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

Executive Summary

Following the brainstorming sessions in Nice, we have set out below what we consider to be the most important takeaways on high-level telco strategy and each of the seven hot topics in business model innovation covered in dedicated sessions at the event:

Telco Strategy – New Revenue from New Business Models

There is almost universal agreement among telco executives that their industry needs to find new sources of revenue.
Despite the current gloomy economic climate, 93% of the delegates in Nice agreed that exploring new business models that generate new revenue is just as important in the near term as achieving operational efficiency and retaining customers
Three-quarters of the delegates characterised existing business and technical transformation efforts by their company or industry as either “not very effective” or “very poor”.
The delegates voted top 3 strategic actions for the industry as “Creating new levels of collaboration between service providers”, “Understanding the needs of upstream industries much better” and “Understanding the needs of end users much better”.

Open APIs – Where’s the joined-up commercial strategy?

There is a great deal of work being done on APIs by the operator and vendor community, but there is a real risk of this activity being derailed by the emergence of numerous independent “islands” of APIs and developer programmes.
It is still early days for the commercial model for APIs, but it is already becoming apparent that a one-size-fits-all solution will be difficult to achieve. It is important for operators to ensure that API platforms (and the associated revenue mechanisms) can service two distinct classes of customer:
Broad adoption by thousands, perhaps millions, of developers via automated web interfaces (similar to signing up for Google Adwords or Amazon’s cloud storage & computing services);
Large-scale one-off projects and collaborations, which may require custom or bespoke capabilities, such as being linked to subscriber data management systems or “semi-closed” or “private” APIs, for example with governments or major media companies.

Retail Services 2.0 – ‘Supermarket strategy’ not enough

The most attractive options around retail services involve turning the operator’s network (and possibly devices) into a platform of “enablers” for third party services and applications. These assets and capabilities may not be easy to deliver, but once in place, should provide a defensible source of value.
Whether a telco should also sell “enabled” services at retail depends upon their existing customer relationships, portfolio of existing in-house services and ease of developing retail partnerships.

Some applications simply cannot be “sold” through an operator’s retail store, as they will be integral parts of much larger services. Although Amazon can enable the sale of a huge variety of products, delivering fresh food or fuels, for example, would not fit with its logistics business. But suppliers of such goods might still exploit Amazon’s various online commerce enablers.

Devices 2.0 – Still no consistent industry strategy

Few fixed or mobile operators have successfully created new types of devices on their own. Few consumers, for example, would view their broadband “box” as a central hub of a home network – despite more than 10 years of discussion of interconnection with consumer electronics, utility meters and home automation.
In the mobile space, probably the most important customisation has been the configuration of the telco’s own portal as the default browser home page. If anything, the shift towards smartphones and PC-based mobile broadband has further weakened telcos’ role – the majority of 3G data traffic goes straight to and from the Internet from “vanilla” devices.
The future possibly holds some more hope. Delegates were strongly in favour of pushing for telco “control points” in otherwise open devices, which fits well with the heritage of SIM cards (which are expanding in capability) as well as standardisation in areas like the browser and widget frameworks (e.g. OMTP BONDI). Software pre-loaded with PC dongles or embedded 3G modems is another option.
In the converged triple/quadplay space, femtocells offer another point of control and service delivery, close to the customer, but delegates viewed the notion of a separate “gateway” product with less enthusiasm. New classes of devices such as mobile Internet devices (MIDs), operator-enabled consumer electronics (Internet TVs, 3G music players, in-car systems etc.) also hold promise, but are seen more as low-risk experiments at this point.

Online Video Distribution – Time to sort out the “Net Neutrality” Issue

Those pushing the ‘network neutrality’ issue are (deliberately or otherwise) causing confusion over differential pricing which creates public relations and regulatory risks for operators that need to be addressed.
Operators need to develop a suite of value-added products and services for third-parties sending digital goods over their networks so they can generate incremental revenues that will enable continued network investment.
Sending-party pays models may or may not work – this is an area where more experiments need to be tried. Distributors need to be working on disentangling bits that are able to be free from those that have to pay, not letting anyone get a free ride.

Enterprise Services 2.0 – A broader suite of platform services needed

Telcos need to learn how to develop, sell and support services which are customised, as well as mass-market “basic” applications and APIs. Ideally, the technical platform will be made up of underlying components (e.g. the API interface “machinery” and the associated back-office support systems) designed to cope with both ‘off the shelf’ and ‘bespoke’ go-to-market models for new services.
Especially in the two-sided model, there are very few opportunities to gain millions – or even tens of thousands – of B2B customers buying the same basic “product”. Google has managed it for advertising, while Amazon has large numbers of hosting and “cloud computing” customers – but these are the exceptions.
Perhaps the easiest and most universal horizontal markets will be enhancements to voice and messaging capabilities – after all, these are the ubiquitous cross-sector services today.
To really exploit unique assets and take friction out of business processes, there is a need to understand specific companies’ (or sectors’) processes in detail – and offer customised or integrated solutions. Despite the lower scale, the aggregated value may be even higher.

Technical Architecture 2.0 – Good Start, but Significant Gaps

Operators are in a unique position in that they have a fuller picture of customers than any single website or retailer or service provider. Several have already recognised this, and a number of vendors are offering scalable platforms which claim to be in line with the current EU legislation on data protection.
But as well as user profile data, the 2-sided business model requires on-demand response from the network infrastructure. Both the network and IT elements must work together to deliver this, implementing new control & monitoring systems such as Resource & Service Control Systems (RSC).
Most new applications are centred around apps stores, mash-up environments, XaaS environments, and smartphone Web browsers, etc. which do not demand a traditional service delivery platform (SDP). In addition, enabling services are becoming an essential element in operators’ core products.
These enabling services need a framework, which is highly flexible, agile and responsive, and integrated with the features defined by the Next Generation Mobile Networks (NGMN) alliance.

Telco 2.0 Pilots – How to trial Telco 2.0 business models

There is insufficient time to pursue the usual protracted telco timescales for research and deliberation. Moreover, projects with long lead times – such as those involving governments – are typically unsuitable. Some target industries are also experiencing lengthening sales/decision cycles in the recession, which are also not optimal conditions for pilots.
Web-based companies are often the most flexible, as are some academic institutions. There may also be a geographic dimension to this – countries with low regulatory burdens, or where it is unusual to have projects stuck for months with lawyers, are attractive for pilots.
Working alone may be fastest, but collaborating with other operators is likely to be more effective in demonstrating the validity of the Telco 2.0 concept.

© 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.

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

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

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

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

The elements of traffic generation

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

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

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

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

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

From receiving to sending

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

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

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

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

Faster adaptation: considered helpful

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

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

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

Conclusions

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

Tag: online video distribution

Full Article: 7 Strategic Priority Areas for new Telecoms Business Models