much more: 881 million minutes in the current quarter compared to 335 million minutes in the previous year.

The other significant element of the BT public WiFi network is the public hotspots they have built with hotels, restaurants, airports. The hotspots number around 5k, of which 1.2k are wholesale arrangements with other public WiFi hotspot providers. While not significant in number, these provide the real incremental value to the BT home broadband user who can connect for “free” in these high traffic locations.

BT was not alone in trying to build a public WiFi business. The Cloud was launched in the UK in 2003 and tried to build a more traditional public WiFi business building upon a combination of direct end user revenues and wholesale and interconnect arrangements. That Sky are paying “south of £50m” for The Cloud compared to the “€50m invested” over the years by the VC backers implies the traditional public WiFi business model just doesn’t work. A different strategy will be taken by Sky going forward.

Sky is the largest pay-tv provider in the UK currently serving approximately 10m homes by satellite DTH. In 2005, Sky decided upon a change of strategy and decided that in addition to offering its customers video services, they needed to offer broadband and phone services. Sky has subsequently invested approximately £1bn in buying an altnet, Easynet, for £211m, in building a LLU network on top of BT infrastructure and acquiring 3m broadband customers. If the past is anything to go by, Sky will be planning on investing considerable further sums in The Cloud to make it at a minimum a comparable service to BT Openzone for its customers.

Virgin Media is the only cable operator of any significance in the UK with a footprint of around 50% of the UK mainly in the dense conurbations. Virgin Media is the child of many years of cable consolidation and historically suffered from disparate metro cable networks of varying quality and an overleveraged balance sheet. The present management has a done a good job of tidying up the mess and upgrading the networks to DOCSIS 3.0 technology. In the last year, Virgin Media has started to expand its footprint again and investing in new products with plans for building a metro WiFi network based around its large footprint of cabinets in the street.

Virgin Media has a large base of 4.3m home broadband users to protect and an even larger base of potential homes to sell services into. In addition, Virgin Media is the largest MVNO in the UK with around 3m mobile subscribers. In recent years, Virgin Media have focused upon selling mobile services into their current cable customers. Although, Virgin Media’s public WiFi strategy is not in the public domain, it is clear that they plan on investing in 2011.

TalkTalk is the only other significant UK Home Broadband player with 4.2m home broadband users and currently has no declared public WiFi strategies.

The mobile operators which have invested in broadband, namely O2 and Orange, have failed to gain traction in the marketplace.

The key trend here is that the fixed broadband network providers are moving outside of the home and providing more value to their customers on the move.

Technology Adoption Cycles

Figure 1: Geoffrey Moore’s Technology Adoption Cycle

Geoffrey Moore documented technology adoption cycles, originally in the “Crossing the Chasm” book and subsequently in the “Living in the Fault Line” book. These books described the pain in products crossing over from early adopters to the mass market. Since publication, they have established themselves as the bible for a generation of Technology marketers. Moore distinguishes six zones, which are adopted to describe the situation of public WiFi in the UK.

  1. The early market: a time of great excitement when visionaries are looking to get on board. In the public WiFi market this period was clearly established in mid-2005 era when public WiFi networks where promoted as real alternatives to private MNOs.
  2. The chasm: a time of great despair as initial interest wanes and the mainstream is not comfortable with adoption. The UK WiFi market has been stagnating for the previous few years as investment in public WiFi has declined and customer adoption has not accelerated beyond the techno-savvy.
  3. The bowling alley: a period of niche adoption ahead of the general marketplace. The UK market is currently in this period. The two key skittles to fall were the BT FON deal changing the public WiFi business model, and the launch of the iPhone with auto-sensing and easy authentication of public WiFi.
  4. The tornado: a period of mass-market adoption. The UK market is about to enter in this phase as public WiFi investment is reinvigorated deploying providing “bundled” access to most home broadband users.
  5. Main street: Base infrastructure has been deployed and the goal is to flesh out the potential. We are probably a few years away from this and this phase will focus on ease-of-use, interconnect of public WiFi networks, consolidation of smaller players and alternate revenue sources such as advertising.
  6. Total Assimilation: Everyone is using the technology and the market is ripe for another wave of disruption. For UK WiFi, this is probably at least a decade away, but who know what the future holds?

Flashback: How Private WiFi crossed the Chasm

It is worthwhile at this point to revisit the history of WiFi as it provides some perspective and pointers for the future, especially who the winners and losers will be in the public WiFi space.

Back in 1985 when deregulation was still in fashion, the USA FCC opened up some spectrum to provide an innovation spurt to US industry under a license exempt and “free-to-use” regime. This was remarkable in itself given that previously spectrum, whether for radio and television broadcasting or public and private communications, had been exclusively licensed. Any applications in the so-called ISM (Industrial, Scientific and Medical) bands would have to deal with contention from other applications using the spectrum and therefore the primary use was seen as indoor and corporate applications.

Retail department stores, one of the main clients of NCR (National Cash Registers), tended to reconfigure their floor space on a regular basis and the cost of continual rewiring of point-of-sales equipment was a significant expense. NCR saw an opportunity to use the ISM bands to solve this problem and started a R&D project in the Netherlands to create wireless local area networks which required no cabling.

At this time, the IEEE were leading the standardization effort for local area networks and the 802.3 Ethernet specification initially approved in 1987 still forms the basis of the most wired LAN implementations today. NCR decided that the standards road was the route to take and played a leading role in the eventual creation of 802.11 wireless LAN standards in 1997. Wireless LAN was considered too much of a mouthful and was reinvented as WiFi in 1999 with the help of a branding agency.

Ahead of the standards approval, NCR launched products under the WaveLAN brand in 1990 but the cost of the plug-in cards at US$1,400 were very expensive compared to the wired ethernet cards which were priced at around US$400. Product take-up was slow outside of early adopters.

In 1991 an early form of Telco-IT convergence emerged as AT&T bought NCR. An early competitor for the ISM bandwidth emerged with AT&T developing a new generation of digital cordless phones using the 2.4GHz band. To this day, in the majority of UK and worldwide households, DECT handsets in the home compete with WiFi for spectrum. Product development of the cards continued and was made consumer friendly easier with the adoption on the PCMIA card slots in PCs.

By 1997, WiFi technology was firmly stuck in the chasm. The major card vendors (Proxim, Aironet, Xircom and AT&T) all had non-standardized products and the vendors were at best marginally profitable struggling to grow the market.
AT&T had broken up and the WiFi business became part of Lucent Technologies. The eyes and brains of the big communications companies (Alcatel, Ericsson, Lucent, Motorola, Nokia, Nortel and Siemens) were focused on network solutions with 3G holding the promise for the future.

All that was about to change in early 1998 with a meeting between Steve Jobs of Apple and Richard McGinn, CEO of Lucent:

  • Steve Jobs declared “Wireless LANs are the greatest thing on earth, Apple wants a radio card for US$50, which Apple will retail at US$99”;
  • Rich McGinn declared 1999 to be the year of DSL and asked if Apple would be ready; and
  • Steve Jobs retort was revealing to this day “Probably not next, maybe the year after; depends upon whether there is one standard worldwide”.

Figure 2: The Apple Airport

In early 1998 the cost of the cards was still above US$100 and needed a new generation of chips to bring the cost down to the Apple price point. Further, Apple wanted to use the 11Mbit/s standard which had just been developed rather than the current 2Mbit/s. However, despite the challenges the product was launched in July 1999 as the Apple Airport with the PCMCIA card at US$99 and the access point at US$299. Apple was the first skittle to fall as private WiFi crossed the chasm. The Windows based OEMs rushed to follow.

By 2001, Lucent had spun out its chip making arm as Agere Systems which had a market share of 50% of a US$1bn WiFi market, which would have been nothing but a pin prick on either the AT&T or Lucent profit and loss had Agere remained as part of them.

The final piece in the WiFi jigsaw fell into place when Intel acquired Xircom in 1999 and developed the Xircom technology and used their WiFi patents as protection against competitors. In 2003, Intel launched its Centrino chipset with built in WiFi functionality for laptops supported by a US$300m worldwide marketing campaign. Effectively for the consumer WiFi had become part the laptop bundle.

Agere Systems and all its WiFi heritage was finished and they discontinued its WiFi activities in 2004.

There are three clear pointers for the future:

  • The players who take a leading role in the early market will not necessary be the ones to succeed in Main Street;
  • Apple took a leading role in the adoption of WiFi and still seems massively committed to WiFi technology to this day;
  • Technology adoption cycles tend to be longer than expected.

Intelligence at the edge of the Network

As early as 2003, Broadcom and Phillips were launching specialized WiFi chips aimed at mobile phones. Several cellular handsets were launched with WiFi combined with 2G/3G connectivity, but the connectivity software was clunky for the user.

The launch of the iPhone in 2007 began a new era where the device automatically attempts to connect to any WiFi network if the signal strength is better than the 2G/3G network. The era of the home or work WiFi network being the preferred route for data traffic was ushered in.

Apple is trying to make authentication as simple as possible: enter the key for any WiFi network once and it will be remembered for the handset’s lifetime and connect automatically when a user returns in range. However, in dense urban networks with multiple WiFi access points, it is quite annoying to be prompted for key after key. The strength of the federated authentication system in cellular networks is therefore still a critical advantage.

The iPhone also senses that some applications can only be used when WiFi connections are available. The classic example is Apple’s own Facetime (video calling) application. Mobile Operators seem happy in the short run that bandwidth intensive applications are kept off their networks. But, there is a longer term value statement with the users being continually being reminded that WiFi networks are superior to mobile operators’ networks.

Other mobile operating systems, such as Android and Windows Phone 7, have copied the Apple approach and today there is no going back: multi-modal mobile phones are here to stay and the devices themselves decide which network to use unless the user over-rides this choice.

One of underlying rules of the internet is that intelligence moves to the edge of the network. The edges are probably in the eyes of Apple and Google the handsets and their server farms. It is not beyond the realms of possibility that future Smartphones will be supplied with automatic authentication for both WiFi and Cellular networks with least-cost routing software determining the best price for the user. As intelligence moves to the edge so does value.

Public WiFi Hotspots – the Business Model challenges

The JiWire directory estimates that there are c. 414k public WiFi locations across the globe at the end of 2010, and there are WiFi hotspots currently located 26.5k in the UK. Across the globe, there is a shift from a paid-for model to a free-model with the USA being top of the free chart with 54% of public WiFi locations being free.

For a café chain offering free access to WiFi is a good model to follow. The theory is that people will make extra visits to buy a coffee just to check their email or some other light internet visit. Starbucks started the trend by offering free WiFi access, all the rest felt compelled to follow. Nowadays, all the major chains whether Costa Coffee, Café Nero and even McDonalds offer free WiFi access provided by either BT Openzone or Sky’s The Cloud. A partnership with a public WiFi provider is perfect as the café chain doesn’t have to provide complicated networking support or regulatory compliance. The costs for the public WiFi provider are relativity small especially if they are amortized across a large base of broadband users.

For hotels and resorts, the business case is more difficult as most hotels are quite large and multiple access points are required to provide decent coverage to all rooms. Furthermore, hotels traditionally have made additional revenues from most services and therefore complexity is added with billing systems. For most hotels and resorts a revenue share agreement is negotiated with the WiFi service provider.

For public places, such as airports and train stations, the business case is also complicated by the owners knowing these sites are high in footfall and therefore demand a premium for any activity whether retail or service based. It is a similar problem that mobile operators face when trying to provide coverage in major locations: access to prime locations is expensive. In the UK, the entry of Sky into the public WiFi and its long association with Sports brings an intriguing possible partnership with the UK’s major venues.

These three types of locations currently account for 75% of current public WiFi usage according to JiWire.

To read the rest of the article, including:

  • How will UK Public WiFi Evolve?
  • Challenge to Mobile Operators
  • O2 Tries an Alternative
  • Vodafone Goes with Femtos
  • Lessons for Other Markets

Members of the Telco 2.0TM Executive Briefing Subscription Service and Future Networks Stream can access and download a PDF of the full report 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. ‘Growing the Mobile Internet’ and ‘Lessons from Apple: Fostering vibrant content ecosystems’ are also featured at our AMERICAS and EMEA Executive Brainstorms and Best Practice Live! virtual events.

Net Neutrality 2.0: Don’t Block the Pipe, Lubricate the Market

Summary: ‘Net Neutrality’ has gathered increasing momentum as a market issue, with AT&T, Verizon, major European telcos and Google and others all making their points in advance of the Ofcom, EC, and FCC consultation processes. This is Telco 2.0’s input, analysis and recommendations. (September 2010, Foundation 2.0,, Executive Briefing Service, Future of the Networks Stream).

NB A PDF copy of this 17 page document can be downloaded in full here. We’ll also be discussing this at the Telco 2.0 Executive Brainstorms. Email contact@telco2.net or call +44 (0) 207 247 5003 to find out more.

Overview

In this paper, Telco 2.0 recommends that the appropriate general response to concerns over ‘Net Neutrality’ is to make it easier for customers to understand what they should expect, and what they actually get, from their broadband service, rather than impose strict technical rules or regulation about how ISPs should manage their networks.

In this article we describe in detail why, and provide recommendations for how.

NB We would like to express our thanks to Dean Bubley of Disruptive Analysis, who has worked closely with our team to develop this paper.

Analysis of Net Neutrality Issues

‘Net Neutrality’ = Self-Interest (Poorly Disguised)

‘Net Neutrality’ is an issue manufactured and amplified by lobbyists on the behalf of competing commercial interests. Much of the debate on the issue has become somewhat distracting and artificial as the ‘noise’ of self-interested opinion has become much louder than the ‘signal’ of potential resolutions.

The libertarian ideal that the title implies is a clever piece of PR manipulation of ideas of freedom of access of information, and freedom from interference. For the most part, this is far from the reality of the motives of the players engaged in the debate.

Additionally, the ‘public’ net neutrality debate is being driven by tech-savvy early adopters whose views and ‘use cases’ are not statistically representative of the overall internet population.

This collection of factors has created a strange landscape of idealist and specialised viewpoints congregating around the industry lobbyists’ various positions.

However, behind the scenes, the big commercial players are becoming increasingly tense, and we have recently experienced a marked reluctance from senior telco executives to comment on the issue in public.

Our position is that, beyond the hyperbole, the fair and proper management of contention between Internet Applications and ‘Specialised Services’ is important in the interests of consumers and the potential creation of new business models.

What, exactly, is the ‘problem’ and for whom?

Rapidly increasing use of the Internet and Specialised Services, particularly bandwidth hungry applications like online video, is causing (or, at least, will in theory cause) increasing contention in parts of the network.

The currently expressed primary concerns of net neutrality activists are that some consumers will receive a service whose delivery has been covertly manipulated by an external party, in this case their ISP. Similarly, some application and service providers fear that their services are or will consequently be discriminated against by telcos.

Some telcos think that certain other large and bandwidth-hungry applications are receiving a ‘free ride’ on their networks, and their corporate owners consequently receiving the benefits of expensive network investments without contribution. As a consequence, ISPs argue that they should be entitled to unilaterally constrain certain types of applications unless application providers pay for the additional bandwidth.

It’s a Commercial Issue, not a Moral Issue

One of the areas of obfuscation in the ‘Net Neutrality’ debate is the confusion between two sets of issues in the debate: ‘moral and legal’ and ‘commercial’.

Moral & legal issues include matters such as ‘freedom of expression’ and the right to unfettered internet access, the treatment of pirated content, and censorship of extreme religious or pornographic materials. We regard these as subjects for the law where the service is consumed / produced etc., but that have in some places become entangled in the ‘Net Neutrality’ debate and which should not be its focus.

The commercial issue is whether operators should be regulated in how they prioritise traffic from one commercial application over another without the user’s knowledge.

What causes this problem?

Contention can arise at different points between the service or application and the user, for example:

  • Caused by bulk traffic from users and applications in the ‘core network’ beyond the local exchange, (akin to the general slowing of Internet applications in the evening in Europe due to greater local and U.S. usage at that time);
  • Between applications on a bandwidth restricted local access route (e.g. ADSL over a copper pair, mobile broadband).

As a service may originate from and be delivered to anywhere globally, the first kind of contention can only be truly be managed if there is either a) an Internet-wide standard for prioritising different types of traffic, or b) a specific overlay network for that service which bypasses the internet to a certain ‘outer’ point in the network closer to the consumer such as a local exchange. This latter class of service delivery may be accompanied by a connection between the exchange and the end-user that is not over the internet – and this is the case in most IPTV services.

To alleviate issues of contention, various ‘Traffic Management’ strategies are available to operators, as shown in the following diagram, with increasingly controversial types of intervention to the right.

Figure 1 – Ofcom’s Traffic Management Continuum

Ofcom's Traffic Management Continuum

Source: Ofcom

Is It Really a Problem?

Operators already do apply traffic management techniques, an example of which was given by 3UK’s Director of Network Strategy at the recent Broadband Stakeholder Group (BSG) event in London, who explained that at peak times in the busiest cells, 3 limits SS7 signalling and P2P traffic. He explained that they selected these categories because they are essentially ‘background’ applications that have little impact on the consumer’s experience, and it was important to keep down latency so that more interactive applications like Web browsing functioned well. A major ‘use case’ for 3UK was identifying which cells needed investment.

In 3UK’s case, there was perhaps surprisingly more signalling traffic than there was P2P. Though this is a mobile peculiarity, it illustrates that assumptions about problems in managing traffic management can often be wrong, and it is important that decisions should be taken on the basis of data rather than prejudice.

While there are vociferous campaigners and powerful commercial interests at stake, it is fair to say that the streets are not often full of angry consumers waving banners reading ‘Hands off my YouTube’ and knocking on the doors of telcos’ HQs. While a quick and entirely non-representative survey of Telco 2.0’s non-technical relatives-of-choice revealed complete ignorance and lack of further interest in the subject, this does not necessarily mean that there is not, or could not be, a problem, and it is possible that consumers could unwittingly suffer. On balance though, Telco 2.0 has not yet seen significant evidence of a market failure. We also believe that the mechanisms of the market are the best means of managing potential conflict.

A case of ‘Terminological Inexactitude’

We broadly agree with Alex Blowers of OFCOM, who said that ‘80% of the net neutrality debate is in the definition’ at the recent BSG conference.

First, the term ‘Net Neutrality’ does not actually distinguish which services it refers to – does ‘Net’ mean ‘The Internet’, ‘The Network’, or something else? To most it is taken to mean ‘The Internet’, so what is ‘The Internet’? Despite the initial sense that the answer to this question seems completely obvious, a short conversation within or outside the industry will reveal an enormous range of definitions. The IT Director will give you a different answer from your non-technical relatives and friends.

These ambiguities have the straightforward consequence that the term ‘Net Neutrality’ can be used to mean whatever the user wants, and its use is therefore generally a guarantee for mindless circular arguments and confusion . In other words: perfect conditions for lobbyists with partial views.

For most people, ‘the internet’ is “everything I can get or do when my computer or phone is connected online”. A consumer with such a view probably has a broadband line and an internet service and is among those, in theory at least, most in need of protection from unscrupulous policy management that might favour one form of online traffic over another without their knowledge or control. It is their understanding and expectation of what they have bought against the reality of what they get that we see as the key in this matter.

In this paper, we discuss two classes of services that can be delivered via a broadband access line.

1. Access to ‘The Internet’ (note capitalisation), which means being able to see and interact with the full range of websites, applications and services that are legitimate and publicly available. We set out some guiding principles below on a tighter definition of what services described as ‘The Internet’ should deliver.

2. ‘Specialised Services’ are other services that use a broadband line, that often connect to a device other than a PC (e.g. IPTV via set-top boxes, smart meters, RIM’s Blackberry Exchange Server (BES)) or a service that may be connected to a PC but via a VPN, such as corporate video conferencing, Cloud or Enterprise VOIP solutions.

While ‘Specialised Services’ are not by our definition pure Internet services, they can also have an effect in certain circumstances on the provision of ‘The Internet’ to an end-user where they share parts of the connection that are in contention. Additionally, there can be contention between services on ‘The Internet’ from multiple users or applications connected via a common router.

Additionally, fixed and mobile communications present different contexts for the services, with different potential mechanisms for control and management. Mobile services have the particular difference that, other than signalling, there is no connection between device and the network when data services are not being used.

The Internet: ‘Appellation Controlee’?

One possible mechanism to improve consumer understanding and standards of marketing services is to introduce a framework for defining more tightly services sold as “Internet Access”.
In our view, services sold as ‘The Internet’ should:

  • Provide access to all legitimate online services using the ‘public’ internet;
  • Perform within certain bounds of service performance as marketed (e.g. speed, latency);
  • Be subject to the minimum necessary ‘traffic management’ by the ISP, which should only be permissible in specific instances, such as contention (e.g. peak hour use) ;
  • Aim to maintain consistent delivery of all services in line with reasonable customer expectation and best possible customer experience (as exemplified in a ‘code of best practice’);
  • Provide published and accessible performance measures against ‘best practice’ standards.

Where a customer has paid extra for a Specialised Service, e.g. IPTV, it is reasonable to give that service priority to pre-agreed limits while in use.

The point of defining such an experience would be to give consumers a reference point, or perhaps a ‘Kitemark’, to assure them of the nature of the service they are buying. In instances where the service sold is less than that defined, the service would need to be identified, e.g. a ‘Limited Internet Access Service’.

The Internet isn’t really ‘Neutral’

To understand the limitations and possible advantages of ‘traffic management’, and put this into context, it is worth briefly reviewing some of the other ways in which customer and service experiences vary.

Different Services Work in Different Ways
Many Internet Services use already use complex mechanisms to optimise their delivery to the end-user. For example:

  • Google has built a huge Content Delivery Network, using fibre to speed communications between data centres, dedicated delivery of traffic to international peering points, and equipment at ISPs for expediting caching and content delivery, to ensure that its content is delivered more rapidly to the outer edges of the network;
  • BBC News Player uses an Akamai Content Delivery Network (CDN) similarly;
  • Skype delivers its traffic more effectively by optimising its route through the peer-to-peer network.

Equally, most ISPs are able to ‘tune’ their data services to better match the characteristics of their own network. Although these assets are only available to the services that pay for, own, or create them, none of these techniques actively slows any other service. Indeed, and in theory, by creating or using new non-congested routes, they free capacity for other services so the whole network benefits.

Consumer Experiences are Different too
Today’s consumer experience of ISP services varies widely on local factors. Two neighbours (who happen to be on different nodes) could, in theory get a very different user experience from the same ISP depending on factors such as:

  • Local congestion (service node contention, loading, router and backhaul capacity);
  • Quality and length of local loop (including customer internal wiring);
  • Physical signal interference at the MDF (potentially a big issue where there is lots of ULL);
  • Time of day;
  • Router make and settings (particularly relating to QOS, security).

These factors will, in many cases, massively outweigh performance variation experienced from possible ‘traffic management’ by ISPs.

Internet Protocols try to be ‘Fair’

The Internet runs using a set of data traffic rules or protocols which determine how different pieces of data reach their destinations. These protocols, e.g. TCP/IP, OSPF, BGP, are designed to ensure that traffic from different sources is transmitted with equal priority and efficiency.

Further Technical Fixes Are Possible

Network congestion is not an issue that appeared overnight with the FCC’s 2005 Comcast decision. In fact, the Internet engineering community has been grappling with it with some success since the near-disaster in the late 1980s that led to the introduction of congestion control mechanisms in TCP.

Much more recently, the popular BitTorrent file sharing protocol, frequently criticised for getting around TCP’s congestion control, has been adapted to provide application-level congestion control. The P4P protocol, created at MIT and tested by Verizon and Telefonica, provides means for P2P systems and service provider networks to cooperate better. However, it remains essentially unused.

A further consideration is that it is necessary to be realistic about what can be expected – we have heard the benefits from traffic-shaping cited as an extension of around 10% in the upgrade cycle in the best-case scenario.

It’s Complex, not Neutral

It is therefore simply not the case that all Internet services progress from point of origin somewhere in the cloud of cyberspace to the end-users via a random and polite system. There are assets that are not equally shared, significant local variations, and there are complex rules and standards.

‘The Internet’ is a highly complex structure with many competing mechanisms of delivery, and this is one of its great strengths – the multiplicity of routes and mechanisms creates a resilient and continually evolving and improving system. But it is not ‘neutral’, although many of its core functions (such as congestion control) are explicitly designed to be fair.

Don’t Block the Pipes, Lubricate the Market

In principle, Telco 2.0 endorses developments that support new business models, but also believes that the rights of end-users should be appropriately protected. They have, after all, already paid for the service, and having done so should have the right to access the services they believe they have paid for within the bounds of legality.

In terms of how to achieve this balance, it’s very difficult to measure and police service levels, and we believe that simply mandating traffic management solutions alone is impractical.

Moreover, we think that creating a fair and efficient market is a better mechanism than any form of regulation on the methods that operators use to prioritise services.

Empower the Customer

There are three basic ways of creating and fulfilling expectations fairly, and empowering end-customers to make better decisions on which service they choose.

  1. Improving Transparency – being clear and honest about what the customer can expect from their service in terms of performance, and making sure that any traffic management approaches are clearly communicated.
  2. Enabling DIY Service Management – some customers, particularly corporate clients and advanced users, are able and can be expected to manage significant components of their Internet services. For example, mechanisms already exist to flag classes of traffic as priority, and many types of CPE are capable of doing so. It’s necessary, however, that the service provider’s routers honour the attribute in question and that users are aware of it. Many customers would need support to manage this effectively, and this could be a role for 3rd parties in the market, though it is unlikely that this alone will result in fairness for all users.
  3. Establishing Protection – for many customers, DIY Service Management is neither interesting nor possible, and we argue that a degree of protection is desirable by defining fair rules or ‘best practice’ for traffic management.

Not all customers are alike

‘Net Neutrality’ or any form of management of contention is not an issue for corporate customers, most of whom have the ability to configure their IP services at their will. For example, a financial services trader is likely to prioritise Bloomberg and trading services above all other services. This is not a new concept, as telcos have been offering managed data services (priority etc) to enterprise customers for years over their data connections and private IP infrastructure.

Some more advanced consumer users can also prioritise their own services. Some can alter the traffic management rules in their routers as described above. However, these customers are certainly in the minority of Innovators and Early Adopters. Innovation in user-experience design could change this to a degree, especially if customers have a reason to engage rather than being asked to do their service provider’s bottom line a favour.

The issue of unmanaged contention is therefore likely to affect the mass market, but is only likely to arise in certain circumstances. To illustrate this we have selected a number of specific scenarios or use cases in which we will show how we believe the principles we advocate should be applied. But first, what are our principles?

Lubricate the Market

There are broadly three regulatory market approaches.

  1. Do nothing’ – the argument for this is that there is no evidence of market failure, and that regulating the service is therefore unnecessary and moreover difficult to do. We have some sympathy for this position, but believe that in practice some of direction is needed as recommended below.
  2. Regulate the Market’ – so that telcos can do what they like with the traffic but customers can choose between suppliers on the basis of clear information about their practices and performance. A pure version of this approach would involve the specification of better consumer information at point of sale and published APIs on congestion.
  3. Regulate the Method’ – with hard rules on traffic management rather than how the services are sold and presented. The ‘hard’ approach is potentially best suited to where the ‘market’ is insufficiently competitive / open. This method is difficult to police as services blur and ‘the game’ then becomes to be categorised as one type of service but act as another.

Telco 2.0 advocates a hybrid approach that promotes market transparency and liquidity to empower customers in their choices of ISP and services, including:

  • Guidelines for operators on ‘best practice in traffic management’, which in general would recommend that operators should follow the principle of “minimum intervention”;
  • Published assessments on how each operator meets these guidelines that make understanding operator’s performance on these issues straightforward for customers.

The criteria of the assessment would include the actual performance of the operator against claimed performance (e.g. speed, latency), and whether they adhere to the ‘Code of Best Practice’.

How might it work?

The communication of this assessment could be as simple as a ‘traffic light’ style indicator, where a full Internet service meeting best practice and consistently achieving say 90% of claimed performance would be ‘Green’, while services meeting lower standards / adherence or failing to report adequately would be signalled ‘Amber’ or ‘Red’. The principles used by the operator should also be published, though utilising this step on its own would run the risk of the “Licence Agreement” problem for software – which is that no-one reads them.

We’ll be working on refining our guidelines and thoughts on how an indicator or other system might work by working through some specific ‘Use Cases’ outlined below. In the meantime, we recommend the suggestions made by long-time Telco 2.0 Associate Dean Bubley in his Disruptive Analysis’s ‘Draft Code of Conduct for Policy Management and Net Neutrality’.

It is our view that as long as Telcos are forced to be open, regulator (and consumer bodies) can question or, ultimately, regulate for/against behaviours that could be beneficial/damaging.

The Role of the Regulator

We believe that the roles of the regulator(s) should be to:

  • Develop an agreed code of best practice with industry collaboration;
  • Agree, collect and publish measures of performance against the code;
  • Make it as easy as possible to switch providers by reducing the ‘hassle factor’ of clumsy processes, and by releasing consumers from onerous contractual obligations in instances of non-compliance with the code or performance at a ‘Red’ standard;
  • Monitor, publicise, and police market performance in line with appropriate regulatory compliance procedures.

We draw a parallel with what the UK regulator, Ofcom, used to do for telephony:

  • Force all providers with over a certain market share to report key performance metrics;
  • Publish these (ideally on the web, real time and by postcode);
  • Make it as easy to switch providers as possible;
  • Continuously review the set of performance metrics collected and published.

New ‘Enhanced Service’ Business Models?

Additionally, we see the following possible theoretical service layers within an Internet Service that could be used to create new business models:

  1. Best efforts’ – e.g. ‘We try our best to deliver all of your broadband services to maximum speed and performance, but some services may take priority at certain times of the day in order to cope with network demands. The services will not cease to work but you may experience temporarily degraded performance.’
  2. Protected’ – akin to the ambulance lane (e.g. Health, SmartGrid – packets that are always delivered/could be low or higher bandwidth e.g. a video health app but the principle of priority stands for both).
  3. Enhanced Service’ – e.g. a TV service that the customer has paid for (e.g. IPTV) or that a network will (or might) pay extra to deliver assure a higher degree of quality.

One possibility that we will be exploring is whether it could be possible to create an ‘On-demand Enhanced Service’. For example, to deliver a better video streaming experience the video provider can pays for their traffic to take priority over other services with the express consent of the customer. This may be achieved by adding a message to the Enhanced Service e.g. ‘Click here to use our Enhanced Video Service where we’ll pay to get your video to you quicker. This may cause degradation to the service to other applications currently active on your broadband line while you are using the Enhanced Video Service’.

We have long thought that there is scope for innovation in service design and pricing – for example, rather than offering a (supposed) continuous 8Mbps throughput (which most UK operators can’t actually support and have no intention of supporting), why not offer a lower average rate and the option to “burst” up to high speed when required? ISPs actually sell each other bandwidth on similar terms, so there is no reason why this should be impossible.

Example Scenarios / Use Cases

We’ve identified a number of specific scenarios which we will be researching and developing ‘Use Cases’ to illustrate how these principles would apply. Each of these cases is intended to illustrate different aspects of how a service should be sold to, and managed by / for the customer to ensure that expectations are set and met and that consumers are protected appropriately.
Fixed ‘Use Cases’

  1. Contention between Internet services over an ADSL line on a copper pair, e.g. Dad is editing a website, Daughter is watching YouTube videos, with a SmartGrid meter in operation over a shared wireless router. This is interesting because of the limited bandwidth on the ADSL line, plus consideration of the SmartGrid monitoring as a ‘Specialised Service’, and potentially also as a ‘Protected Service’ in our exploratory classification of potential service classes.
  2. Contention between Internet and Specialised Services over an ADSL line on a copper pair, e.g. Dad is streaming an HD video on the internet, daughter is watching IPTV. This is interesting because of the limited bandwidth on the ADSL line and the additional factor of the IPTV service over the broadband connection. Unlike a DOCSIS 3 cable link, where the CATV service is additional to the Internet service and in fact can be used to offload applications like iPlayer, the DSL environment means that “specialised services” will contend with public Internet service.
  3. Managed Vs Unmanaged Femtocells over an ADSL connection. An Unmanaged Femtocell is e.g. a Sprint Femtocell over an AT&T ADSL connection, where the Femtocell is treated purely as another source of IP traffic. A Managed Femtocell is e.g. a Softbank Femtocell operating on a Softbank ADSL line, using techniques such as improved synchronisation with the network to produce a better service. An examination of alternate approaches to managing Femtocell traffic is interesting: 1) because a Femtocell inherently involves a combination of mobile and fixed traffic over different networks, so draws out fixed/mobile issues, and; 2) it is useful to work through how a Managed Femtocell Use Case might work within the market approach we’ve defined.
  4. A comparison of a home worker using videoconferencing with remote colleagues in two scenarios: one using VPN software and configured router; the second using Skype with no local configuration. The objective here is to explore the relative difference in the quality of user experience as an illustration of what is possible in a advanced user ‘DIY’ management scenario.
  5. The ‘Use Case’ of an ‘On-demand Enhanced Service’ for a professional web video-cast, with the consumer experience as outlined above. The idea here is that the user grants temporary permission to the video provider and the network to temporarily provide an ‘Enhanced Service’. This role of this ‘Use Case’ is to explore how and whether a ‘sender pays’ model could be implemented both technically and commercially in a way that respected consumer concerns.
  6. HDTV to the living room TV. This is interesting because the huge bandwidth requirements needed to deliver HDTV are far beyond those originally envisaged and have a potentially significant impact on network costs. Would user expectations of such a service permit e.g. buffering to deliver it without extra cost, or might this also enable a legitimate ‘two-sided’ sender pays model where the upstream customer (e.g. the media provider) pays?

Mobile ‘Use Case’

  1. VOIP over mobile. Is it right that VOIP over mobile networks should be treated differently from how it is over fixed networks?

Telco 2.0’s Position Vs the Rest

There is reasonably common ground between most analysts and commentators on the need for more transparency in Internet Access service definition and performance and management standards, though there is little clarity yet in the ways in which this clarity might be achieved.

The area which is most contentious is the notion of ‘non-discrimination’ – that is of allowing ISPs to prioritise one form or source of traffic over another. AT&T are firmly in favour of ‘paid prioritisation’ whereas Google/Verizon are not, and says ‘wireline broadband providers would not be able to discriminate against or prioritize lawful Internet content, applications or services in a way that causes harm to users or competition’.

Interestingly, in the Norwegian Government’s Net Neutrality Guidelines issued in 2009, provision is made that allows operators to manage traffic in certain circumstances in order to protect the network and other services.

Free Press are a US activist movement who champion ‘Net Neutrality’. While we have accord with their desire for freedom of speech, and understand the imperative to create a more level-playing field for media in the US, our position is not aligned in terms of enshrining total neutrality globally by regulation.

In terms of the regulators’ positions, the UK’s Ofcom is tentatively against ‘ex-ante’ regulation, whereas the FCC seems to favour non-discrimination as a principle. The FCC is also asking whether mobile and fixed are different – we say they are, although as the example of 3UK shows, the differences may not be the ones you expect. Ofcom is also already looking at how it might make switching easier for customers.

We also note that US-based commentators generally see less competition on fixed internet services than in Europe, and less mobile broadband options for customers. Our position is that local competitive conditions are a relevant consideration in these matters, albeit that the starting point should be to regulate the market as described before considering a stronger stance on intervention in circumstances of low local competition.

Conclusion & Recommendations

‘Net Neutrality’ is largely a clever but distracting lobbyists’ ploy that has gathered enormous momentum on the hype circuit. The debate does create a possible opportunity to market and measure broadband services better, and that’s no bad thing for customers. There may also be opportunities to create new business models, but there’s still work to be done to assess if these are material.

‘Lubricate the Market’

1. “Internet Access” should be more tightly defined to mean a service that:

  • Provides access to all legitimate online services using the ‘public’ internet;
  • Performs within certain bounds of service performance as marketed (e.g. speed, latency);
  • Is subject to the minimum necessary ‘traffic management’ by the ISP, which should only be permissible in specific instances, such as contention (e.g. peak hour use);
  • Maintains consistent delivery of all services in line with reasonable customer expectation and best possible customer experience (as exemplified in a ‘code of best practice’);
  • Provides published and accessible performance measures against ‘best practice’ standards.

2. Where a customer has paid extra for a ‘Specialised Service’, e.g. IPTV, it is reasonable to give that service priority to agreed limits while in use. Services not meeting these criteria should be named, e.g. “Limited Internet Access”.

3. ISPs should be:

  • Able to do ‘what they need’ in terms of traffic management to deliver an effective service but that they must be open and transparent about it;
  • Realistic about the likely limits to possible benefits from traffic-shaping.

4. The roles of the regulator are to:

  • Develop an agreed code of best practice with industry collaboration;
  • Agree, collect and publish measures of performance against the code;
  • Ensure sufficient competition and ease of switching in the market;
  • Monitor, publicise, and police market performance in line with appropriate regulatory compliance procedures.

We have also outlined:

  • Principles for a code of best practice;
  • A simple ‘traffic light’ system that might be used to signal quality and compliance levels;
  • ‘Use Cases’ for further analysis to help refine the recommended ‘Code of Practice’ and its implementation, including exploration of an ‘On-Demand Enhanced Service’ that could potentially enable new business models within the framework outlined.

 

Optimising Mobile Broadband Economics: Key Issues and Next Steps

Summary: below is the Executive Summary and extract from a report on key issues for operators seeking to optimise mobile broadband network economics which were debated at the recent Telco 2.0 EMEA Brainstorm in London.

(NB: New video presentations exploring these issues in more detail will be broadcast online at Telco 2.0 Best Practice Live! on 28-30 June. Register here – it’s FREE.)

Executive Summary

At the 9th Telco 2.0 Executive Brainstorm, held in London on April 28-30, a dedicated session addressed the technical and business model challenges of mobile broadband, specifically looking at the cost problems and opportunities of the data boom.

The primary points made by the presenters were that:

  • New air interfaces and spectrum will not be enough to on their own to cope with the continued rise in data traffic. Building more cells alone is not a solution, and it will be necessary to address costs and pricing;
  • The challenge needs to be approached both from the network, through policy-based control including tiering and maybe traffic-shaping, backhaul optimisation, and offload through femtocells or WLAN, and from the business side with pricing, potential tiered offers and segmentation;
  • Techniques have to be deployed to manage traffic to deliver customer experiences, particularly for cloud and TV services;
  • The use of DPI for application-based traffic charging isn’t thought to be a practical solution, though device based management may be in some instances;
  • No single method of addressing capacity issues provides a complete solution and therefore a combination of offload, traffic management and segmentation is recommended.

Figure 1 – Key issues in Optimising the Economics of Mobile Broadband Networks

DB%20Conclusion%20slides.png

Source: Telco 2.0, 9th Telco 2.0 Executive Brainstorm, April 2010

Delegates: tiering sounds good but how do we do it?

Charging for providing higher and tiered Quality of Service (QoS) was a major topic of debate, and although this was ultimately voted as the most important potential current strategy, there were also strong disparate views offered by delegates. Other major themes were potential technological approaches, the role of content owners, LTE, and application based pricing.

Figure 2 – Delegate Vote on Near-Term Strategies
Vote%203%20Impact%20of%20business%20models.png

Source: 9th Telco 2.0 Executive Brainstorm, April 2010

[Ratings: 1-5, where 1 = ‘doesn’t move the needle’, and 5 = ‘dramatic positive effect on the economics of mobile broadband provision’]

Telco 2.0 Next Steps: Optimising Mobile Broadband Business Model Economics

Optimising mobile broadband economics is a complex challenge, or might perhaps be more accurately described as a collection of different challenges for different operators. There’s always a temptation to try to solve complex problems with a single ‘silver bullet’ idea, but in this instance this is almost certainly impossible, as there are many different possible solutions and different combinations of solutions will work at different times for different operators.

In our series of Future Broadband Business Models Strategy Reports, Telco 2.0 has previously explored the long term business model and technical architectures in Beyond Bundling: Growth Strategies for Fixed and Mobile Broadband – “Winning the $250Bn delivery game.”, the structure and evolution of the online video distribution market in Online Video Market Study: The impact of video on broadband business models, and most recently updated our analysis on a range of nearer term potential business model strategies in New Mobile, Fixed and Wholesale Broadband Business Models.

We will next create a new report summarizing the main options for optimizing mobile broadband business model economics. In addition, Mobile Broadband will feature in the first Telco 2.0 Best Practice Live! event at the end of June. This will provide a video-based online data bank of some of the most interesting Mobile Broadband case studies from across the world.

– Start of Detailed Report Extract –

Mobile Broadband Network Economics – Invest in Business Models as well as Technology

Moving attention away from the service side of the mobile broadband debate, speakers at the 9th Telco 2.0 Executive Brainstorm concentrated instead on how to move the needle on the cost side of the mobile broadband economics equation.

Stimulated by presentations by Dean Bubley, Senior Associate, Telco 2.0, and Dan Kirk, Director, Value Partners and a panel discussion that also included Johan Wickman, CTO Mobility, TeliaSonera, Eddie Chan, Global Head, Efficiency, NSN Consulting, and Andrew Bud, Chairman, MBlox, delegates came to the conclusion that pricing and segmentation strategies, together with offloading capabilities are more important than LTE in dealing with the data-inspired capacity crunch.

Redefining the Problem

Dean Bubley, Senior Associate, Telco 2.0, laid out the problem facing mobile operators. He displayed the now-iconic chart illustrating the ‘broadband incentive problem’ but argued that this was not a problem in itself – he said it was interesting but not necessarily a problem. It didn’t, for example, follow that the data service was going to be provided at a loss. Indeed, Johan Wickman’s TeliaSonera is one of a number of operators that are experiencing data revenues higher than is commonly believed. The incentive problem also doesn’t say anything about where cost or capacity issues would manifest themselves – in which elements of the network, or indeed what the right strategy would be to deal with them. Indeed, there are complex technology strategy issues present that aren’t addressed by such a statement at all.

Figure 3 – The ‘Broadband Incentive Problem’ Statement

BB%20incentive.png

 
Source: Telco 2.0, 9th Telco 2.0 Executive Brainstorm, April 2010 

Understanding Costs and Technology

Furthermore, he suggested that the industry may be paying more attention to how revenues from mobile broadband might be increased than how its costs could be controlled. Referring to an Agilent Technologies presentation on LTE, he pointed out that the large majority of all current and future wireless capacity was accounted for by the creation of new cells, therefore radio air interface improvements and spectrum release would not be anywhere near enough to support continued traffic growth without much more cell subdivision, with all its associated costs, and more use of “small cells” such as femtocells, WiFi, or pico-cells.

Network Solutions and Limitations

It is inevitable therefore to look at ways to better use the capacity available. However, the options for managing and shaping traffic are not straightforward and, as NSN’s Eddie Chan said, it is necessary to realise that “efficient” is not the same as “cheap” – efficiency is also about service improvements.

Traffic Management Mess

Bubley was particularly critical of traffic management solutions. He pointed to the important subtlety that traffic management could easily become a “mess”, particularly as traffic to and from PCs is difficult to manage. It tends to include many applications and, what is more, many applications and protocols can often be tunnelled within each other. The PC is a powerful open development platform and therefore there is much scope for users to circumvent traffic shaping. The share of PC traffic that consisted of non-voice data is in the order of 90%+ and essentially all of it is going to or from the public Internet, so whatever the operator does would be come at a cost. The complexity of this is illustrated below.

Figure 4 – Traffic Management Options

DB%20traffic%20management.png

Source: Telco 2.0, 9th Telco 2.0 Executive Brainstorm, April 2010

Bubley did point out that smartphone data and featurephone traffic are much more likely to be open to operators “adding value” than PC traffic as they are going to operator-hosted or operator-managed services. The traffic still has to be “managed”, but it’s now “friendly” traffic which is much more predictable. M2M devices, meanwhile, send all their traffic through the operator’s network – which might be a good reason to promote them as a line of business. Given the associated behaviours, it might be wise to segment by device rather than by application, an approach that Bubley feels is even more pertinent given concerns over DPI (Deep Packet Inspection), a technique by which network equipment looks beyond the header used for routing to non-header content (typically the actual payload) for some purpose, in this case to prioritise traffic.

The Doubtful Promise of DPI

Bubley argues that application-layer traffic shaping based on DPI has serious downsides; a major one simply being the definition of an application. For example, which service class would a YouTube video inside a Facebook plug-in have? Users would also adapt to it, use encryption, and tunnel one application in another to get round restrictions. Indeed, much of the file-sharing traffic had already moved to HTTP or HTTPS on ports 80 and 443. This may sound overly ‘techie’ but what it means is that file sharing traffic becomes indistinguishable from, and blends with, generic Web traffic. In addition, there would certainly inaccurate results and ‘false positives’, which could lead to political, regulatory, and reputational issues.

The only uses for deep packet inspection he could see were compliance with law-enforcement demands and gathering data for network optimisation, which might help the industry clear up whether its problems were caused by pirates running P2P, or bad network designs, aggressive data use by smartphones etc., or software updates.

Offload Options

So, if managing and shaping traffic effectively on one network is problematic, does it make more sense to offload it onto another?

The major advantage of the offload concept is that nobody’s data is being de-prioritised – rather than a re-allocation of (supposedly) scarce bandwidth, it represents an actual improvement in the efficiency of the network. It is therefore much less complex from a regulatory, political, and economic standpoint.

Solutions at the Business Layer

There are certainly some valuable options for addressing the data issue from a technical point of view, offload perhaps the most valuable amongst them. However, these are not all the weapons in an operator’s arsenal. They can also look to manage the impact of traffic on their networks and their bottom lines by looking at different business model and pricing options.

On the revenue side, Bubley says the bulk of revenue will be from ‘downstream’ subscription and pre-pay customers, and while helpful, that the near-term growth of new ‘upstream’ or wholesale / carrier services revenues alone would not be enough to cover the costs of capacity increases.

Figure 5 – New Revenue Streams Not Enough to Offset Capacity Requirements

Capacity%20table%20stakes.png

Source: Telco 2.0, 9th Telco 2.0 Executive Brainstorm, April 2010

This view was backed up by a delegate vote (see below) that suggests that while other options are possible, in the short term better tiering and segmentation strategies will be the best answer, followed by device-orientated solutions.

In this vote, the “New device categories” captures M2M (Machine-to-Machine) markets, “device bundled” refers to “comes with data” business models such as the connectivity Sprint provides for the Amazon Kindle, while ‘better tiering and segmentation’ refers to service and tariff packages. ‘Sender party pays’ is where users receive the service free and the sending party, be it an advertiser or other enterprise, pays, and ‘government sponsored’ is the case where the government pays for the connection as a public service.

Figure 6 – Impact of Mobile Broadband Business Models

Vote%201%20MBB%20short%20term%20revenue%20impact.png

Source: 9th Telco 2.0 Executive Brainstorm, April 2010

All Devices Are Not Equal

Returning to Bubley’s earlier claim that device segmentation may be more effective than application management policies, devices are a natural place to start when looking at business segmentation strategies. However, not all devices are created equal.

Smartphones, for example, tend to generate many relatively brief data sessions, they move around constantly and therefore carry out large numbers of register/handoff transactions with the network, and they also generate voice and messaging traffic. Because the signalling overhead for a data call is incurred when setting up and tearing down the session, a given amount of traffic split into 10 brief sessions is dramatically more demanding for the network than the same amount in one continuous session. Also, smartphones often have aggressive power-management routines that cause more signalling as they attempt to migrate to the cell that requires the least transmitter power.

On the other hand, although laptops tend to consume lots of bulk data, they do so in a relatively network-friendly fashion. The cellular dongles are typically operated much like a fixed-line modem, registering with the network and staying on-line throughout the user session. Their use profile tends to be nomadic rather than truly mobile, as the user is typically sitting down to work at the computer for an extended session. And the modems rarely have any serious power management, as they draw power over USB from the computer. These behaviours therefore create natural segments.

To read the rest of the report, covering…

  • Selling QoS/QoE
  • LTE – Build and They Will Come?
  • Four Scenarios for the Future Development of Mobile Broadband Business
  • Concluding Analysis
  • Telco 2.0 Next Steps: Optimising Mobile Broadband Business Model Economics

…and including…

  • Figure 1: Key Options for Cost Management in Mobile Broadband Networks
  • Figure 2: Delegate Vote on Near-Term Strategies
  • Figure 3: The ‘Broadband Incentive Problem’ Statement
  • Figure 4: Traffic Management Options
  • Figure 5: New Revenue Streams Not Enough to Offset Capacity Requirements
  • Figure 6: Impact of Mobile Broadband Business Models
  • Figure 7: More to Customer Experience than the Access Network
  • Figure 8: Upstream Demands for More Bandwidth
  • Figure 9: Predicted Timing of LTE Revenues in Europe
  • Figure 10: Impact of Mobile Broadband Business Models
  • Figure 11: Integrated Traffic and Segmentation Strategies More Important than LTE Alone
  • Figure 12: Key Options for Cost Management in Mobile Broadband Networks

 …Members of the Telco 2.0TM Executive Briefing Subscription Service and Future Networks Stream can download the full 20 page report in PDF format here. Non-Members, please see here for how to subscribe. Please email contact@telco2.net or call
+44 (0) 207 247 5003 for further details.

Mobile & Fixed Broadband Business Models: Four Strategy Scenarios

Summary: an introduction to the four strategy scenarios we see playing out in the market – ‘Telco 2.0 Player’, ‘Happy Piper’, ‘Device Specialist’, and ‘Government Department’ – part of a major new report looking at innovation in mobile and fixed broadband business models. (March 2010, Foundation 2.0, Executive Briefing Service, Future of the Networks Stream).

Introduction

This is an extract from the Overview section of the Telco 2.0 report ‘Mobile and Fixed Broadband Business Models: Best Practice, ‘Telco 2.0′ Opportunities, Forecasts and Future Scenarios‘.

The extract includes:

  • Overview of the three macroscopic broadband market trends
  • The five recurrent themes
  • Defining Telcos and Broadband Service Providers (BSPs) in the future
  • Market adoption of broadband
  • An Introduction to the four scenarios

A PDF version of this page can be downloaded here.

Overview

This section of the report provides a backdrop to the rest of the study. It highlights the key trends and developments in the evolution of broadband, which fundamentally underpin the other aspects of business model innovation discussed in the subsequent chapters. It also introduces Telco 2.0’s main ‘end-game scenarios’ for broadband service providers (BSPs), and gives a round-up of some of the key background statistics.

There are three main macroscopic trends in the broadband market:

1.   A focus on improving the reach and profitability of existing low/mid-speed broadband in developed countries, especially with the advent of inexpensive mobile data, and new methods of monetising the network through wholesale options, value-added services and better segmentation;

2.   Deployment of next-generation very high-speed broadband, and the building of business models and services to support this investment, typically involving video services and/or state backing for nationally-critical infrastructure projects;

3.   Continued steady rollout of broadband in developing markets, balancing theoretical gains in social and economic utility against the practical constraints of affordability, PC/device penetration and the need for substantial investment.

Cutting across all three trends are five recurrent themes:

Maturing products and business models

  • The global broadband market is maturing fast. In developed countries, baseline penetration rates are starting to level off as saturation approaches. Coupled with price erosion and increasing capacity demands, this deceleration is pressuring margins, especially in the recession;
  • The pivotal role of video in driving both costs and revenues, given its huge requirement for bandwidth, especially in high-definition (HD) format.
  • An awareness of the need for retail and wholesale business model evolution, as revenue growth plateaus and current attempts at bundling voice and/or IPTV (fixed) or content (mobile) show only patchy success.

Convergence of fixed and mobile technology and product offerings

  • The impact of mobile broadband, either as a substitute or a complement to fixed broadband. This goes hand-in-hand with the advent of more powerful personal devices such as smartphones and netbooks.

Greater state intervention in deploying and controlling broadband access

  • Intensifying regulation, focusing on areas such as facilities and service-based competition, unbundling and structural separation, Net Neutrality, spectrum policy and consumer advocacy;
  • Increasing government intervention in areas, such as broadband roll-out and strategy, outside the (traditional) scope of the regulatory authorities. This is conducted either through subsidy and stimulus programmes, or broader initiatives relating to national efforts on energy, health, education and the like;
  • A growing belief that broadband networks should also support ‘infrastructure’ services which may not be delivered by the public Internet – for example, remote metering and ‘smart grid’ connectivity, support for healthcare or e-government, or education services. A major battle over the next 10 years will be whether these are delivered as ‘Telco services’, ‘Internet services’ or as distinct and separately-managed network services by providers using wholesale access to a Telco network.

A more complex broadband ecosystem

The increasing role of major equipment vendors in facilitating new business models, either through managed services / outsourcing / transformation, direct engagement with governments on strategic architecture issues, or supply of key ‘platform’ components. However, many vendors are torn between protecting the legacy heavily-centralised models of their existing Telco customers, and exploring new targets within public-sector or Internet domains.

New consumer behaviour and higher expectations

Changing user behaviour as broadband becomes a basic expectation (or a government-mandated right) rather than a premium service, with the mass uptake of new applications and the added benefits of mobility.

Defining Telcos and BSPs in the future

One of the largest challenges in identifying Telco business models for the forthcoming era of next-generation access is the question of what actually defines a Telco, or a Broadband Service Provider (BSP).

In fixed networks, especially with new fibre deployment, the situation is becoming ever more complex because of the number of levels at which wholesaling can take place. If an incumbent ADSL operator buys, packages and rebrands wholesale dark fibre capacity from a municipally-owned fibre network, which one is the BSP? Or are they both BSPs?

The situation is a lot easier in mobile, where there still remains a fairly clear definition of a mobile operator, or a mobile virtual network operator (MVNO) – although in future network-sharing and outsourcing may also blur the boundaries in this market.

It is possible that there isn’t an appropriate strict definition, so a range of proxy definitions will start to apply – membership of bodies like the GSMA, possession of a ‘mobile network code’, access to certain number ranges, ownership of spectrum and so forth. In an era where Google buys dark fibre leases, Ericsson manages cellular networks, investment consortia contract to run a government-sponsored infrastructure and  mobile operators offer ‘over the top’ applications – it all becomes much less clear.

In this report, BSPs are taken as a broad class to include:

  • Owners of physical broadband access network infrastructure – taken as either physical cabling or fibre (wireline) or spectrum and radio cells (mobile). Telco 2.0 does not include rights-of-way owners or third-party cell-tower operators in this definition;
  • Owners of broadband access networks built using wholesale capacity on another provider’s wires or fibres, but with their own active electronics, E.g. basing a network on unbundled loops or dark fibre;
  • Providers of retail broadband access, perhaps bundled with other services, using bitstream, ethernet access or MVNO models based on wholesale from another network operator.

These definitions exclude 2G-only (non-broadband) mobile operators and MVNOs, PSTN or cable TV access provided without broadband connectivity and non-retail access providers, such as microwave backhaul operators and content delivery networks (CDNs) Etc.

Market adoption of broadband


The global broadband access market has grown from fewer than 10 million lines in 1999, to more than half a billion at the end of 2009, predominantly through the growth of DSL-based solutions, as well as cable and other technologies. Although growth has started to slow in percentage terms, there remains significant scope for more homes and businesses to connect, especially in developing economies, such as China. Older fixed broadband services in more industrialised economies will gradually be replaced with fibre.

The other major area of change is in wireless. Since 2007, there has been rapid growth, with the uptake of mobile broadband for ‘personal’ use with either smartphones or laptops, often in addition to users’ existing fixed lines. This category of access will grow faster than fixed connections, reaching more than one billion active individual users and almost two billion devices by 2020 (see Figure 1). Although a strong fixed/mobile overlap will remain, there will also be a growing group of users whose only broadband access is via 3G, 4G or similar technologies.

There are a number of complexities in the data:

  • Almost all fixed broadband connections are ‘actively used’. The statistics do not count copper lines capable of supporting broadband, but where the service is not provisioned;
  • Conversely, many notional ‘mobile broadband’ connections (E.g. 3G SIMs in HSPA-capable devices) are, in fact, not used actively for high-speed data access. The data in this report attempts to estimate ‘real’ users or subscribers, rather than those that are theoretically-capable, but dormant;
  • At present, most broadband usage is based on subscriptions, either through monthly contracts or regular pre-paid plans (mostly on mobile). Going forward, Telco 2.0 expects to see may non-subscription access customers who have either temporary accounts (similar to the WiFi single-use model) or have other forms of subsidised or bundled access as described later in the report;
  • Lastly, the general assumption is that fixed broadband can be shared by multiple people or devices in a home or office, but mobile broadband tends to be personal. This is starting to change with the advent of ‘shared mobile access’ on devices like Novatel’s MiFi, as well as the use of WiMAX and, sometimes, 3G broadband for fixed wireless access.

Figure 1. Global broadband access lines, 2000-2020

personal%20mobile%20growth%20mar%202010.png

Source: Telco 2.0 analysis  

Breaking the data out further shows the recent growth trends by access type (see Figure 2). Mobile use has exploded with the growth of consumer-oriented 3G modems (dongles) and popular smartphones, such as the Apple iPhone and various other manufacturers’ recent devices. DSL growth has continued in some markets, such as Eastern Europe and China. Conversely, cable modem growth, entrenched in North America, has been slow as there has been limited roll out of new cable TV networks.

Figure 2: Global broadband access lines by technology, 2005-10

fbbm%20bar%20chart%20extract%20mar%2024%202010.png

Source: Telco 2.0 analysis  

It is important to note the importance of Asia in the overall numbers (see Figure 3). Although many examples in this report focus on developed markets in Europe and North America, it is also important to consider the differences elsewhere. Fibre is already well-established in several Asian markets, such as Japan and Singapore, while future growth in markets, such as India, may well turn out to be mobile-driven.

An alternative way of looking at the industry dynamics is through levels of data traffic. This metric is critically important in determining future business models, as often data expands to fill capacity available – but without a direct link between revenue and costs. In future, fixed broadband access will start to become dominated by video traffic. Connecting an HDTV display directly to the Internet could consume 5GB of data per hour, orders of magnitude above even comparatively-intense use of PC-based services, such as YouTube or Facebook.

Figure 3: Global fixed broadband by region, mid-2009
 

fbbm%20extract%20pice%20chart%20mar%2024%202010.png

Source: Broadband Forum

The dynamics of mobile traffic growth (see Figure 4) are somewhat different, and likely to be dominated by a sustained rise in the device/user numbers for the next few years, rather than specific applications. Nevertheless, the huge ramp-up in aggregated data consumption will put pressure on networks, especially given probable downward pressure on pricing and the natural constraints of cellular network architectures and spectrum. The report looks in depth at the options for ‘offloading‘ data traffic from cellular devices onto the fixed network.

Figure 4: Global broadband traffic

fbbm%20traffic%20growth%20chart%20extract%2024%20mar%202010.png

Source: Cisco Systems   

Note: EB = Exabyte. 1 Exabyte = 1,000 Petabytes = 1 million Terabytes

The Four Scenarios

Given the broad diversity of national markets in terms of economic development, regulation, competition and technology adoption, it is difficult to create simplistic categories for the BSPs of the future. Clearly, there is a big distance between an open access, city-owned local fibre deployment in Europe versus a start-up WiMAX provider in Africa, or a cable provider in North America.

Nevertheless, it is worth attempting to set out a few scenarios, at least for BSPs in developed markets for which market maturity might at least be in sight (see Figure 5 below). While recognising the diversity in the real world, these archetypes help to anchor the discussion throughout the rest of the report.  The four we have explored (and which are outlined in summary below) are:

  • Telco 2.0 Broadband Player
  • The Happy Piper
  • Government Department
  • Device specialist

There are also a few others categories that could be considered, but which are outside the scope of this report. Most obvious is ‘Marginalised and unprofitable’, which clearly is not so much a business model as a route towards acquisition or withdrawal. The other obvious group is ‘Greenfield BSP in emerging market’, which is likely to focus on basic retail connectivity offers, although perhaps with some innovative pricing and bundling approaches.

It is also important to recognise that a given operator may be a BSP in either or both mobile and fixed domains, and possibly in multiple geographic markets. Hybrid operators may move towards ‘hybrid end-games’ in their various service areas.


Figure 5: Potential scenarios for BSPs

fbbm%20four%20scenarios%20mar%2023%202010.png

Source: Telco 2.0 Mobile and Fixed Future Broadband Business Models

For more details on the scenarios, please see the new Telco 2.0 Strategy Report ‘Mobile and Fixed Broadband Business Models – Best Practice Innovation, ‘Telco 2.0’ Opportunities, Forecasts and Future Scenarios‘, email contact@telco2.net, or call +44 (0) 207 247 5003.

Full Article: New Opportunities in Online Content Distribution

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

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

Introduction

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

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

Figure 1: 2-sided business model framework

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

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

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

Defining 2-sided distribution

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

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

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

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

Figure 2: Examples of 2-sided Telco distribution

Example

Description

Comment

Freephone

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

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

Premium SMS (carriage-only)

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

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

TwitterPeek

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

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

Breaking down the opportunity

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

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

The “opportunity blocks” in more detail:

Wired

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

Wireless

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

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

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

Application area

Description

Example

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

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

Mobile Offload:
Fixed operator
service to MNOs

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

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

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

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

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

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

Low latency: Real-time cloud
apps

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

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

Volume:
Very large file
transfer (XXGb)

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

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

[1] Maybe Not Quite So Net Neutral

Guaranteed income?

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


Full Article: LTE: Late, Tempting, and Elusive

Summary: To some, LTE is the latest mobile wonder technology – bigger, faster, better. But how do institutional investors see it?

AreteThis is a Guest Briefing from Arete Research, a Telco 2.0™ partner specialising in investment analysis.

The views in this article are not intended to constitute investment advice from Telco 2.0™ or STL Partners. We are reprinting Arete’s Analysis to give our customers some additional insight into how some Investors see the Telecoms Market.

For further information please contact:

Richard Kramer, Analyst
richard.kramer@arete.net
+44 (0)20 7959 1303


NB. This article can be downloaded in PDF format here or browsed on-screen below.

Wireless Infrastructure

[Figure]

LTE is the new HSPA is the new WCDMA: another wave of new air interfaces, network architectures, and enabled services to add mobile data capacity. From 3G to 3.5G to 4G, vendors are pushing technology into a few “pioneer” operators, hoping to boost sales. Yet, like previous “G’s,” LTE will see minimal near-term sales, requires $1bn+ of R&D per vendor, and promises uncertain returns. The LTE hype is adding costs for vendors that saw margins fall for two years.

Despite large projects in China and India, we see wireless infrastructure sales down 5% in ’09, after 10% growth in ’08. As major 2G rollouts near an end, emerging markets 3G pricing should take to new lows. Some 75% of sales are with four vendors (Ericsson, NSN-Nortel, Huawei, and Alcatel-Lucent), but margins have been falling: we do not see consolidation (like the recent NSN-Nortel deal) structurally improving margins. LTE is another chapter in the story of a fundamentally deflationary market, with each successive generation having a shorter lifecycle and yielding lower sales. We expect a period of heightened (and politicised) competition for a few “strategic accounts,” and fresh attempts to “buy” share (as in NSN-Nortel, or by ZTE).

Late Is Great. We think LTE will roll out later, and in a more limited form than is even now being proposed (after delays at Verizon and others). There is little business case for aggressive deployment, even at CDMA operators whose roadmaps are reaching dead ends. HSPA+ further confuses the picture.

Temptations Galore. Like WCDMA, every vendor thinks it can take market share in LTE. And like WCDMA, we think share shifts will prove limited, and the ensuing fight for deals will leave few winners.

Elusive Economics. LTE demands $1bn in R&D spend over three to five years; with extensive testing and sharing of technical data among leading operators, there is little scope to cut corners (or costs).  LTE rollouts will not improve poor industry margins, and at 2.6GHz, may force network sharing.

Reaching for the Grapes

Table 1 shows aggregate sales, EBITDA, and capex for the top global and emerging markets operators. It reflects a minefield of M&A, currencies, private equity deals, and changes in reporting structure. Getting more complete data is nearly impossible: GSA says there are 284 GSM/WCMDA operators, and CDG claims another 280 in CDMA. We have long found only limited correlation between aggregate capex numbers and OEM sales (which often lag shipments due to revenue recognition). Despite rising data traffic volumes and emerging markets capex, we think equipment vendor sales will fall 5%+ in US$. We think LTE adds risk by bringing forward R&D spend to lock down key customers, but committing OEMs to roll out immature technology with uncertain commercial demand.

Table 1: Sales and Capex Growth, ’05-’09E

  ’05 ’06 ’07 ’08 ’09E
Top 20 Global Operators          
Sales Growth 13% 16% 15% 10% 5%
EBITDA Growth 13% 15% 14% 10% 8%
Capex Growth 10% 10% 5% 9% -1%
Top 25 Emerging Market Operators          
Sales Growth 35% 38% 29% 20% 11%
EBITDA Growth 33% 46% 30% 18% 8%
Capex Growth 38% 29% 38% 25% -12%
Global Capex Total 16% 18% 13% 14% -5%

Source: Arete Research

LaTE for Operators

LTE was pushed by the GSM community in a global standards war against CDMA and WiMAX. Since LTE involves new core and radio networks, and raises the prospect of managing three networks (GSM, WCMDA/HSPA, and LTE), it is a major roadmap decision for conservative operators. Added to this are questions about spectrum, IPR, devices, and business cases. These many issues render moot near-term speculation about timing of LTE rollouts.

Verizon and DoCoMo aside, few operators profess an appetite for LTE’s new radio access products, air interfaces, or early-stage handsets and single-mode datacards. We expect plans for “commercial service” in ’10 will be “soft” launches. Reasons for launching early tend to be qualitative: gaining experience with new technology, or a perception of technical superiority. A look at leading operators shows only a few have clear LTE commitments.

  • Verizon already pushed back its Phase I (fixed access in 20-30 markets) to 2H10, with “rapid deployment” in ’11-’12 at 700MHz, 850MHz, and 1.9GHz bands, and national coverage by ’15, easily met by rolling out at 700Mhz. Arguably, Verizon is driven more by concerns over the end of the CDMA roadmap, and management said it would “start out slow and see what we need to do.”
  • TeliaSonera targets a 2010 data-only launch in two cities (Stockholm and Oslo), a high-profile test between Huawei and Ericsson.
  • Vodafone’s MetroZone concept uses low-cost femto- or micro-cells for urban areas; it has no firm commitment on launching LTE.
  • 3 is focussing on HSPA+, with HSPA datacards in the UK offering 15GB traffic for £15, on one-month rolling contracts.
  • TelefónicaO2 is awaiting spectrum auctions in key markets (Germany, UK) before deciding on LTE; it is sceptical about getting datacards for lower frequencies.
  •  Orange says it is investing in backhaul while it “considers LTE network architectures.”
  • T-Mobile is the most aggressive, aiming for an ’11 LTE rollout to make up for its late start in 3G, and seeks to build an eco-system around VoLGA (Voice over LTE via Generic Access).
  • China Mobile is backing a China-specific version (TD-LTE), which limits the role for Western vendors until any harmonising of standards.
  • DoCoMo plans to launch LTE “sometime” in ’10, but was burnt before in launching WCDMA early. LTE business plans submitted to the Japanese regulator expect $11bn of spend in five years, some at unique frequency bands (e.g., 1.5GHz and 1.7GHz).

LTE’s “commercial availability” marks the start of addressing the issue of handling voice, either via fallback to circuit switched networks, or with VoIP over wireless. The lack of LTE voice means operators have to support three networks, or shut down GSM (better coverage than WCDMA) or WCDMA (better data rates than GSM).  This is a major roadblock to mass market adoption: Operators are unlikely to roll out LTE based on data-only business models. The other hope is that LTE sparks fresh investment in core networks: radio is just 35-40% of Vodafone’s capex and 30% of Orange’s. The rest goes to core, transmission, IT, and other platforms. Yet large OEMs may not benefit from backhaul spend, with cheap wireline bandwidth and acceptance for point-to-multipoint microwave.

HSPA+ is a viable medium-term alternative to LTE, offering similar technical performance and spectral efficiency. (LTE needs, 20MHz vs. 10Mhz for HSPA+.)  There have been four “commercial” HSPA+ launches at 21Mbps peak downlink speeds, and 20+ others are pending. Canadian CDMA operators Telus and Bell (like the Koreans) adopted HSPA only recently. HSPA+ is favoured by existing vendors: it lacks enough new hardware to be an entry point for the industry’s second-tier (Motorola, NEC, and to a lesser extent Alcatel-Lucent), but HSPA+ will also require new devices. There are also further proposed extensions of GSM, quadrupling capacity (VAMOS, introducing MIMO antennas, and MUROS for multiplexing re-use); these too need new handsets.

Vendors say successive 3G and 4G variants require “just a software upgrade.”  This is largely a myth.  With both HSPA+ or LTE, the use of 64QAM brings significant throughput degradation with distance, sharply reducing the cell area that can get 21Mbps service to 15%. MIMO antennas and/or multi-carrier solutions with additional power amplifiers are needed to correct this. While products shipping from ’07 onwards can theoretically be upgraded to 21Mbps downlink, both capacity (i.e., extra carriers) and output power (to 60W+) requirements demand extra hardware (and new handsets). Vendors are only now starting to ship newer multi-mode (GSM, WCDMA, and LTE) platforms (e.g., Ericsson’s RBS6000 or Huawei’s Uni-BTS). Reducing the number of sites to run 2G, 3G, and 4G will dampen overall equipment sales.

Tempting for Vendors

There are three reasons LTE holds such irresistible charm for vendors. First, OEMs want to shift otherwise largely stagnant market shares. Second, vendor marketing does not allow for “fast followers” on technology roadmaps. Leading vendors readily admit claims of 100-150Mpbs throughput are “theoretical” but cannot resist the tendency to technical one-upmanship. Third, we think there will be fewer LTE networks built than in WCDMA, especially at 2.6GHz, as network-sharing concepts take root and operators are capital-constrained. Can the US afford to build 4+ nationwide LTE networks? This scarcity makes it even more crucial for vendors to win deals.

Every vendor expected to gain share in WCDMA. NSN briefly did, but Huawei is surging ahead, while ALU struggled to digest Nortel’s WCDMA unit and Motorola lost ground. Figure 1 shows leading radio vendors’ market share. In ’07, Ericsson and Huawei gained share.  In ’08, we again saw Huawei gain, as did ALU (+1ppt), whereas Ericsson was stable and Motorola and NSN lost ground.

Figure 1: Wireless Infrastructure Market Share, ’07E-’09E

[Figure]

Source: Arete Research; others incl. ZTE, Fujitsu, LG, Samsung, and direct sub-systems vendor sales (Powerwave, CommScope, Kathrein, etc.);
excludes data and transmission sales from Cisco, Juniper, Harris, Tellabs, and others.

While the industry evolved into an oligopoly structure where four vendors control 75% of sales, this has not eased pricing pressure or boosted margins. Ericsson remains the industry no. 1, but its margins are half ’07 levels; meanwhile, NSN is losing money and seeking further scale buying Nortel’s CDMA and LTE assets. Huawei’s long-standing aggressiveness is being matched by ZTE (now with 1,000 staff in EU), and both hired senior former EU execs from vendors such as Nortel and Motorola. Alcatel-Lucent and Motorola are battling to sustain critical mass, with a mix of technologies for each, within ~$5bn revenue business units.

We had forecast Nortel’s 5% share would dwindle to 3% in ’09 (despite part purchase by NSN) and Motorola seems unlikely to get LTE wins it badly needs, after abandoning direct 3G sales. ALU won a slice of Verizon’s LTE rollout (though it may be struggling with its EPC core product), and hopes for a role in China Mobile’s TD-LTE rollouts, but lacks WCDMA accounts to migrate. Huawei’s market share gains came from radio access more than core networks, but we hear it recently won Telefónica for LTE. NSN was late on its HSPA roadmap (to 7.2Mpbs and 14.4Mbps), and lacks traction in packet core. It won new customers in Canada and seeks a role in AT&T’s LTE rollout, but is likely to lose share in ’09. Buying Nortel is a final (further) bid for scale, but invites risks around retaining customers and integrating LTE product lines. Finally, Ericsson’s no. 1 market share looks stable, but it has been forced to respond to fresh lows in pricing from its Asian rivals, now equally adept at producing leading-edge technology, even if their delivery capability is still lagging.

Elusive Economics

The same issues that plagued WCDMA also make LTE elusive: coverage, network performance, terminals, and volume production of standard equipment. Operators have given vendors a list of issues to resolve in networks (esp. around EPC) and terminals. Verizon has its own technical specs relating to transmit output power and receive sensitivity, and requires tri-band support. We think commercialising LTE will require vendors to commit $1bn+ in R&D over three to five years, based on teams of 2-3,000 engineers. LTE comes at a time when every major OEM is seeking €1bn cost savings via restructuring, but must match plunging price levels.

Recent bids at a host of operators across a range of markets (i.e., emerging and developed) show no easing of pricing pressure. As a benchmark, if pricing starts out at 100, final prices may be <50, given “market entry” strategies, bundling within deals, or “gaming” bids to reduce incumbents’ profits at “house accounts.”  Competition remains intense. KDDI has eight vendors pitching for LTE business (Ericsson, NSN, ALU, Hitachi, Motorola, Samsung, Huawei, and NEC), with pricing “very important.”  Telefónica just awarded a radio and core network LTE deal to Huawei, which has been joined by ZTE in getting large Chinese orders and accessing ample export credit financing (as has Ericsson, via Sweden’s EKN).

Operators are pressuring vendors to add capacity at low incremental costs, with ever more sophisticated purchasing: Vodafone has a Luxembourg office that has run 3,000+ e-auctions; China Unicom did the same for 3G, squeezing prices. Operators are also hiring third-party benchmarking firms, which help unpack complex “black box” software pricing models.

It is no coincidence that every OEM saw a sharp structural decline in profitability during ’07, and none had recovered margins by 1Q09. (We cannot chart this precisely, since ALU, NSN, and others do not disclose wireless equipment-only profits, but Ericsson’s Networks margins offer a clear proxy.)  Vendors’ ongoing restructuring has not rid the industry of overcapacity, only shifted it down the value chain. Every OEM needs 50%+ of its cost base in low-cost countries by decade’s end. While ALU’s and NSN’s painful experience hardly recommends it, some M&A (or partial closures) has already begun with Nortel, and must spread to Motorola.

It took Ericsson six years of commercial WCMDA shipments before it neared the level of 2G sales: Indeed, WCDMA base station shipments surpassed GSM in 1Q09, driven by China (with APAC now 40% of the WCDMA market). Figure 2 shows our view that each successive wireless infrastructure generation yields a smaller addressable market, thanks in part to pricing. GSM sales peaked in ’08 and could fall 15% in ’09 as unit shipments peak, then drop sharply in ’11/’12. In WCDMA, shipments should rise 25% in ’09, but sales are likely to increase just 8-10%, led by the US and China, peaking in ’13/’14 on low-cost emerging markets deals.

Figure 2: Deflation and Delays in Successive Technology Generations

[Figure]

Source: Arete Research

We thought there were 300-400k Node Bs shipped by mid-’09; this may surpass 1m by YE’09 but seems unlikely to scale to the 3-4m cumulative GSM BTS deployed. The shrinking of addressable markets between generations and the shift to emerging markets invites further cost pressure. Speeding up LTE may leave a “hole” in OEM earnings.

There are no more “easy wins” for OEMs to boost margins from product re-design or squeezing suppliers. Sub-systems vendors like Powerwave and Commscope are struggling and can no longer afford to make product variants for each OEM. Ancillary costs (commodities, transport, energy) remain volatile and OEMs are often contractually obliged to deliver cost savings under managed services deals. Scores of smaller chipmakers have LTE basebands for base stations, but TI still has 80%+ market share. Cost pressures forced OEMs to adopt third-party products for femto-cells and WiMax. LTE aside, all OEMs are seeking project- and services-led deals (a trend we saw back in Managed Services: Gangland Warfare? June ’06). While it “locks in” customers, this people-intensive approach inherently lacks operating leverage.

LTE also awaits spectrum allocations (2.6GHz, digital dividend, or re-farming of 900MHz) that could affect industry economics, or tilt them towards HSPA+. This wide range of frequency bands limits scale economies and adds RF costs to devices. Terminals are a final challenge: Industry R&D staff were gushing about HSPA-enabled tablet devices back in mid-’07, yet they are only coming at YE’09 or by mid-’10. The same applies to “visionary” LTE device strategies: after a year of single-mode datacards (stretching into ’11), multi-mode handsets might come, followed by CE products with slots for SIM cards (or software solutions for this). Adding LTE modems to all CE devices is cost-prohibitive, and would require new business models from operators, with several iterations needed to cut chipset costs.

IPR remains a contentious and unresolved issue in both LTE and WiMax; QCOM and IDCC declarations to ETSI were preliminary filings; some have already expired, some have continuations, and some got re-filed. Many LTE IPR holders have not yet shown their hand, much like WiMax, where numerous key companies are not in Intel’s Open Patent Alliance. A sizable number of handset OEMs are working on their own LTE chipsets to build up IPR and avoid future royalties. NGNM speaks for 14 operators, many of whom also have their own IPR portfolios. Ground rules are unclear: will there be FRAND in LTE?

Coping with Traffic

Operators have numerous low-cost ways to add capacity (coding schemes, offloading traffic, adding carriers, etc.). We hear line cards for second carriers in a Node B cost as little as €2,000, before (controversial) associated software costs, which OEMs hoped would scale with subscribers, traffic, and speeds, but operators sought to contractually “cap.”  Most Node Bs are still not capable of handling 7.2Mbps.  Operators are also shifting investment from radio capacity (now in ample supply) to backhaul (which scales more directly with traffic), and seek to avoid new cells (a.k.a. “densification”), which add costs for rent, power, and maintenance. GSM micro-cells were deployed for coverage, but operators will not build 5,000+ 3G micro-cells. Vodafone said ~10% of its sites generate ~50% of its data traffic. On average, 3G networks are currently 10-20% utilised; only “hotspots” (airports, key metro hubs) are near 50–60%. We think mobile broadband depends in part on use of, and integration with, fixed broadband.  This “offload” makes more sense as 3G network traffic originates from “immobile” PCs using USB modems, near a fixed line connection.

Is There a Role for WiMax?

After three years of hype and delays, WiMax is finally getting deployed, with Clearwire, Yota (a Russian Greenfield operator with 75K subs), and UCOM (backed by KDDI, with 8,000 free trial subs) the highest-profile launches. Efforts to cut chipset costs are ongoing. Intel is moving to 45nm in ’10, and its rivals, e.g., Sequans, Beceem, and GCT, are seeing volumes ramp. WiMax chipsets are now $35-50, and must drop under $20 in ‘10 to match HSPA roadmaps. IOT should get easier as 802.16e networks become common, and more devices emerged at May ’09’s Computex fair. The roster of infrastructure vendors is seeing ALU and NSN retreat, leaving Motorola, Alvarion, Samsung, and possibly Cisco (for enterprise networks). Spectrum allocations remain uneven, with most new projects in emerging markets using WiMax as a DSL substitute. WiMax IPR remains controversial, fragmented, and lacking basic ground rules (i.e., FRAND). Intel has not won over potential heavyweight claimants like Qualcomm or Nokia in its Open Patent Alliance. As a data-only service, WiMax has a narrow window in which to reach critical mass before LTE rollouts subsume it. There remain too many differences between LTE and WiMax (frame structure, uplink transmission format, FDD vs. TDD, etc.) to merge them.

One long-promised solution is femto-cells, as part of so-called patch networks, which shift and intelligently re-route traffic onto fixed networks. Femto-cells have been through seemingly endless trials covering issues of distribution, support, network management, pricing, and customer propositions. As ever, femto-cells sit on the cusp of large-scale rollouts (due in ’10 or later) that depend on pricing and whether operators also have converged offerings. Regional incentives vary: The US needs coverage and to limit use of repeaters, Europe needs to ease congestion for specific users, and Japan might use femto-cells to integrate home devices.

All operators are targeting structurally lower capex/sales ratios. In emerging markets, the “mini-boom” in ’08 spending in Russia and Latin America is over. Attention is shifting to hotly contested 3G rollouts in China and India, both highly fragmented markets. India has six large established operators and half a dozen other projects, while China is split by technologies, provinces, and operators. Without over-engineering for “five nines” reliability, will developing world 3G be as profitable as GSM or CDMA? We already saw pricing fall by 30-50% in successive rounds of bids for China Unicom’s vast 3G rollout deal.

Will Anyone Get the Grapes?

Standing back from the hype, we struggle to see who really wants LTE to come in a hurry: Verizon and others are highly profitable, and have years to harvest cash flows from existing networks. Vendors’ R&D teams cannot resist the siren song of a wholly new technology, despite blindingly obvious drawbacks. None of these groups has excess cash to burn, though some are trying to force an end-game (as seen by NSN’s attempt to increase its relevance to US operators by buying Nortel). There is no doubt that wireless infrastructure is a deflationary industry; its last great success at rebuilding margins came from shifting costs onto a now moribund supply chain. We expect LTE and the NSN-Nortel deal (and another likely move involving Motorola) to usher in a period of highly political competition for “strategic accounts” and fresh attempts to “buy” share.


AreteThis is a Guest Briefing from Arete Research, a Telco 2.0™ partner specialising in investment analysis.

The views in this article are not intended to constitute investment advice from Telco 2.0™ or STL Partners. We are reprinting Arete’s Analysis to give our customers some additional insight into how some Investors see the Telecoms Market.

For further information please contact:

Richard Kramer, Analyst
richard.kramer@arete.net
+44 (0)20 7959 1303


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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.

Online Video Distribution: how will the market play out?

Members of the Executive Briefing Service and Future of Networks Stream: please click here for further access. Non-Members: please see here for how to access this content or go straight to buy here.

Overview

The online video distribution business model faces increasing challenges, particularly as explosive traffic growth is driving some costs faster than revenues. This is unsustainable – and there are many other changes: in content creation, aggregation, and distribution; in devices; and in end-user behaviour.

[Figure]

The Online Video Value Chain

This new Briefing summarises the evolution of the key technologies, the shifting industry structures, business models and behaviours, the evolving scenarios and the strategies required to prosper.

Who should read the report

Telco: Group strategy director, business development and strategy teams, data and IPTV product managers, CIO, CTO, CMO; Media companies; Broadcasters; Content players.

Key Challenges

In theory, telecom operators should be well-poised to benefit from the evolution of video technology. Fixed and mobile broadband services are increasing in speed, while phones and set-top boxes are becoming much more sophisticated and user-friendly.

Yet apart from some patchy adoption of IPTV as part of broadband triple-play in markets like Japan and France, the agenda is being set by Internet specialists like Google/YouTube and Joost, or offshoots of traditional media players like the BBC’s iPlayer and Hulu.

Many consumers are also turning to self-copied and pirated video content found on streaming or P2P sites. And although there is a lot of noise about the creativity of user-generated video and mashups, it is not being matched by revenue, especially from advertisers.

These changes present commercial challenges to different players in the value chain. Changes in user demand challenge the economics of “all you can eat” data plans (see “iPlayer nukes ISP business model”), content creators face well known issues relating to digital piracy and content protection, while aggregators face challenges monetising content.

Which Scenario will win – and who will prosper?

Our new research uses scenario planning to map out and analyse the future. The methodology was designed to deal with many moving parts, uncertain times and rapid change. We identified three archetypal future scenarios:

  • Old order restored: Historic distribution structures and business models are replicated online. Existing actors succeed in reinventing and reasserting themselves against new entrants.
  • Pirate world: Distribution becomes commoditised, copyright declines in relevance and the Internet destroys value. A new business model is required.
  • New order emerges: New or “evolved” distributors replace existing ones, with content aggregation becoming more valuable, as well as delivery via a multitude of devices and networks.

Which of these scenarios will dominate, when, and what can operators and other players do in order to prosper?

Key Topics Covered

  • Current market and variation across national markets
  • Significant changes and trends in content production, aggregation and distribution
  • Significant changes and trends in devices and end-user behaviour
  • Detail on the scenarios and the likely market evolution
  • Consequences of the changes by content genre (movies, sport, user-generated, adult)
  • Strategies to prosper as the scenarios evolve

Contents

Key questions for online video distribution

  • Online video today
  • Bandwidth
  • Penetration
  • Other factors

Emerging industry structure

  • User-generated vs. professional content
  • Aggregated vs. curated content
  • Market size

Future challenges for the industry

  • Content creation
  • Aggregation
  • Distribution
  • Customer environment and devices
  • Supply and demand side issues

Future scenarios for online video

  • Genre differences
  • Mobile video evolution
  • Regional differences

Strategic options for distributors

  • Threats
  • Weakness
  • Strengths
  • Opportunities
  • Strategic options

Conclusion

Members of the Executive Briefing Service and Future of Networks Stream: please click here for further accessNon-Members: please see here for how to access this content or go straight to buy here.

Full Article: Mobile NGN, a Real Telco 2.0 Opportunity?

The sixty page document “Next-Generation Mobile Networks (NGMN): Beyond HSPA and EVDO? is the latest white paper of NGMN.org, an initiative by the CTO’s of China Mobile, KPN Mobile, NTT DoCoMo, Orange, Sprint Nextel, T-Mobile International and Vodafone Group. It provides a technical requirements framework to vendors for the next iteration of mobile networks.

To be clear, what’s defined is just a technology toolkit. Different carriers may deploy it in different ways with varying business models and services. Until we see the business models, jubilation or damnation is premature. Nonetheless, this is an extremely important document. The “walled gardens? of 3G are starting to look like weed patches, and this is a rare chance to define a truly new Telco 2.0 approach that takes the best of the Internet and traditional telecoms models.

The document avoids wild flights of fancy about sophisticated combinatorial services, and focuses on practical implementation concerns of mobile broadband. It rightly sees the mobile ecosystem as a co-evolution of devices, access and services. This offers a valid and viable parallel/alternative path to the fragmented and sometimes chaotic Internet approach. It’s clear about what generic classes of service are to be offered, and what tradeoffs are likely to be acceptable. The document also outlines a very much evolutionary approach: business-as-usual, only faster and cheaper.

And therein lie the big questions:
* Does it go far enough in addressing the forces tugging apart network access, services and devices?
* Does it react to the counter-forces that would push them back together in order to address deep architectural issues of IP and the Internet (such as weak security and low efficiency)?

Our answer based on our reading is “maybe, if deployed right? — but you need to be a bit of a Kremlinologist to read between the lines and think about what’s left unsaid.

We’ll start with the easy bit: things in the document that make sense about Making Money in an IP world. Then we can delve into the more philosophical and practical limits of that IP world and how a next-generation architecture might address them.

Plenty to praise

There are many positive improvements proposed. Some highlights might include:

  • Self-configuring networks that cost less to run.
  • Improved scheduling algorithms that focus on user “quality of experience? at the periphery of a cell site, rather than RFP-friendly numbers for maximum burst throughput standing under the cell tower at 3am on Christmas morning.
  • Flexible and modular service-oriented architecture to accommodate future change.

Put simply, whatever NGMN turns out to be, operators want OSS and BSS thought through in advance, and for vendors to take responsibility for the operator and user experience post-installation. So far, so good.

Aligned with several Telco 2.0 trends

There are also some features which come with the “Telco 2.0 Approved��? stamp because of their reflection of the business trends we see:

  • The ability to share equipment and do more slice-and-dice of the infrastructure similar to MVNOs, but better. We believe infrastructure sharing and new modes of financing/ownership as being a key Telco 2.0 trend (as we will discuss at our forthcoming Digital Town event workstream).
  • Stronger device and end-to-end security to enable transactions of money or sensitive data. As telcos are already diversifying into the payments and identity business, this can only grow — and depends on such enabling infrastructure. DoCoMo are part of the consortium, and given their trailblazing in payments services, we’re hopeful of seeing diversification successes of operators elsewhere based on their learnings.
  • Detection and mitigation of network traffic resulting from malware or attack. This we feel will be a growth area as the services become less controlled. A limitation of the “intelligence at the edge? concept is the ability of those edges to collaborate to detect and eliminate abuse. The experience of email spam and phishing tells us that not all is wonderful in Internetland.

Moving on, there are several things conspicuous by their absence.

The Internet elephant in the corner

Apart from some in-passing references in a few tables and diagrams, the word “Internet? is wholly absent from the document. It’s a bit like Skype, YouTube and BitTorrent never happened. In fact, you can only conclude this absence is deliberate.

It could very well be that the technology defined can be deployed in very different manners, and operators may take radically different approaches — such as the contrast between 3 and T-Mobile in the UK embracing open Internet access, O2 trying to keep people on-portal, and Vodafone outright banning many popular Internet services such as IM, VoIP and streaming. Will operators want to continue to ride the “Telco 1.0? command-and-control horse, or switch to a more open “Telco 2.0? Internet-centric approach? Will the point of a future mobile network to channel bits back at all costs to a cell tower where they can contend for expensive backhaul to be deep-packet-inspected. metered and accounted for? Or will it complement the other infrastructure that exists?

The IMS mouse in the cupboard

Equally conspicuous by its general absence is reference to IMS. Our take is that there could be a polarisation here between “service-centric? operators trying to define interoperable new services and compete against Internet players; and “connectivity-centric? operators who create “smart dumb pipes? and enabling platforms for a wide ecosystem of players. You could deploy NGMN and completely ignore IMS if you chose to do so.

Local connectivity, globally interoperable

At the other extreme of connectivity, another thing not given much ink is the explosion of highly local connectivity. For example, we’ve just passed the billionth Bluetooth-enabled device. Motorola’s Chief Software Architect, John Waclawsky, described this at the last Telco 2.0 event in October in his presentation “From POTS [telephony] to PANS [Personal Area Networks]?. The mobile network itself can still play a part in this, such as offering directories of resources. If you’re sat in Starbucks today and want to print out a document, you’re out of luck — the network can’t help you locate or pay for such services.

Given that this is an integrated vision of handset, network and service evolution, we think it may be gold-plating the longhaul connectivity vision, and underspecified the local connectivity one. The business model will also need to evolve, since there may be no billable event. It has to anyway: products like Truphone will make it ever easier for users to bypass or arbitrage network access.

What’s the commercial vision?

Naturally, the operators can’t write down a collective commercial vision (because of anti-trust), nor an individual one (due to commercial confidentiality). So you have to impute the commercial vision from the technology roadmap.

The stated requirement is for a network that’s low-latency, efficient, high-throughput, more symmetrical, good at unicast, multicast and broadcast, cheap, and interoperates seamlessly with everything that went before it. It’s a bit like low-calorie cream-topped chocolate cake. Sounds like a good idea, until you try making one.

The inevitable billion-dollar question is what are the services and the business model that will pay for all this? The experience from 3G was that “faster? isn’t itself a user benefit of significance (particularly when it doesn’t work indoors!) In fact, given that battery technology follows a curve well below that of Moore’s Law (or its transmission equivalent), there’s the “oven mitt? problem of early 3G handsets still lurking: how to create hand-held devices that are physically capable of sourcing and sinking data at such speeds and over such distances (and high power) — and that create services users care about in the process.

Or, to put in another way, why sync my iPod over the air slowly when I can plug this USB cable into my laptop and do it at 400Mbps for free?

What is a mobile network for, exactly?

There’s a significant difference of expert opinion here that’s worth noting. There isn’t universal agreement on what wireless networks are best used for compared to wireline. For example, Peter Cochrane, the former CTO and head of research at BT has long been keen on forgetting DSL and copper and going all-wireless. NGMN’s ambitions to match and exceed the technical and cost capabilities of DSL suggest a commercial vision of competing against fixed access.

Our take is that success is most likely to come from intelligently blending the best of fixed, mobile and media-based delivery of data, rather than an absolutist approach to any one of these. Furthermore, the unsolved user problems are more to do with identity, provisioning, security and “seamlessness? than speed or even price. Finally, users don’t generally see the up-front value in metered or fixed buckets of IP connectivity, particularly given the anxiety it causes over cost or overage. True unlimited use isn’t technically possible, so the network has to allow connectivity to be bundled into the sale of specific device or application types, where traffic is more predictable.

Stop looking for the platinum bit

The hypothesis seems to be that some bits will be blessed with “End-to-end QoS? and continue to gather super-premium pricing (by many orders of magnitude). The need for this QoS capability is repeatedly stated. At the same time as the network capacity, latency and cost improve to near-wireline levels. I think you can spot the problem. I’ve made a successful Skype call to someone 35,000 feet up on a 747 somewhere over central Asia, and there wasn’t any QoS involved.

Our post on Paris Metro Pricing attempts to challenge some of the assumptions that drive this requirement. It sounds esoteric to those from the commercial side of the business, but ignoring this small technical detail is telecom’s equivalent of the frozen O-ring. Set the price high, and at some point all the valuable bits flow around the “premium pipe? and not through it, and the commercial model fails.

NGMN could be part of the solution here, not the problem. If operators can switch to a congestion-based mode of pricing, rather than pure capacity, they could offer users a far better deal.

What are the real sources value?

Here are some examples of requirements in the document, and how NGMN provides opportunities for product and business innovation:

  • Making user data more seamlessly accessible, blurring the line between online and offline. The specification includes
    Standardised APIs (i.e. not operator or handset-specific) to sync online and offline data like address books, so the user doesn’t have to care so much about network connection state. This whole process could be taken much further to cover all content. This lecture video by Van Jacobson, former Chief Scientist at Cisco, points to a very different future network architecture based around diffusion of data rather than today’s packet-only networks where you have to know where every pieve of data is located to find it. (Hat tip: Gordon Cook.) This isn’t a theoretical concern: wireless networks readily become congested. Maybe it’s time to reward your neighbours for delivery you the content, rather than backhauling everything across the globe. The Internet’s address space is flat, but its cost structure is not.
  • Deeper coverage, richer business models. The document talks about hub terminals (e.g. femtocells). Deep in-building and local coverage is a clear user desire. The first step is outlined, but there’s no corresponding economic model being included. Companies like FON and Iliad are doing innovative things with user-premises equipment and roaming. We nope NGMN doesn’t repeat the experience of Wi-Fi, where hooks for payment weren’t included (causing a mess of splash screens), and the social aspects neglected (am I sharing this access point deliberately?). The existence of bottom-up network deployment is an interesting possibility. You need to create new security and payment mechanisms so that local entrepreneurs can extend networks based on local knowledge and marketing. Top-down is becoming top-heavy.
  • Support for a diverse array of charging models. It’s in there, but could get lost in the deep-packet-inspection swamps. The genius of telephony and SMS is to sell connectivity bundled with service in little incremental slices. We’d like to see richer, better and simpler ways of device makers and service providers bundling in connectivity. (See out earlier artlce on this for more details.) For example, the manifest of a download application could say that Acme Corp. is going to pay for the resulting traffic — and the secure handset will ensure it’s not abused to tunnel unrelated data at Acme’s expense. NGMN could enable this.
  • Uplinks vs. downlinks. Users create as much content as they consume. Devices are equipped with multi-megapixel cameras and video capture, which will be uploaded for online storage and sharing. That media is then often down-sized for viewing (if it is ever viewed at all). Yet the standards continue to emphasise downlink performance. We’ll acknowledge that from a technology perspective uplink engineering is like trying to fire bullets back into the gun barrel from a distance. Somehow this issue needs to be looked at. NGMN takes us closer, at least.
  • Peer-to-peer. A great requirement in the specification is “better support for ‘always on’ devices, with improved battery performance and network resource usage.?. We’d second that. But given this requirement, where’s the peer-to-peer specification of the services those devices should host? Or do operators still believe that the purpose of the network remains distribution of professionally authored media entertainment from “central them to “edge us?
  • Building an identity-centric business. Another good requirement is for more advanced modes of device authentication, such as sharing a SIM among multiple devices. In some ways it defines an “identity network that is independent of the NGMN, and potentially fixes some serious problems with the Internet. Mobile networks may happen to use those identities, but they’re equals with other uses. We’d encourage more creative thinking in this area.

Summary thoughts

Overall, it’s a good piece of work. Change doesn’t happen overnight, and given a 3-5 year time horizon, the world will not be beyond recognition. Nonetheless, without a parallel vision of business model evolution, much of the investment in NGMN could become as equally stranded as that in 3G. With the right vision, it could make the “mobile Internet really work, since the “real Internet continues to be a polluted, expensive and frustrating experience for users.

Full Article: Beyond bundling, the future of broadband

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

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

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

So, read on for the background and evidence:

Background to the survey and research

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Survey supporters and respondents

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

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

We asked about four main areas:

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

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

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

Sustainability of ISP business model

What’s the future business model for broadband?

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

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

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

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

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

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

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

Broadband voice

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

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

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

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

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

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

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

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

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

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

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

Broadband video

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

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

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

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

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

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

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

We gave respondents a choice of four scenarios:

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

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

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

Network ownership models

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

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

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

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

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

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

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

What is the product we are selling?

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

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

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

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

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

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

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

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

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

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

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

Conclusions and summary

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

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