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.

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.
 

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)

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).
 

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.

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