Net Neutrality 2021: IoT, NFV and 5G ready?

Introduction

It’s been a while since STL Partners last tackled the thorny issue of Net Neutrality. In our 2010 report Net Neutrality 2.0: Don’t Block the Pipe, Lubricate the Market we made a number of recommendations, including that a clear distinction should be established between ‘Internet Access’ and ‘Specialised Services’, and that operators should be allowed to manage traffic within reasonable limits providing their policies and practices were transparent and reported.

Perhaps unsurprisingly, the decade-long legal and regulatory wrangling is still rumbling on, albeit with rather more detail and nuance than in the past. Some countries have now implemented laws with varying severity, while other regulators have been more advisory in their rules. The US, in particular, has been mired in debate about the process and authority of the FCC in regulating Internet matters, but the current administration and courts have leaned towards legislating for neutrality, against (most) telcos’ wishes. The political dimension is never far away from the argument, especially given the global rise of anti-establishment movements and parties.

Some topics have risen in importance (such as where zero-rating fits in), while others seem to have been mostly-agreed (outright blocking of legal content/apps is now widely dismissed by most). In contrast, discussion and exploration of “sender-pays” or “sponsored” data appears to have reduced, apart from niches and trials (such as AT&T’s sponsored data initiative), as it is both technically hard to implement and suffers from near-zero “willingness to pay” by suggested customers. Some more-authoritarian countries have implemented their own “national firewalls”, which block specific classes of applications, or particular companies’ services – but this is somewhat distinct from the commercial, telco-specific view of traffic management.

In general, the focus of the Net Neutrality debate is shifting to pricing issues, often in conjunction with the influence/openness of major web and app “platform players” such as Facebook or Google. Some telco advocates have opportunistically tried to link Net Neutrality to claimed concerns over “Platform Neutrality”, although that discussion is now largely separate and focused more on bundling and privacy concerns.

At the same time, there is still some interest in differential treatment of Internet traffic in terms of Quality of Service (QoS) – and also, a debate about what should be considered “the Internet” vs. “an internet”. The term “specialised services” crops up in various regulatory instruments, notably in the EU – although its precise definition remains fluid. In particular, the rise of mobile broadband for IoT use-cases, and especially the focus on low-latency and critical-communications uses in future 5G standards, almost mandate the requirement for non-neutrality, at some levels at least. It is much less-likely that “paid prioritisation” will ever extend to mainstream web-access or mobile app data. Large-scale video streaming services such as Netflix are perhaps still a grey area for some regulatory intervention, given the impact they have on overall network loads. At present, the only commercial arrangements are understood to be in CDNs, or paid-peering deals, which are (strictly speaking) nothing to do with Net Neutrality per most definitions. We may even see pressure for regulators to limit fees charged for Internet interconnect and peering.

This report first looks at the changing focus of the debate, then examines the underlying technical and industry drivers that are behind the scenes. It then covers developments in major countries and regions, before giving recommendations for various stakeholders.

STL Partners is also preparing a broader research piece on overall regulatory trends, to be published in the next few months as part of its Executive Briefing Service.

What has changed?

Where have we come from?

If we wind the clock back a few years, the Net Neutrality debate was quite different. Around 2012/13, the typical talking-points were subjects such as:

  • Whether mobile operators could block messaging apps like WhatsApp, VoIP services like Skype, or somehow charge those types of providers for network access / interconnection.
  • If fixed-line broadband providers could offer “fast lanes” for Netflix or YouTube traffic, often conflating arguments about access-network links with core-network peering capacity.
  • Rhetoric about the so-called “sender-pays” concept, with some lobbying for introducing settlements for data traffic that were reminiscent of telephony’s called / caller model.
  • Using DPI (deep packet inspection) to discriminate between applications and charge for “a la carte” Internet access plans, at a granular level (e.g. per hour of view watched, or per social-network used).
  • The application of “two-sided business models”, with Internet companies paying for data capacity and/or quality on behalf of end-users.

Since then, many things have changed. Specific countries’ and regions laws’ will be discussed in the next section, but the last four years have seen major developments in the Netherlands, the US, Brazil, the EU and elsewhere.

At one level, the regulatory and political shifts can be attributed to the huge rise in the number of lobby groups on both Internet and telecom sides of the Neutrality debate. However, the most notable shift has been the emergence of consumer-centric pro-Neutrality groups, such as Access Now, EDRi and EFF, along with widely-viewed celebrity input from the likes of comedian John Oliver. This has undoubtedly led to the balance of political pressure shifting from large companies’ lawyers towards (sometimes slogan-led) campaigning from the general public.

But there have also been changes in the background trends of the Internet itself, telecom business models, and consumers’ and application developers’ behaviour. (The key technology changes are outlined in the section after this one). Various experiments and trials have been tried, with a mix of successes and failures.

Another important background trend has been the unstoppable momentum of particular apps and content services, on both fixed and mobile networks. Telcos are now aware that they are likely to be judged on how well Facebook or Spotify or WeChat or Netflix perform – so they are much less-inclined to indulge in regulatory grand-standing about having such companies “pay for the infrastructure” or be blocked. Essentially, there is tacit recognition that access to these applications is why customers are paying for broadband in the first place.

These considerations have shifted the debate in many important areas, making some of the earlier ideas unworkable, while other areas have come to the fore. Two themes stand out:

  • Zero-rating
  • Specialised services

Content:

  • Executive summary
  • Contents
  • Introduction
  • What has changed?
  • Where have we come from?
  • Zero-rating as a battleground
  • Specialised services & QoS
  • Technology evolution impacting Neutrality debate
  • Current status
  • US
  • EU
  • India
  • Brazil
  • Other countries
  • Conclusions
  • Recommendations

The European Telecoms market in 2020, Report 2: 4 scenarios and 7 predictions

Introduction

The second report in The European Telecoms market in 2020, this document uses the framework introduced in Report 1 to develop four discrete scenarios for the European telecoms market in 2020.  Although this report can be read on its own, STL Partners suggests that more value will be derived from reading Report 1 first.

The role of this report

Strategists (and investors) are finding it very difficult to understand the many and varied forces affecting the telecoms industry (Report 1), and predict the structure of, and returns from, the European telecoms market in 2020 (the focus of this Report 2).  This, in turn, makes it challenging to determine how operators should seek to compete in the future (the focus of a STL Partners report in July, Four strategic pathways to Telco 2.0).

In summary, The European Telecoms market in 2020 reports therefore seek to:

  • Identify the key forces of change in Europe and provide a useful means of classifying them within a simple and logical 2×2 framework (Report 1);
  • Help readers refine their thoughts on how Europe might develop by outlining four alternative ‘futures’ that are both sufficiently different from each other to be meaningful and internally consistent enough to be realistic (Report 2);
  • Provide a ‘prediction’ for the future European telecoms market based on our own insights plus two ‘wisdom of crowds’ votes conducted at a recent STL Partners event for senior managers from European telcos (Report 2).

Four European telecoms market scenarios for 2020

The second report in The European Telecoms market in 2020, this document uses the framework introduced in Report 1 to develop four discrete scenarios for the European telecoms market in 2020.  Although this report can be read on its own, STL Partners suggests that more value will be derived from reading Report 1 first.

Overview

STL Partners has identified the following scenarios for the European market in 2020:

  1. Back to the Future. This scenario is likely to be the result of a structurally attractive telecoms market and one where operators focus on infrastructure-led ‘piping’ ambition and skills.
  2. Consolidated Utility. This might be the result of the same ‘piping’ ambition in a structurally unattractive market.
  3. Digital Renaissance. A utopian world resulting from new digital ambitions and skills developed by operators coupled with an attractive market.
  4. Telco Trainwreck. As the name suggests, a disaster stemming from lofty digital ambitions being pursued in the face of an unattractive telco market.

The four scenarios are shown on the framework in Figure 1 and are discussed in detail below.

Figure 1: Four European telecoms market scenarios for 2020

Source: STL Partners/Telco 2.0

How each scenario is described

In addition to a short overview, each scenario will be examined by exploring 8 key characteristics which seek to reflect the combined impact of the internal and external forces laid out in the previous section:

  1. Market Structure. The absolute and relative size and overall number of operators in national markets and across the wider EU region.
  2. Operator service pricing and profits. The price levels and profit performance of telecoms operators (and the overall industry) and the underlying direction (stable, moving up, moving down).
  3. The role of content in operators’ service portfolios. The importance of IPTV, games and applications within operators’ consumer offering and the importance of content, software and applications within operators’ enterprise portfolio.
  4. The degree to which operators can offer differentiated services. How able operators are to offer differentiated network services to end users and, most importantly, upstream service providers based on such things as network QoS, guaranteed maximum latency, speed, etc.
  5. The relationships between operators and NEP/IT players. Whether NEP and IT players continue to predominantly sell their services to and through operators (to other enterprises) or whether they become ‘Under the Floor’ competitors offering network services directly to enterprises.
  6. Where service innovation occurs – in the network/via the operator vs at the edge/via OTT players. The extent to which services continue to be created ‘at the edge’ – with little input from the network – or are ‘network-reliant’ or, even, integrated directly into the network. The former clearly suggests continued dominance by OTT players and the latter a swing towards operators and the telecoms industry.
  7. The attitude of the capital markets (and the availability of capital). The willingness of investors to have their capital reinvested for growth by telecoms operators as opposed to returned to them in the form of dividends. Prospects of sustained growth from operators will lead to the former whereas profit stasis or contraction will result in higher yields.
  8. Key industry statistics. Comparison between 2020 and 2015 for revenue and employees – tangible numbers that demonstrate how the industry has changed.

The European macro-economy – a key assumption

The health and structure of all industries in Europe is dependent, to a large degree, on the European macro-economy. Grexit or Brexit, for example, would have a material impact on growth throughout Europe over the next five years.  Our assumption in these scenarios is that Europe experiences a stable period of low-growth and that the economic positions of the stretched Southern European markets, particularly Italy and Spain, improves steadily.  If the European economic position deteriorates then opportunities for telecoms growth of any sort is likely to disappear.

 

  • Executive Summary
  • Introduction
  • The role of this report
  • Four European telecoms market scenarios for 2020
  • Overview
  • How each scenario is described
  • The European macro-economy – a key assumption
  • Back to the Future
  • Consolidated Utility
  • Digital Renaissance
  • Telco Trainwreck
  • Risk and returns in the scenarios
  • Making predictions
  • Wisdom of crowds: 2 approaches
  • Approach 1: Aggregating individual forces – ‘Sum-of-the-parts’
  • Approach 2: Picking a scenario
  • STL Partners’ prediction for the European telecoms market in 2020
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: Four European telecoms market scenarios for 2020
  • Figure 2: Back to the Future – key characteristics
  • Figure 3: Consolidated Utility – key characteristics
  • Figure 4: Digital Renaissance – key characteristics
  • Figure 5: Telco Trainwreck – key characteristics
  • Figure 6: Risk and returns in the four scenarios
  • Figure 7: Europe’s future based on aggregating individual forces – ‘Sum-of-the-parts’
  • Figure 8: Europe’s future – results of the two approaches compared

Mobile Broadband 2.0: The Top Disruptive Innovations

Summary: Key trends, tactics, and technologies for mobile broadband networks and services that will influence mid-term revenue opportunities, cost structures and competitive threats. Includes consideration of LTE, network sharing, WiFi, next-gen IP (EPC), small cells, CDNs, policy control, business model enablers and more.(March 2012, Executive Briefing Service, Future of the Networks Stream).

Trends in European data usage

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Below is an extract from this 44 page Telco 2.0 Report that can be downloaded in full in PDF format by members of the Telco 2.0 Executive Briefing service and Future Networks Stream here. Non-members can subscribe here, buy a Single User license for this report online here for £795 (+VAT for UK buyers), or for multi-user licenses or other enquiries, please email contact@telco2.net / call +44 (0) 207 247 5003. We’ll also be discussing our findings and more on Facebook at the Silicon Valley (27-28 March) and London (12-13 June) New Digital Economics Brainstorms.

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Introduction

Telco 2.0 has previously published a wide variety of documents and blog posts on mobile broadband topics – content delivery networks (CDNs), mobile CDNs, WiFi offloading, Public WiFi, network outsourcing (“‘Under-The-Floor’ (UTF) Players: threat or opportunity? ”) and so forth. Our conferences have featured speakers and panellists discussing operator data-plan pricing strategies, tablets, network policy and numerous other angles. We’ve also featured guest material such as Arete Research’s report LTE: Late, Tempting, and Elusive.

In our recent ‘Under the Floor (UTF) Players‘ Briefing we looked at strategies to deal with some of of the challenges facing operators’ resulting from market structure and outsourcing

Under The Floor (UTF) Players Telco 2.0

This Executive Briefing is intended to complement and extend those efforts, looking specifically at those technical and business trends which are truly “disruptive”, either immediately or in the medium-term future. In essence, the document can be thought of as a checklist for strategists – pointing out key technologies or trends around mobile broadband networks and services that will influence mid-term revenue opportunities and threats. Some of those checklist items are relatively well-known, others more obscure but nonetheless important. What this document doesn’t cover is more straightforward concepts around pricing, customer service, segmentation and so forth – all important to get right, but rarely disruptive in nature.

During 2012, Telco 2.0 will be rolling out a new MBB workshop concept, which will audit operators’ existing technology strategy and planning around mobile data services and infrastructure. This briefing document is a roundup of some of the critical issues we will be advising on, as well as our top-level thinking on the importance of each trend.

It starts by discussing some of the issues which determine the extent of any disruption:

  • Growth in mobile data usage – and whether the much-vaunted “tsunami” of traffic may be slowing down
  • The role of standardisation , and whether it is a facilitator or inhibitor of disruption
  • Whether the most important MBB disruptions are likely to be telco-driven, or will stem from other actors such as device suppliers, IT companies or Internet firms.

The report then drills into a few particular domains where technology is evolving, looking at some of the most interesting and far-reaching trends and innovations. These are split broadly between:

  • Network infrastructure evolution (radio and core)
  • Control and policy functions, and business-model enablers

It is not feasible for us to cover all these areas in huge depth in a briefing paper such as this. Some areas such as CDNs and LTE have already been subject to other Telco 2.0 analysis, and this will be linked to where appropriate. Instead, we have drilled down into certain aspects we feel are especially interesting, particularly where these are outside the mainstream of industry awareness and thinking – and tried to map technical evolution paths onto potential business model opportunities and threats.

This report cannot be truly exhaustive – it doesn’t look at the nitty-gritty of silicon components, or antenna design, for example. It also treads a fine line between technological accuracy and ease-of-understanding for the knowledgeable but business-focused reader. For more detail or clarification on any area, please get in touch with us – email mailto:contact@stlpartners.com or call +44 (0) 207 247 5003.

Telco-driven disruption vs. external trends

There are various potential sources of disruption for the mobile broadband marketplace:

  • New technologies and business models implemented by telcos, which increase revenues, decrease costs, improve performance or alter the competitive dynamics between service providers.
  • 3rd party developments that can either bolster or undermine the operators’ broadband strategies. This includes both direct MBB innovations (new uses of WiFi, for example), or bleed-over from adjacent related marketplaces such as device creation or content/application provision.
  • External, non-technology effects such as changing regulation, economic backdrop or consumer behaviour.

The majority of this report covers “official” telco-centric innovations – LTE networks, new forms of policy control and so on,

External disruptions to monitor

But the most dangerous form of innovation is that from third parties, which can undermine assumptions about the ways mobile broadband can be used, introducing new mechanisms for arbitrage, or somehow subvert operators’ pricing plans or network controls. 

In the voice communications world, there are often regulations in place to protect service providers – such as banning the use of “SIM boxes” to terminate calls and reduce interconnection payments. But in the data environment, it is far less obvious that many work-arounds can either be seen as illegal, or even outside the scope of fair-usage conditions. That said, we have already seen some attempts by telcos to manage these effects – such as charging extra for “tethering” on smartphones.

It is not really possible to predict all possible disruptions of this type – such is the nature of innovation. But by describing a few examples, market participants can gauge their level of awareness, as well as gain motivation for ongoing “scanning” of new developments.

Some of the areas being followed by Telco 2.0 include:

  • Connection-sharing. This is where users might link devices together locally, perhaps through WiFi or Bluetooth, and share multiple cellular data connections. This is essentially “multi-tethering” – for example, 3 smartphones discovering each other nearby, perhaps each with a different 3G/4G provider, and pooling their connections together for shared use. From the user’s point of view it could improve effective coverage and maximum/average throughput speed. But from the operators’ view it would break the link between user identity and subscription, and essentially offload traffic from poor-quality networks on to better ones.
  • SoftSIM or SIM-free wireless. Over the last five years, various attempts have been made to decouple mobile data connections from SIM-based authentication. In some ways this is not new – WiFi doesn’t need a SIM, while it’s optional for WiMAX, and CDMA devices have typically been “hard-coded” to just register on a specific operator network. But the GSM/UMTS/LTE world has always relied on subscriber identification through a physical card. At one level, it s very good – SIMs are distributed easily and have enabled a successful prepay ecosystem to evolve. They provide operator control points and the ability to host secure applications on the card itself. However, the need to obtain a physical card restricts business models, especially for transient/temporary use such as a “one day pass”. But the most dangerous potential change is a move to a “soft” SIM, embedded in the device software stack. Companies such as Apple have long dreamed of acting as a virtual network provider, brokering between user and multiple networks. There is even a patent for encouraging bidding per-call (or perhaps per data-connection) with telcos competing head to head on price/quality grounds. Telco 2.0 views this type of least-cost routing as a major potential risk for operators, especially for mobile data – although it also possible enables some new business models that have been difficult to achieve in the past.
  • Encryption. Various of the new business models and technology deployment intentions of operators, vendors and standards bodies are predicated on analysing data flows. Deep packet inspection (DPI) is expected to be used to identify applications or traffic types, enabling differential treatment in the network, or different charging models to be employed. Yet this is rendered largely useless (or at least severely limited) when various types of encryption are used. Various content and application types already secure data in this way – content DRM, BlackBerry traffic, corporate VPN connections and so on. But increasingly, we will see major Internet companies such as Apple, Google, Facebook and Microsoft using such techniques both for their own users’ security, but also because it hides precise indicators of usage from the network operators. If a future Android phone sends all its mobile data back via a VPN tunnel and breaks it out in Mountain View, California, operators will be unable to discern YouTube video from search of VoIP traffic. This is one of the reasons why application-based charging models – one- or two-sided – are difficult to implement.
  • Application evolution speed. One of the largest challenges for operators is the pace of change of mobile applications. The growing penetration of smartphones, appstores and ease of “viral” adoption of new services causes a fundamental problem – applications emerge and evolve on a month-by-month or even week-by-week basis. This is faster than any realistic internal telco processes for developing new pricing plans, or changing network policies. Worse, the nature of “applications” is itself changing, with the advent of HTML5 web-apps, and the ability to “mash up” multiple functions in one app “wrapper”. Is a YouTube video shared and embedded in a Facebook page a “video service”, or “social networking”?

It is also really important to recognise that certain procedures and technologies used in policy and traffic management will likely have some unanticipated side-effects. Users, devices and applications are likely to respond to controls that limit their actions, while other developments may result in “emergent behaviours” spontaneously. For instance, there is a risk that too-strict data caps might change usage models for smartphones and make users just connect to the network when absolutely necessary. This is likely to be at the same times and places when other users also feel it necessary, with the unfortunate implication that peaks of usage get “spikier” rather than being ironed-out.

There is no easy answer to addressing these type of external threats. Operator strategists and planners simply need to keep watch on emerging trends, and perhaps stress-test their assumptions and forecasts with market observers who keep tabs on such developments.

The mobile data explosion… or maybe not?

It is an undisputed fact that mobile data is growing exponentially around the world. Or is it?

A J-curve or an S-curve?

Telco 2.0 certainly thinks that growth in data usage is occurring, but is starting to see signs that the smooth curves that drive so many other decisions might not be so smooth – or so steep – after all. If this proves to be the case, it could be far more disruptive to operators and vendors than any of the individual technologies discussed later in the report. If operator strategists are not at least scenario-planning for lower data growth rates, they may find themselves in a very uncomfortable position in a year’s time.

In its most recent study of mobile operators’ traffic patterns, Ericsson concluded that Q2 2011 data growth was just 8% globally, quarter-on-quarter, a far cry from the 20%+ growths seen previously, and leaving a chart that looks distinctly like the beginning of an S-curve rather than a continued “hockey stick”. Given that the 8% includes a sizeable contribution from undoubted high-growth developing markets like China, it suggests that other markets are maturing quickly. (We are rather sceptical of Ericsson’s suggestion of seasonality in the data). Other data points come from O2 in the UK , which appears to have had essentially zero traffic growth for the past few quarters, or Vodafone which now cites European data traffic to be growing more slowly (19% year-on-year) than its data revenues (21%). Our view is that current global growth is c.60-70%, c.40% in mature markets and 100%+ in developing markets.

Figure 1 – Trends in European data usage

 Trends in European Data Usage
 

Now it is possible that various one-off factors are at play here – the shift from unlimited to tiered pricing plans, the stronger enforcement of “fair-use” plans and the removal of particularly egregious heavy users. Certainly, other operators are still reporting strong growth in traffic levels. We may see resumption in growth, for example if cellular-connected tablets start to be used widely for streaming video. 

But we should also consider the potential market disruption, if the picture is less straightforward than the famous exponential charts. Even if the chart looks like a 2-stage S, or a “kinked” exponential, the gap may have implications, like a short recession in the economy. Many of the technical and business model innovations in recent years have been responses to the expected continual upward spiral of demand – either controlling users’ access to network resources, pricing it more highly and with greater granularity, or building out extra capacity at a lower price. Even leaving aside the fact that raw, aggregated “traffic” levels are a poor indicator of cost or congestion, any interruption or slow-down of the growth will invalidate a lot of assumptions and plans.

Our view is that the scary forecasts of “explosions” and “tsunamis” have led virtually all parts of the industry to create solutions to the problem. We can probably list more than 20 approaches, most of them standalone “silos”.

Figure 2 – A plethora of mobile data traffic management solutions

A Plethora of Mobile Data Traffic Management Solutions

What seems to have happened is that at least 10 of those approaches have worked – caps/tiers, video optimisation, WiFi offload, network densification and optimisation, collaboration with application firms to create “network-friendly” software and so forth. Taken collectively, there is actually a risk that they have worked “too well”, to the extent that some previous forecasts have turned into “self-denying prophesies”.

There is also another common forecasting problem occurring – the assumption that later adopters of a technology will have similar behaviour to earlier users. In many markets we are now reaching 30-50% smartphone penetration. That means that all the most enthusiastic users are already connected, and we’re left with those that are (largely) ambivalent and probably quite light users of data. That will bring the averages down, even if each individual user is still increasing their consumption over time. But even that assumption may be flawed, as caps have made people concentrate much more on their usage, offloading to WiFi and restricting their data flows. There is also some evidence that the growing numbers of free WiFi points is also reducing laptop use of mobile data, which accounts for 70-80% of the total in some markets, while the much-hyped shift to tablets isn’t driving much extra mobile data as most are WiFi-only.

So has the industry over-reacted to the threat of a “capacity crunch”? What might be the implications?

The problem is that focusing on a single, narrow metric “GB of data across the network” ignores some important nuances and finer detail. From an economics standpoint, network costs tend to be driven by two main criteria:

  • Network coverage in terms of area or population
  • Network capacity at the busiest places/times

Coverage is (generally) therefore driven by factors other than data traffic volumes. Many cells have to be built and run anyway, irrespective of whether there’s actually much load – the operators all want to claim good footprints and may be subject to regulatory rollout requirements. Peak capacity in the most popular locations, however, is a different matter. That is where issues such as spectrum availability, cell site locations and the latest high-speed networks become much more important – and hence costs do indeed rise. However, it is far from obvious that the problems at those “busy hours” are always caused by “data hogs” rather than sheer numbers of people each using a small amount of data. (There is also another issue around signalling traffic, discussed later). 

Yes, there is a generally positive correlation between network-wide volume growth and costs, but it is far from perfect, and certainly not a direct causal relationship.

So let’s hypothesise briefly about what might occur if data traffic growth does tail off, at least in mature markets.

  • Delays to LTE rollout – if 3G networks are filling up less quickly than expected, the urgency of 4G deployment is reduced.
  • The focus of policy and pricing for mobile data may switch back to encouraging use rather than discouraging/controlling it. Capacity utilisation may become an important metric, given the high fixed costs and low marginal ones. Expect more loyalty-type schemes, plus various methods to drive more usage in quiet cells or off-peak times.
  • Regulators may start to take different views of traffic management or predicted spectrum requirements.
  • Prices for mobile data might start to fall again, after a period where we have seen them rise. Some operators might be tempted back to unlimited plans, for example if they offer “unlimited off-peak” or similar options.
  • Many of the more complex and commercially-risky approaches to tariffing mobile data might be deprioritised. For example, application-specific pricing involving packet-inspection and filtering might get pushed back down the agenda.
  • In some cases, we may even end up with overcapacity on cellular data networks – not to the degree we saw in fibre in 2001-2004, but there might still be an “overhang” in some places, especially if there are multiple 4G networks.
  • Steady growth of (say) 20-30% peak data per annum should be manageable with the current trends in price/performance improvement. It should be possible to deploy and run networks to meet that demand with reducing unit “production cost”, for example through use of small cells. That may reduce the pressure to fill the “revenue gap” on the infamous scissors-diagram chart.

Overall, it is still a little too early to declare shifting growth patterns for mobile data as a “disruption”. There is a lack of clarity on what is happening, especially in terms of responses to the new controls, pricing and management technologies put recently in place. But operators need to watch extremely closely what is going on – and plan for multiple scenarios.

Specific recommendations will depend on an individual operator’s circumstances – user base, market maturity, spectrum assets, competition and so on. But broadly, we see three scenarios and implications for operators:

  • “All hands on deck!”: Continued strong growth (perhaps with a small “blip”) which maintains the pressure on networks, threatens congestion, and drives the need for additional capacity, spectrum and capex.
    • Operators should continue with current multiple strategies for dealing with data traffic – acquiring new spectrum, upgrading backhaul, exploring massive capacity enhancement with small cells and examining a variety of offload and optimisation techniques. Where possible, they should explore two-sided models for charging and use advanced pricing, policy or segmentation techniques to rein in abusers and reward those customers and applications that are parsimonious with their data use. Vigorous lobbying activities will be needed, for gaining more spectrum, relaxing Net Neutrality rules and perhaps “taxing” content/Internet companies for traffic injected onto networks.
  • “Panic over”: Moderating and patchy growth, which settles to a manageable rate – comparable with the patterns seen in the fixed broadband marketplace
    • This will mean that operators can “relax” a little, with the respite in explosive growth meaning that the continued capex cycles should be more modest and predictable. Extension of today’s pricing and segmentation strategies should improve margins, with continued innovation in business models able to proceed without rush, and without risking confrontation with Internet/content companies over traffic management techniques. Focus can shift towards monetising customer insight, ensuring that LTE rollouts are strategic rather than tactical, and exploring new content and communications services that exploit the improving capabilities of the network.
  • “Hangover”: Growth flattens off rapidly, leaving operators with unused capacity and threatening brutal price competition between telcos.
    • This scenario could prove painful, reminiscent of early-2000s experience in the fixed-broadband marketplace. Wholesale business models could help generate incremental traffic and revenue, while the emphasis will be on fixed-cost minimisation. Some operators will scale back 4G rollouts until cost and maturity go past the tipping-point for outright replacement of 3G. Restrictive policies on bandwidth use will be lifted, as operators compete to give customers the fastest / most-open access to the Internet on mobile devices. Consolidation – and perhaps bankruptcies – may ensure as declining data prices may coincide with substitution of core voice and messaging business

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

  • Introduction
  • Telco-driven disruption vs. external trends
  • External disruptions to monitor
  • The mobile data explosion… or maybe not?
  • A J-curve or an S-curve?
  • Evolving the mobile network
  • Overview
  • LTE
  • Network sharing, wholesale and outsourcing
  • WiFi
  • Next-gen IP core networks (EPC)
  • Femtocells / small cells / “cloud RANs”
  • HetNets
  • Advanced offload: LIPA, SIPTO & others
  • Peer-to-peer connectivity
  • Self optimising networks (SON)
  • M2M-specific broadband innovations
  • Policy, control & business model enablers
  • The internal politics of mobile broadband & policy
  • Two sided business-model enablement
  • Congestion exposure
  • Mobile video networking and CDNs
  • Controlling signalling traffic
  • Device intelligence
  • Analytics & QoE awareness
  • Conclusions & recommendations
  • Index

…and the following figures…

  • Figure 1 – Trends in European data usage
  • Figure 2 – A plethora of mobile data traffic management solutions
  • Figure 3 – Not all operator WiFi is “offload” – other use cases include “onload”
  • Figure 4 – Internal ‘power tensions’ over managing mobile broadband
  • Figure 5 – How a congestion API could work
  • Figure 6 – Relative Maturity of MBB Management Solutions
  • Figure 7 – Laptops generate traffic volume, smartphones create signalling load
  • Figure 8 – Measuring Quality of Experience
  • Figure 9 – Summary of disruptive network innovations

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

Organisations, geographies, people and products referenced: 3GPP, Aero2, Alcatel Lucent, AllJoyn, ALU, Amazon, Amdocs, Android, Apple, AT&T, ATIS, BBC, BlackBerry, Bridgewater, CarrierIQ, China, China Mobile, China Unicom, Clearwire, Conex, DoCoMo, Ericsson, Europe, EverythingEverywhere, Facebook, Femto Forum, FlashLinq, Free, Germany, Google, GSMA, H3G, Huawei, IETF, IMEI, IMSI, InterDigital, iPhones,Kenya, Kindle, Light Radio, LightSquared, Los Angeles, MBNL, Microsoft, Mobily, Netflix, NGMN, Norway, NSN, O2, WiFi, Openet, Qualcomm, Radisys, Russia, Saudi Arabia, SoftBank, Sony, Stoke, Telefonica, Telenor, Time Warner Cable, T-Mobile, UK, US, Verizon, Vita, Vodafone, WhatsApp, Yota, YouTube, ZTE.

Technologies and industry terms referenced: 2G, 3G, 4.5G, 4G, Adaptive bitrate streaming, ANDSF (Access Network Discovery and Selection Function), API, backhaul, Bluetooth, BSS, capacity crunch, capex, caps/tiers, CDMA, CDN, CDNs, Cloud RAN, content delivery networks (CDNs), Continuous Computing, Deep packet inspection (DPI), DPI, DRM, Encryption, Enhanced video, EPC, ePDG (Evolved Packet Data Gateway), Evolved Packet System, Femtocells, GGSN, GPS, GSM, Heterogeneous Network (HetNet), Heterogeneous Networks (HetNets), HLRs, hotspots, HSPA, HSS (Home Subscriber Server), HTML5, HTTP Live Streaming, IFOM (IP Flow Mobility and Seamless Offload), IMS, IPR, IPv4, IPv6, LIPA (Local IP Access), LTE, M2M, M2M network enhancements, metro-cells, MiFi, MIMO (multiple in, MME (Mobility Management Entity), mobile CDNs, mobile data, MOSAP, MSISDN, MVNAs (mobile virtual network aggregators)., MVNO, Net Neutrality, network outsourcing, Network sharing, Next-generation core networks, NFC, NodeBs, offload, OSS, outsourcing, P2P, Peer-to-peer connectivity, PGW (PDN Gateway), picocells, policy, Policy and Charging Rules Function (PCRF), Pre-cached video, pricing, Proximity networks, Public WiFi, QoE, QoS, RAN optimisation, RCS, remote radio heads, RFID, self-optimising network technology (SON), Self-optimising networks (SON), SGW (Serving Gateway), SIM-free wireless, single RANs, SIPTO (Selective IP Traffic Offload), SMS, SoftSIM, spectrum, super-femtos, Telco 2.0 Happy Pipe, Transparent optimisation, UMTS, ‘Under-The-Floor’ (UTF) Players, video optimisation, VoIP, VoLTE, VPN, White space, WiFi, WiFi Direct, WiFi offloading, WiMAX, WLAN.

‘Under-The-Floor’ (UTF) Players: threat or opportunity?

Introduction

The ‘smart pipe’ imperative

In some quarters of the telecoms industry, the received wisdom is that the network itself is merely an undifferentiated “pipe”, providing commodity connectivity, especially for data services. The value, many assert, is in providing higher-tier services, content and applications, either to end-users, or as value-added B2B services to other parties. The Telco 2.0 view is subtly different. We maintain that:

  1. Increasingly valuable services will be provided by third-parties but that operators can provide a few end-user services themselves. They will, for example, continue to offer voice and messaging services for the foreseeable future.
  2. Operators still have an opportunity to offer enabling services to ‘upstream’ service providers such as personalisation and targeting (of marketing and services) via use of their customer data, payments, identity and authentication and customer care.
  3. Even if operators fail (or choose not to pursue) options 1 and 2 above, the network must be ‘smart’ and all operators will pursue at least a ‘smart network’ or ‘Happy Pipe’ strategy. This will enable operators to achieve three things.
  • To ensure that data is transported efficiently so that capital and operating costs are minimised and the Internet and other networks remain cheap methods of distribution.
  • To improve user experience by matching the performance of the network to the nature of the application or service being used – or indeed vice versa, adapting the application to the actual constraints of the network. ‘Best efforts’ is fine for asynchronous communication, such as email or text, but unacceptable for traditional voice telephony. A video call or streamed movie could exploit guaranteed bandwidth if possible / available, or else they could self-optimise to conditions of network congestion or poor coverage, if well-understood. Other services have different criteria – for example, real-time gaming demands ultra-low latency, while corporate applications may demand the most secure and reliable path through the network.
  • To charge appropriately for access to and/or use of the network. It is becoming increasingly clear that the Telco 1.0 business model – that of charging the end-user per minute or per Megabyte – is under pressure as new business models for the distribution of content and transportation of data are being developed. Operators will need to be capable of charging different players – end-users, service providers, third-parties (such as advertisers) – on a real-time basis for provision of broadband and maybe various types or tiers of quality of service (QoS). They may also need to offer SLAs (service level agreements), monitor and report actual “as-experienced” quality metrics or expose information about network congestion and availability.

Under the floor players threaten control (and smartness)

Either through deliberate actions such as outsourcing, or through external agency (Government, greenfield competition etc), we see the network-part of the telco universe suffering from a creeping loss of control and ownership. There is a steady move towards outsourced networks, as they are shared, or built around the concept of open-access and wholesale. While this would be fine if the telcos themselves remained in control of this trend (we see significant opportunities in wholesale and infrastructure services), in many cases the opposite is occurring. Telcos are losing control, and in our view losing influence over their core asset – the network. They are worrying so much about competing with so-called OTT providers that they are missing the threat from below.

At the point at which many operators, at least in Europe and North America, are seeing the services opportunity ebb away, and ever-greater dependency on new models of data connectivity provision, they are potentially cutting off (or being cut off from) one of their real differentiators.
Given the uncertainties around both fixed and mobile broadband business models, it is sensible for operators to retain as many business model options as possible. Operators are battling with significant commercial and technical questions such as:

  • Can upstream monetisation really work?
  • Will regulators permit priority services under Net Neutrality regulations?
  • What forms of network policy and traffic management are practical, realistic and responsive?

Answers to these and other questions remain opaque. However, it is clear that many of the potential future business models will require networks to be physically or logically re-engineered, as well as flexible back-office functions, like billing and OSS, to be closely integrated with the network.
Outsourcing networks to third-party vendors, particularly when such a network is shared with other operators is dangerous in these circumstances. Partners that today agree on the principles for network-sharing may have very different strategic views and goals in two years’ time, especially given the unknown use-cases for new technologies like LTE.

This report considers all these issues and gives guidance to operators who may not have considered all the various ways in which network control is being eroded, from Government-run networks through to outsourcing services from the larger equipment providers.

Figure 1 – Competition in the services layer means defending network capabilities is increasingly important for operators Under The Floor Players Fig 1 Defending Network Capabilities

Source: STL Partners

Industry structure is being reshaped

Over the last year, Telco 2.0 has updated its overall map of the telecom industry, to reflect ongoing dynamics seen in both fixed and mobile arenas. In our strategic research reports on Broadband Business Models, and the Roadmap for Telco 2.0 Operators, we have explored the emergence of various new “buckets” of opportunity, such as verticalised service offerings, two-sided opportunities and enhanced variants of traditional retail propositions.
In parallel to this, we’ve also looked again at some changes in the traditional wholesale and infrastructure layers of the telecoms industry. Historically, this has largely comprised basic capacity resale and some “behind the scenes” use of carriers-carrier services (roaming hubs, satellite / sub-oceanic transit etc).

Figure 2 – Telco 1.0 Wholesale & Infrastructure structure

Under The Floor (UTF) Players Fig 2 Telco 1.0 Scenario

Source: STL Partners

Content

  • Revising & extending the industry map
  • ‘Network Infrastructure Services’ or UTF?
  • UTF market drivers
  • Implications of the growing trend in ‘under-the-floor’ network service providers
  • Networks must be smart and controlling them is smart too
  • No such thing as a dumb network
  • Controlling the network will remain a key competitive advantage
  • UTF enablers: LTE, WiFi & carrier ethernet
  • UTF players could reduce network flexibility and control for operators
  • The dangers of ceding control to third-parties
  • No single answer for all operators but ‘outsourcer beware’
  • Network outsourcing & the changing face of major vendors
  • Why become an under-the-floor player?
  • Categorising under-the-floor services
  • Pure under-the-floor: the outsourced network
  • Under-the-floor ‘lite’: bilateral or multilateral network-sharing
  • Selective under-the-floor: Commercial open-access/wholesale networks
  • Mandated under-the-floor: Government networks
  • Summary categorisation of under-the-floor services
  • Next steps for operators
  • Build scale and a more sophisticated partnership approach
  • Final thoughts
  • Index

 

  • Figure 1 – Competition in the services layer means defending network capabilities is increasingly important for operators
  • Figure 2 – Telco 1.0 Wholesale & Infrastructure structure
  • Figure 3 – The battle over infrastructure services is intensifying
  • Figure 4 – Examples of network-sharing arrangements
  • Figure 5 – Examples of Government-run/influenced networks
  • Figure 6 – Four under-the-floor service categories
  • Figure 7: The need for operator collaboration & co-opetition strategies

Broadband 2.0: Mobile CDNs and video distribution

Summary: Content Delivery Networks (CDNs) are becoming familiar in the fixed broadband world as a means to improve the experience and reduce the costs of delivering bulky data like online video to end-users. Is there now a compelling need for their mobile equivalents, and if so, should operators partner with existing players or build / buy their own? (August 2011, Executive Briefing Service, Future of the Networks Stream).

Telco 2.0 Mobile CDN Schematic Small

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Introduction

As is widely documented, mobile networks are witnessing huge growth in the volumes of 3G/4G data traffic, primarily from laptops, smartphones and tablets. While Telco 2.0 is wary of some of the headline shock-statistics about forecast “exponential” growth, or “data tsunamis” driven by ravenous consumption of video applications, there is certainly a fast-growing appetite for use of mobile broadband.

That said, many of the actual problems of congestion today can be pinpointed either to a handful of busy cells at peak hour – or, often, the inability of the network to deal with the signalling load from chatty applications or “aggressive” devices, rather than the “tonnage” of traffic. Another large trend in mobile data is the use of transient, individual-centric flows from specific apps or communications tools such as social networking and messaging.

But “tonnage” is not completely irrelevant. Despite the diversity, there is still an inexorable rise in the use of mobile devices for “big chunks” of data, especially the special class of software commonly known as “content” – typically popular/curated standalone video clips or programmes, or streamed music. Images (especially those in web pages) and application files such as software updates fit into a similar group – sizeable lumps of data downloaded by many individuals across the operator’s network.

This one-to-many nature of most types of bulk content highlights inefficiencies in the way mobile networks operate. The same data chunks are downloaded time and again by users, typically going all the way from the public Internet, through the operator’s core network, eventually to the end user. Everyone loses in this scenario – the content publisher needs huge servers to dish up each download individually. The operator has to deal with transport and backhaul load from repeatedly sending the same content across its network (and IP transit from shipping it in from outside, especially over international links). Finally, the user has to deal with all the unpredictability and performance compromises involved in accessing the traffic across multiple intervening points – and ends up paying extra to support the operator’s heavier cost base.

In the fixed broadband world, many content companies have availed themselves of a group of specialist intermediaries called CDNs (content delivery networks). These firms on-board large volumes of the most important content served across the Internet, before dropping it “locally” as near to the end user as possible – if possible, served up from cached (pre-saved) copies. Often, the CDN operating companies have struck deals with the end-user facing ISPs, which have often been keen to host their servers in-house, as they have been able to reduce their IP interconnection costs and deliver better user experience to their customers.

In the mobile industry, the use of CDNs is much less mature. Until relatively recently, the overall volumes of data didn’t really move the needle from the point of view of content firms, while operators’ radio-centric cost bases were also relatively immune from those issues as well. Optimising the “middle mile” for mobile data transport efficiency seemed far less of a concern than getting networks built out and handsets and apps perfected, or setting up policy and charging systems to parcel up broadband into tiered plans. Arguably, better-flowing data paths and video streams would only load the radio more heavily, just at a time when operators were having to compress video to limit congestion.

This is now changing significantly. With the rise in smartphone usage – and the expectations around tablets – Internet-based CDNs are pushing much more heavily to have their servers placed inside mobile networks. This is leading to a certain amount of introspection among the operators – do they really want to have Internet companies’ infrastructure inside their own networks, or could this be seen more as a Trojan Horse of some sort, simply accelerating the shift of content sales and delivery towards OTT-style models? Might it not be easier for operators to build internal CDN-type functions instead?

Some of the earlier approaches to video traffic management – especially so-called “optimisation” without the content companies’ permission of involvement – are becoming trickier with new video formats and more scrutiny from a Net Neutrality standpoint. But CDNs by definition involve the publishers, so potentially any necessary compression or other processing can be collaboratively, rather than “transparently” without cooperation or willingness.

At the same time, many of the operators’ usual vendors are seeing this transition point as a chance to differentiate their new IP core network offerings, typically combining CDN capability into their routing/switching platforms, often alongside the optimisation functions as well. In common with other recent innovations from network equipment suppliers, there is a dangled promise of Telco 2.0-style revenues that could be derived from “upstream” players. In this case, there is a bit more easily-proved potential, since this would involve direct substitution of the existing revenues already derived from content companies, by the Internet CDN players such as Akamai and Limelight. This also holds the possibility of setting up a two-sided, content-charging business model that fits OK with rules on Net Neutrality – there are few complaints about existing CDNs except from ultra-purist Neutralists.

On the other hand, telco-owned CDNs have existed in the fixed broadband world for some time, with largely indifferent levels of success and adoption. There needs to be a very good reason for content companies to choose to deal with multiple national telcos, rather than simply take the easy route and choose a single global CDN provider.

So, the big question for telcos around CDNs at the moment is “should I build my own, or should I just permit Akamai and others to continue deploying servers into my network?” Linked to that question is what type of CDN operation an operator might choose to run in-house.

There are four main reasons why a mobile operator might want to build its own CDN:

  • To lower costs of network operation or upgrade, especially in radio network and backhaul, but also through the core and in IP transit.
  • To improve the user experience of video, web or applications, either in terms of data throughput or latency.
  • To derive incremental revenue from content or application providers.
  • For wider strategic or philosophical reasons about “keeping control over the content/apps value chain”

This Analyst Note explores these issues in more details, first giving some relevant contextual information on how CDNs work, especially in mobile.

What is a CDN?

The traditional model for Internet-based content access is straightforward – the user’s browser requests a piece of data (image, video, file or whatever) from a server, which then sends it back across the network, via a series of “hops” between different network nodes. The content typically crosses the boundaries between multiple service providers’ domains, before finally arriving at the user’s access provider’s network, flowing down over the fixed or mobile “last mile” to their device. In a mobile network, that also typically involves transiting the operator’s core network first, which has a variety of infrastructure (network elements) to control and charge for it.

A Content Delivery Network (CDN) is a system for serving Internet content from servers which are located “closer” to the end user either physically, or in terms of the network topology (number of hops). This can result in faster response times, higher overall performance, and potentially lower costs to all concerned.

In most cases in the past, CDNs have been run by specialist third-party providers, such as Akamai and Limelight. This document also considers the role of telcos running their own “on-net” CDNs.

CDNs can be thought of as analogous to the distribution of bulky physical goods – it would be inefficient for a manufacturer to ship all products to customers individually from a single huge central warehouse. Instead, it will set up regional logistics centres that can be more responsive – and, if appropriate, tailor the products or packaging to the needs of specific local markets.

As an example, there might be a million requests for a particular video stream from the BBC. Without using a CDN, the BBC would have to provide sufficient server capacity and bandwidth to handle them all. The company’s immediate downstream ISPs would have to carry this traffic to the Internet backbone, the backbone itself has to carry it, and finally the requesters’ ISPs’ access networks have to deliver it to the end-points. From a media-industry viewpoint, the source network (in this case the BBC) is generally called the “content network” or “hosting network”; the destination is termed an “eyeball network”.

In a CDN scenario, all the data for the video stream has to be transferred across the Internet just once for each participating network, when it is deployed to the downstream CDN servers and stored. After this point, it is only carried over the user-facing eyeball networks, not any others via the public Internet. This also means that the CDN servers may be located strategically within the eyeball networks, in order to use its resources more efficiently. For example, the eyeball network could place the CDN server on the downstream side of its most expensive link, so as to avoid carrying the video over it multiple times. In a mobile context, CDN servers could be used to avoid pushing large volumes of data through expensive core-network nodes repeatedly.

When the video or other content is loaded into the CDN, other optimisations such as compression or transcoding into other formats can be applied if desired. There may also be various treatments relating to new forms of delivery such as HTTP streaming, where the video is broken up into “chunks” with several different sizes/resolutions. Collectively, these upfront processes are called “ingestion”.

Figure 1 – Content delivery with and without a CDN

Mobile CDN Schematic, Fig 1 Telco 2.0 Report

Source: STL Partners / Telco 2.0

Value-added CDN services

It is important to recognise that the fixed-centric CDN business has increased massively in richness and competition over time. Although some of the players have very clever architectures and IPR in the forms of their algorithms and software techniques, the flexibility of modern IP networks has tended to erode away some of the early advantages and margins. Shipping large volumes of content is now starting to become secondary to the provision of associated value-added functions and capabilities around that data. Additional services include:

  • Analytics and reporting
  • Advert insertion
  • Content ingestion and management
  • Application acceleration
  • Website security management
  • Software delivery
  • Consulting and professional services

It is no coincidence that the market leader, Akamai, now refers to itself as “provider of cloud optimisation services” in its financial statements, rather than a CDN, with its business being driven by “trends in cloud computing, Internet security, mobile connectivity, and the proliferation of online video”. In particular, it has started refocusing away from dealing with “video tonnage”, and towards application acceleration – for example, speeding up the load times of e-commerce sites, which has a measurable impact on abandonment of purchasing visits. Akamai’s total revenues in 2010 were around $1bn, less than half of which came from “media and entertainment” – the traditional “content industries”. Its H1 2011 revenues were relatively disappointing, with growth coming from non-traditional markets such as enterprise and high-tech (eg software update delivery) rather than media.

This is a critically important consideration for operators that are looking to CDNs to provide them with sizeable uplifts in revenue from upstream customers. Telcos – especially in mobile – will need to invest in various additional capabilities as well as the “headline” video traffic management aspects of the system. They will need to optimise for network latency as well as throughput, for example – which will probably not have the cost-saving impacts expected from managing “data tonnage” more effectively.

Although in theory telcos’ other assets should help – for example mapping download analytics to more generalised customer data – this is likely to involve extra complexity with the IT side of the business. There will also be additional efforts around sales and marketing that go significantly beyond most mobile operators’ normal footprint into B2B business areas. There is also a risk that an analysis of bottlenecks for application delivery / acceleration ends up simply pointing the finger of blame at the network’s inadequacies in terms of coverage. Improving delivery speed, cost or latency is only valuable to an upstream customer if there is a reasonable likelihood of the end-user actually having connectivity in the first place.

Figure 2: Value-added CDN capabilities

Mobile CDN Schematic - Functionality Chart - Telco 2.0 Report

Source: Alcatel-Lucent

Application acceleration

An increasingly important aspect of CDNs is their move beyond content/media distribution into a much wider area of “acceleration” and “cloud enablement”. As well as delivering large pieces of data efficiently (e.g. video), there is arguably more tangible value in delivering small pieces of data fast.

There are various manifestations of this, but a couple of good examples illustrate the general principles:

  • Many web transactions are abandoned because websites (or apps) seem “slow”. Few people would trust an airline’s e-commerce site, or a bank’s online interface, if they’ve had to wait impatiently for images and page elements to load, perhaps repeatedly hitting “refresh” on their browsers. Abandoned transactions can be directly linked to slow or unreliable response times – typically a function of congestion either at the server or various mid-way points in the connection. CDN-style hosting can accelerate the service measurably, leading to increased customer satisfaction and lower levels of abandonment.
  • Enterprise adoption of cloud computing is becoming exceptionally important, with both cost savings and performance enhancements promised by vendors. Sometimes, such platforms will involve hybrid clouds – a mixture of private (Internal) and public (Internet) resources and connectivity. Where corporates are reliant on public Internet connectivity, they may well want to ensure as fast and reliable service as possible, especially in terms of round-trip latency. Many IT applications are designed to be run on ultra-fast company private networks, with a lot of “hand-shaking” between the user’s PC and the server. This process is very latency-dependent, and especially as companies also mobilise their applications the additional overhead time in cellular networks may otherwise cause significant problems.

Hosting applications at CDN-type cloud acceleration providers achieves much the same effect as for video – they can bring the application “closer”, with fewer hops between the origin server and the consumer. Additionally, the CDN is well-placed to offer additional value-adds such as firewalling and protection against denial-of-service attacks.

To read the 25 note in full, including the following additional content…

  • How do CDNs fit with mobile networks?
  • Internet CDNs vs. operator CDNs
  • Why use an operator CDN?
  • Should delivery mean delivery?
  • Lessons from fixed operator CDNs
  • Mobile video: CDNs, offload & optimisation
  • CDNs, optimisation, proxies and DPI
  • The role of OVPs
  • Implementation and planning issues
  • Conclusion & recommendations

… and the following additional charts…

  • Figure 3 – Potential locations for CDN caches and nodes
  • Figure 4 – Distributed on-net CDNs can offer significant data transport savings
  • Figure 5 – The role of OVPs for different types of CDN player
  • Figure 6 – Summary of Risk / Benefits of Centralised vs. Distributed and ‘Off Net’ vs. ‘On-Net’ CDN Strategies

……Members of the Telco 2.0 Executive Briefing Subscription Service and Future Networks Stream can download the full 25 page report in PDF format here. Non-Members, please see here for how to subscribe, here to buy a single user license for £595 (+VAT), or for multi-user licenses and any other enquiries please email contact@telco2.net or call +44 (0) 207 247 5003.

Organisations and products referenced: 3GPP, Acision, Akamai, Alcatel-Lucent, Allot, Amazon Cloudfront, Apple’s Time Capsule, BBC, BrightCove, BT, Bytemobile, Cisco, Ericsson, Flash Networks, Huawei, iCloud, ISPs, iTunes, Juniper, Limelight, Netflix, Nokia Siemens Networks, Ooyala, OpenWave, Ortiva, Skype, smartphone, Stoke, tablets, TiVo, Vantrix, Velocix, Wholesale Content Connect, Yospace, YouTube.

Technologies and industry terms referenced: acceleration, advertising, APIs, backhaul, caching, CDN, cloud, distributed caches, DNS, Evolved Packet Core, eyeball network, femtocell, fixed broadband, GGSNs, HLS, HTTP streaming, ingestion, IP network, IPR, laptops, LIPA, LTE, macro-CDN, micro-CDN, middle mile, mobile, Net Neutrality, offload, optimisation, OTT, OVP, peering proxy, QoE, QoS, RNCs, SIPTO, video, video traffic management, WiFi, wireless.

Digital Entertainment 2.0: Telcos risk missing the UltraViolet online video opportunity

Summary: 2011 sees the introduction of the UltraViolet digital locker platform by DECE, a consortium led by 6 of the 7 top Hollywood studios and backed by 50 more cross-industry heavyweights. This anticipates and supports the transition of film and TV to online distribution. Here we analyse the opportunities telcos will miss out on if they fail to engage with DECE.

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Alternatively, please email contact@telco2.net or call +44 (0) 207 247 5003 for further details. There’s also more on DECE UltraViolet strategies at our AMERICAS, EMEA and APAC Executive Brainstorms and Best Practice Live! virtual events.

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In our Executive Briefing entitled, Entertainment 2.0: New Sources of Revenue for Telcos we laid out a series of trends that are changing the video market and the opportunities and challenges this poses for telcos. In this Analyst Note, we examine the ways in which DECE’s UltraViolet will impact the market and explain why telcos can’t afford to adopt a ‘wait, see and proctect approach to its introduction.

DECE UltraViolet explained

DECE UltraViolet has been created in anticipation and support of the switch-over of video content from physical to online distribution. It aims to offer consumers an ultimate level of flexibility as they can not only own, store and manage their content through a digital locker but also share it with family members and view it anywhere through a wide range of devices from TVs and PCs to tablets and mobile phones.

Figure 1 – The UltraViolet proposition: buy once, play everywhere, forever, for the whole family 

Source: Telco 2.0

Furthermore, it provides the video industry with a real alternative to piracy based on an open platform with licensable specifications, not a proprietary system such as Apple’s. The platform is set up to support multiple business models and rentals are expected to follow relatively quickly, which explains the interest of Netflix and LoveFilm (now part of Amazon) in the initiative, but at launch it will offer only online purchase.

Finally, the digital locker meta-data will provide a single view of customer buying and viewing preferences on which future planning can be based.

It is not surprising therefore that the initiative has attracted a powerful and active membership comprising in excess of 50 companies including 6 of the 7 major studios, network equipment and consumer electronics vendors, service providers and retailers. Notable exceptions to the current membership are Disney, which has its own digital locker, and WalMart, which has a deal with Apple. Both, however, are free to join at a later date as it is an open platform.

UltraViolet is due to launch in the US in the middle of 2011, with Canada and the UK following towards the end of the year before a full international rollout begins in 2012.

Virtually all the players involved in the video distribution ecosystem from content owners to retailers have their own plays in online video distribution but they are still heavily involved in DECE because they understand that it has the potential to impact on their existing and future business plans. This is not the case with telcos, with a few notable exceptions such as BT which is a member of DECE.

Telco’s adopt a “wait, see and protect my network” strategy

Most telcos seem to be cautious and sceptical about UltraViolet and digital content lockers in general. Rightly or wrongly, they perceive that UltraViolet faces major challenges and represents a headache for them rather than an opportunity.

They appear to doubt that they need digital locker content to drive use of their services and see little margin in retailing movies. Furthermore, mobile network operators in particular are concerned about the impact of video streaming on network congestion and will not hesitate to institute network policy rules that will curtail this perceived “damage”.

Without a clear opportunity for “delivery” income for telcos (for x-plan MBs, QoS, guaranteed bandwidth), or clear business models for moving to this, there is limited incentive for them to step up their interest. We have therefore observed three general telco responses to DECE. For clarity, we have described these as three discreet positions but, in reality, telcos can and do pursue combinations of these.

Telco2.0 believes that there is a potential opportunity for telcos to adopt a more pro-active approach to DECE through an early-adopter strategy as:

  • The entertainment market is large and premium entertainment key
  • Entertainment plays a key role in securing consumer attention
  • DECE UltraViolet has the ingredients for success
  • UltraViolet represents an opportunity for telcos as suppliers to the ecosystem
  • Telcos share a common interest with DECE

Each of these reasons is discussed in detail in the sections that follow.

Entertainment: A market too large and valuable to ignore

The global entertainment market is huge and as such is obviously attractive to telcos looking to counter falling ARPUs. It accounts for a considerable share of disposable income and overall entertainment spending is much higher than that on telecoms.

In the UK, which as the leading western European market is to a degree indicative of most developed markets, the average household monthly spend on entertainment is more than double that for communications. Furthermore, the decline in communications spend has been faster than that for entertainment over the last five years and this is despite the rapid decline in music sales revenues.

Figure 2 – Comparative monthly spend on telecoms and entertainment in the UK

  

Source: STL Partners Estimates, OFCOM – UK Regulator

Of course UltraViolet is not yet targeting entertainment in its entirety or even all of the home entertainment video market. Instead it is initially setting its sights on the retail market through online sell-through and that is currently very small, accounting for a mere $590 million in 2009 and the lowest contributor of all entertainment sectors to online revenues.

Figure 3 – Digital film downloads are so far the lowest revenue generators in online entertainment

 

Source: Telco 2.0

It is perhaps not surprising therefore, that telcos have not seen this as a particularly inspiring target segment. However, online sell-through is a nascent market and one we believe has exponential growth potential.

This is certainly proving the case for online rentals. According to Bain’s figures presented at the 9th Telco 2.0 Executive Brainstorm in Santa Monica, 80% of US consumers already view video online and Netflix streaming services now account for 20% of total US internet traffic, twice YouTube’s share. Furthermore, by 2014, 60% of TVs will be connected to the Internet, addressing the major remaining barrier to take up by connecting the primary viewing device to online video content.

Sizing the market

Attempts to accurately size future markets are always fraught with inaccuracy, and none more so than punts on film and TV entertainment, as the outcome will always be dependent on the quality and appeal of the content as well as many other factors.

That aside, we are convinced that the market can grow much faster than currently predicted. In fact, we see DECE UltraViolet as capable of stimulating market growth for digital sell-through similar to that of Apple (depicted below). We expect it to grow its share of the home entertainment market from 1% to 13.5%, providing a sizable target market and one that will continue to grow for some time.

Figure 4 – An Apple-style growth is possible for online sell through with UltraViolet

 

Source: PriceWaterhouseCoopers, Apple, Netflix, Telco 2.0

UltraViolet’s growth potential should at least put it on telco’s ‘strategic interest radar’, especially as it has been designed to accommodate multiple business models, including the rental models in the future.

However, we would argue that waiting for the growth to happen is missing more than one opportunity. The first is to influence in the platform’s development and, perhaps even more importantly, the second is to fit it into and around other strategies that are currently developing in silos, namely video services, customer retention and digital shopping malls.

Low margins put off telcos – but they miss its attention value

There is a set of telcos that believe that TV and film content neither offers the kind of margins they require, nor differentiation, as content owners have proven that they are unwilling to negotiate exclusive deals with telcos that can usually only reach a minority proportion of any national market.

Again, we believe this is missing a point for any telco looking to develop a significant retail play. Certainly it is true that margins are low. Tesco, the world’s third largest retailer by revenue, has revealed that it is currently making next to no margin on its physical video business and there is no reason to assume it will be significantly better online. However, the business case for entertainment products developed by what we consider a ‘master retailer’ is not based on sales but instead on footfall and the overall size of the shopping basket. Indeed, it is going all out to develop the same relationship online between entertainment product sales and fuller baskets.

Tesco is developing a digital Locker platform that works across multiple devices to deliver a joined up experience and drive impulse buying. It is a staunch supporter of DECE/Ultraviolet and plans on using it, rebranded as InvisiDisc, as a central part of its entertainment platform.

Figure 5 – Tesco puts digital locker at heart of portal proposition

 

Source: Tesco Presentation, 11th Telco 2.0 Brainstorm, EMEA

As the Tesco example proves, while margins on the products themselves can be small or non-existant, there may be significant other benefits. Tesco see that the overall basket spend is significantly higher when it involves an entertainment product, and entertainment is a both an impulse buy and an attention draw.

Furthermore, the investments that have been made in infrastructure by the DECE group means the entry costs are lower. For the few telcos that don’t have an entertainment platform, UltraViolet offers an opportunity to join the party and use that infrastructure to access what is expected to be premium content which they can offer to customers through their own retail portals. For the majority that already have their own platforms consideration should be given to adding UntraViolet into the mix for what is lost in duplicating infrastructures could be gained with premium content.

Entertainment’s primary role in securing consumer attention

Many upstream services rely on the ability to secure consumer attention and sell this on to third parties in some form. This is the basis of the advertising-based business models, including the one that dominates the Internet. Entertainment is a major tool in attracting and maintaining consumer attention as it has such a high profile in the minds and lives of consumers (as exemplified by the UK figures in the chart below).

Figure 6 – Comparative daily usage of entertainment and telecoms in the UK (2009)

Source: STL Partners Estimates, OFCOM – UK Regulator

The difference in the time spent by consumers on communications services and entertainment is stark and reflects the fact that while communication is a vital part of everyday life, entertainment holds their attention more. This is particularly important and valuable when developing portal and other upstream strategies. as exemplified by the value retailers such as Tesco that are using it as a key part of their online strategy.

DECE UltraViolet has a recipe for success

The ability of online entertainment delivery platforms to move the needle should not be in question. Netflix and LoveFilm have already made an impact with online rentals, while Apple’s success is indisputable. To do this they have introduced services that have a utility value combined with innovative and disruptive business and pricing models. Using these experiences as a base reference, we have identified the following as important success factors for online distribution platforms:

  • Offering new and premium content in a timely way and from many owners;
  • Creating a substantial back catalogue quickly;
  • Delivering to all devices that consumers wish to use and that are in the market;
  • Supporting the legal transfer of content between devices and people;
  • Creating a differentiated value proposition;
  • Introducing services with a disruptive model and pricing;
  • Creating multiple channels to market;
  • Future-proofing so that consumers don’t lose their content as devices and technologies develop;
  • Providing links between physical and online products to ease the transition.

In theory at least, UltraViolet has strengths across all these.

UltraViolet is getting the proposition right

UltraViolet’s basic proposition of ‘buy once, play everywhere, forever, for the whole family’ is a new and valuable one that overcomes many of the frustrations consumers have with online video content as it offers:

  • A single point of access to content from multiple content owners;
  • The ability to buy once and view content on up to 12 devices;
  • The ability for up to 6 family members to view the same content.

This creates a new and differentiated value proposition and supports the legal transfer of content between people and devices, as well as the capability to view on a full range of devices now and in the future.

It is an open platform based on interoperable standards and licensable technology specifications. So far DECE has laid out some the technical framework for a Common File Format which means video files are encoded and encrypted just once, as well as the technical design specifications for each of the six major categories of company – content providers, retailers, streaming service providers, device and application providers and digital distribution infrastructure providers. These ensure that all players are working in the same way and services will be interoperable. (See Can Telcos Help Save the Video Distribution Industry for more details).

All the right backers…

This is a unique and highly valuable proposition and one that has attracted a great deal of support and attention from those currently active in the value chain with the exception of telcos. All the major Hollywood studios bar Disney, which has its own digital locker solution, are behind the initiative which should ensure high quality and desirable content from the start and gives potential access to a huge back catalogue. Indeed, it is widely accepted that the studios will promote new content through UltraViolet first, providing an online alternative to the DVD/Blu-ray sales window.

This is highly significant for telcos that have so far been satisfied to stick to delivering their own content services through VoD, IPTV and mobile believing they have an advantage in providing a multi-screen service as they have the potential to control the delivery quality and have understanding of the user’s device.

However, they are still reliant on content deals with studios to secure the types of films and TV programmes that consumers want. These are usually based around the fourth pay TV window, meaning that consumers would get to new content earlier through UltraViolet than telco VoD services. For this reason we believe that telcos ignoring DECE as part of their downstream consumer entertainment services are missing an important plank in their strategic portfolio.

Furthermore, online service providers are well represented, as are device manufacturers, while traditional retailers, with the notable exception of WalMart which has an existing relationship with Apple, are also putting their weight behind it, providing multiple channels to market.

…with a common and urgent motivation

Beyond the appeal of the consumer proposition, DECE UltraViolet is also appealing because it offers a credible alternative to both piracy and Apple that have dominated the transition of music content distribution online.

As we’ve previously discussed in Digital Hollywood: How to out-Apple Apple, Apple dominates online music and is constantly adding more TV and film content. With over 150 million account holders it is the biggest music retailer in the world and has created the first and so far the dominant business model for digital online retail with its 30/70 revenue share deals. It no longer includes optical drives in any of its current product portfolio as it hopes to drive more film and TV content to its digital store, expanding its content range and reinforcing its existing business model.

To read the Analyst Note in full, including in addition to the above analysis of:

  • Apple, piracy and the motivations of the DECE membership
  • The continuing importance of the physical product
  • UltraViolet’s upstream potential
  • Recommendations for telco entertainment strategy development to include DECE/UltraViolet

…and additional figures…

  • Figure 7 – Apple’s 5-screen Strategy
  • Figure 8 – BD Live proposition provides link between physical and online
  • Figure 9 – Generic 2-sided model for entertainment
  • Figure 10 – US: Traditional video distributors and cable companies are most under threat, as online viewing continues to increase
  • Figure 11 – Potential roles for telcos in digital lockers

Members of the Telco 2.0TM Executive Briefing Subscription Service can download the full 19 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. There’s also more on DECE UltraViolet strategies at our AMERICAS, EMEA and APAC Executive Brainstorms and Best Practice Live! virtual events.

Full Article: Video Distribution 2.0 – How to fix a broken value chain

NB A full PDF copy of this briefing can be downloaded here.

This special Executive Briefing report summarises the brainstorming output from the Content Distribution 2.0 (Broadband Video) section of the 6th Telco 2.0 Executive Brainstorm, held on 6-7 May in Nice, France, with over 200 senior participants from across the Telecoms, Media and Technology sectors. See: www.telco2.net/event/may2009.

It forms part of our effort to stimulate a structured, ongoing debate within the context of our ‘Telco 2.0′ business model framework (see www.telco2research.com).

Each section of the Executive Brainstorm involved short stimulus presentations from leading figures in the industry, group brainstorming using our ‘Mindshare’ interactive technology and method, a panel discussion, and a vote on the best industry strategy for moving forward.

There are 5 other reports in this post-event series, covering the other sections of the event: Retail Services 2.0, Enterprise Services 2.0, Piloting 2.0, Technical Architecture 2.0, and APIs 2.0. In addition there will be an overall ‘Executive Summary’ report highlighting the overall messages from the event.

Each report contains:

  • Our independent summary of some of the key points from the stimulus presentations
  • An analysis of the brainstorming output, including a large selection of verbatim comments
  • The ‘next steps’ vote by the participants
  • Our conclusions of the key lessons learnt and our suggestions for industry next steps.

 

The brainstorm method generated many questions in real-time. Some were covered at the event itself and others we have responded to in each report. In addition we have asked the presenters and other experts to respond to some more specific points.

 

Background to this report

The demand for internet video is exploding. This is putting significant stress on the current fixed and mobile distribution business model. Infrastructure investments and operating costs required to meet demand are growing faster than revenues. The strategic choices facing operators are to charge consumers more when they expect to pay less, to risk upsetting content providers and users by throttling bandwidth, or to unlock new revenues to support investment and cover operating costs by creating new valuable digital distribution services for the video content industry.

Brainstorm Topics

  • A summary of the new Telco 2.0 Online Video Market Study: Options and Opportunities for Distributors in a time of massive disruption.
  • What are the most valuable new digital distribution services that telcos could create?
  • What is the business model for these services – who are the potential buyers and what are prior opportunity areas?
  • What progress has been made in new business models for video distribution – including FTTH deployment, content-delivery networking, and P2P?
  • Preliminary results of the UK cross-carrier trial of sender-pays data
  • How the TM Forum’s IPSphere programme can support video distribution

 

Stimulus Presenters and Panellists

  • Richard D. Titus, Controller, Future Media, BBC
  • Trudy Norris-Grey, MD Transformation and Strategy, BT Wholesale
  • Scott Shoaf, Director, Strategy and Planning, Juniper Networks
  • Ibrahim Gedeon, CTO, Telus
  • Andrew Bud, Chairman, Mobile Entertainment Forum
  • Alan Patrick, Associate, Telco 2.0 Initiative

 

Facilitator

  • Simon Torrance, CEO, Telco 2.0 Initiative

 

Analysts

  • Chris Barraclough, Managing Director, Telco 2.0 Initiative
  • Dean Bubley, Senior Associate, Telco 2.0 Initiative
  • Alex Harrowell, Analyst, Telco 2.0 Initiative

 

Stimulus Presentation Summaries

Content Distribution 2.0

Scott Shoaf, Director, Strategy and Planning, Juniper Networks opened the session with a comparison of the telecoms industry’s response to massive volumes of video and that of the US cable operators. He pointed out that the cable companies’ raison d’etre was to deliver vast amounts of video; therefore their experience should be worth something.

The first question, however, was to define the problem. Was the problem the customer, in which case the answer would be to meter, throttle, and cap bandwidth usage? If we decided this was the solution, though, the industry would be in the position of selling broadband connections and then trying to discourage its customers from using them!

Or was the problem not one of cost, but one of revenue? Networks cost money; the cloud is not actually a cloud, but is made up of cables, trenches, data centres and machines. Surely there wouldn’t be a problem if revenues rose with higher usage? In that case, we ought to be looking at usage-based pricing, but also at alternative business models – like advertising and the two-sided business model.

Or is it an engineering problem? It’s not theoretically impossible to put in bigger pipes until all the HD video from everyone can reach everyone else without contention – but in practice there is always some degree of oversubscription. What if we focused on specific sources of content? Define a standard of user experience, train the users to that, and work backwards?

If it is an engineering problem, the first step is to reduce the problem set. The long tail obviously isn’t the problem; it’s too long, as has been pointed out, and doesn’t account for very much traffic. It’s the ‘big head’ or ‘short tail’ stuff that is the heart of the problem: we need to deal with this short tail of big traffic generators. We need a CDN or something similar to deliver for this.

On cable, the customers are paying for premium content – essentially movies and TV – and the content providers are paying for distribution. We need to escape from the strict distinctions between Internet, IPTV, and broadcast. After all, despite the alarming figures for people leaving cable, many of them are leaving existing cable connections to take a higher grade of service. Consider Comcast’s Fancast – focused on users, not lines, with an integrated social-recommendation system, it integrates traditional cable with subscription video. Remember that broadcast is a really great way to deliver!

Advertising – at the moment, content owners are getting 90% of the ad money.

Getting away from this requires us to standardise the technology and the operational and commercial practices involved. The cable industry is facing this with the SCTE130 and Advanced Advertising 1.0 standards, which provide for fine-grained ad insertion and reporting. We need to blur the definition of TV advertising – the market is much bigger if you include Internet and TV ads together. Further, 20,000 subscribers to IPTV aren’t interesting to anyone – we need to attack this across the industry and learn how to treat the customer as an asset.

 

The Future of Online Video, 6 months on

Alan Patrick, Associate, Telco 2.0 updated the conference on how things had changed since he introduced the ”Pirate World” concept from our Online Video Distribution strategy report at the last Telco 2.0 event. The Pirate World scenario, he said, had set in much faster and more intensely than we had expected, and was working in synergy with the economic crisis.

Richard Titus, Controller, Future Media, BBC: ”I have no problem with carriers making money, in fact, I pay over the odds for a 50Mbits link, but the real difference is between a model that creates opportunities for the public and one which constrains them.”

Ad revenues were falling; video traffic still soaring; rights-holders’ reaction had been even more aggressive than we had expected, but there was little evidence that it was doing any good. Entire categories of content were in crisis.

On the other hand, the first stirrings of the eventual “New Players Emerge” scenario were also observable; note the success of Apple in creating a complete, integrated content distribution and application development ecosystem around its mobile devices.

The importance of CPE is only increasing; especially with the proliferation of devices capable of media playback (or recording) and interacting with Internet resources. There’s a need for a secure gateway to help manage all the gadgets and deliver content efficiently. Similarly, CDNs are only becoming more central – there is no shortage of bandwidth, but only various bottlenecks. It’s possible that this layer of the industry may become a copyright policing point.

We think new forms of CPE and CDNs are happening now; efforts to police copyright in the network are in the near future; VAS platforms are the next wave after that, and then customer data will become a major line of business.

Most of all, time is flying by, and the overleveraged, or undercapitalised, are being eaten first.

 

The Content Delivery Framework

Ibrahim Gedeon, CTO, Telus introduced some lessons from Telus’s experience deploying both on-demand bandwidth and developer APIs. Telcos aren’t good at content, he said; instead, we need to be the smartest pipe and make use of our trusted relationship with customers, built up over the last 150 years.

We’re working in an environment where cash is scarce and expensive, and pricing is a zero- or even negative-sum game; impossible to raise prices, and hard to cut without furthering the price war. So what should we be doing? A few years ago the buzzword was SDP; now it’s CDN. We’d better learn what those actually mean!

Trudy Norris-Gray, Managing Director, BT Wholesale: ”There is no capacity problem in the core, but there is to the consumer – and three bad experiences means the end of an application or service for that individual user.”

Anyway, we’re both a mobile and fixed operator and ISP, and we’ve got an IPTV network. We’ve learned the hard way that technology isn’t our place in the value chain. When we got the first IPTV system from Microsoft, it used 2,500 servers and far, far too much power. So we’re moving to a CDF (Content Delivery Framework) – which looks a lot like a SDP. Have the vendors just changed the labels on these charts?

So why do we want this? So we can charge for bandwidth, of course; if it was free, we wouldn’t care! But we’re making around $10bn in revenues and spending 20% of that in CAPEX. We need a business case for this continued investment.

We need the CDF to help us to dynamically manage the delivery and charging process for content. There was lots of goodness in IMS, the buzzword of five years ago, and in SDPs. But in the end it’s the APIs that matter. And we like standards because we’re not very big. So, we want to use TM Forum’s IPSphere to extend the CDF and SDF; after all, in roaming we apply different rate cards dynamically and settle transactions, so why not here too, for video or data? I’d happily pay five bucks for good 3G video interconnection.

And we need to do this for developer platforms too, which is why we’re supporting the OneAPI reference architecture. To sum up, let’s not forget subscriber identity, online charging – we’ve got to make money – the need for policy management because not all users are equal, and QoS for a differentiated user experience.

 

Sender-Pays Data in Practice

Andrew Bud, Chairman, MEF gave an update on the trial of sender-pays data he announced at the last event. This is no longer theoretical, he said; it’s functioning, just with a restricted feature set. Retail-only Internet has just about worked so far; because people pay for the services through their subscription and they’re free. Video breaks this, he said; it will be impossible to be comprehensive, meaningful, and sustainable.

You can’t, he said, put a meaningful customer warning that covers all the possible prices you might encounter due to carrier policy with your content; and everyone is scared of huge bills after the WAP experience. Further, look at the history of post offices, telegraphy and telephony – it’s been sender-pays since the 1850s. Similarly, Amazon.com is sender-pays, as is Akamai.

Hence we need sending-party pays data – that way, we can have truly free ads: not one where the poor end users ends up paying the delivery cost!

Our trial: we have relationships with carriers making up 85% of the UK market. We have contracts, priced per-MB of data, with them. And we have four customers – Jamster, who brought you the Crazy Frog, Shorts, THMBNLS, who produce mobisodes promoting public health, and Creative North – mobile games as a gift from the government. Of course, without sender-pays this is impossible.

We’ve discovered that the carriers have no idea how much data costs; wholesale pricing has some very interesting consequences. Notably the prices are being set too high. Real costs and real prices mean that quality of experience is a real issue; it’s a very complicated system to get right. The positive sign, and ringing endorsement for the trial, is that some carriers are including sender-pays revenue in their budgets now!

 

Participant Feedback

Introduction

The business of video is a prime battleground for Telco 2.0 strategies. It represents the heaviest data flows, the cornerstone of triple/quad-play bundling, powerful entrenched interests from broadcasters and content owners, and a plethora of regulators and industry bodies. For many people, it lies at the heart of home-based service provision and entertainment, as well as encroaching on the mobile space. The growth of P2P and other illegal or semi-legal download mechanisms puts pressure on network capacity – and invites controversial measures around protecting content rights and Net Neutrality.

In theory, operators ought to be able to monetise video traffic, even if they don’t own or aggregate content themselves. There should be options for advertising, prioritised traffic or blended services – but these are all highly dependent on not just capable infrastructure, but realistic business models.  Operators also need to find a way to counter the ‘Network Neutrality’ lobbyists who are confounding the real issue (access to the internet for all service providers on a ‘best efforts’ basis) with spurious arguments that operators should not be able to offer premium services, such as QoS and identity, to customers that want to pay for them.  Telco 2.0 would argue that the right to offer (and the right to buy) a better service is a cornerstone of capitalism and something that is available in every other industry.  Telecoms should be no different.  Of course, it remains up to the operators to develop services that customers are willing to pay more for…

A common theme in the discussion was “tempus fugit” – time flies. The pace of evolution has been staggering, especially in Internet video distribution – IPTV, YouTube, iPlayer, Hulu, Qik, P2P, mashups and so forth. Telcos do not have the luxury of time for extended pilot projects or grandiose collaborations that take years to come to fruition.

With this timing issue in mind, the feedback from the audience was collected in three categories, although here the output has been aggregated thematically, as follows:

  • STOP – What should we stop doing?
  • START – What should we start doing?
  • DO MORE – What things should we do more of?

 

Feedback: STOP the current business model

There was broad agreement that the current model is unsustainable, especially given the demands that “heavy” content like video traffic places on the network…..

·         [Stop] giving customers bandwidth for free [#5]

·         Stop complex pricing models for end-user [#9]

·         Stop investing so much in sustaining old order [#18]

·         Stop charging mobile subscribers on a per megabyte basis. [#37]

·         Current peering agreement/ip neutrality is not sustainable. [#41]

·         [Stop] assuming things are free. [#48]

·         [Stop] lowering prices for unlimited data. [#61]

·         Have to develop more models for upstream charging for data rather than just flat rate to subscribers. [#11]

·         Build rational pricing segmentation for data to monetize both sides of the value chain with focus on premium value items. [#32]

 

Feedback: Transparency and pricing

… with many people suggesting that Telcos first need to educate users and service providers about the “true cost” of transporting data…. although whether they actually know the answer themselves is another question, as it is much an issue of accounting practices as network architecture. 

·         Make the service providers aware of the cost they generate to carriers. [#31]

·         Make pricing transparency for consumers a must. [#10]

·         Mobile operators start being honest with themselves about the true cost of data before they invest in LTE. [#7]

·         When resources are limited, then rationing is necessary. Net Neutrality will not work. Today people pay for water in regions where it is limited in supply. Its use is abused when there are no limits. [#17]

·         Start being transparent in data charges, it will all stay or fall with cost transparency. [#12]

·         You can help people understand usage charges, with meters or regular updates, requires education for a behavioural change, easier for fixed than mobile. [#14]

·         Service providers need to have a more honest dialogue with subscribers and give them confidence to use services [#57]

·         As an industry we must invest more in educating the market about network economics, end-users as well as service providers. [#58]

·         Start charging subscribers flat rate data fee rather than per megabyte. [#46]

Feedback: Sender-pays data

Andrew Bud’s concept of “sender pays data”, in which a content provider bundles in the notional cost of data transport into the download price for the consumer, generated both enthusiasm and concerns (although very little outright disagreement). Telco 2.0 agrees with the fundamental ‘elegance’ of the notion, but thinks that there are significant practical, regulatory and technical issues that need to be resolved. In particular, the delivery of “monolithic” chunks of content like movies may be limited, especially in mobile networks where data traffic is dominated by PCs with mobile broadband, usually conducting a wide variety of two-way applications like social networking.

Positive

·         Sender pays is the only sane model. [#6]

·         Do sender pays on both ‘sides’ consumer as well…gives ‘control’ and clarity to user. [#54]

·         Sender Pays is one specific example of a much larger category of 3rd-party pays data, which also includes venue owners (e.g. hotels or restaurants), advertisers/sponsors (‘thanks for flying Virgin, we’re giving you 10MB free as a thank-you’), software developers, government (e.g. ‘benefit’ data for the unemployed etc) etc. The opportunity for Telcos may be much larger from upstream players outside the content industry [#73]

·         We already do sender pays on our mobile portal – on behalf of all partner content providers including Napster mobile. [#77]

·         Change the current peering model into an end to end sender pay model where all carriers in the chain receive the appropriate allocation of the sender pay revenue in order to guarantee the QoS for the end user. [#63]

·         Focus on the money flows e.g. confirm the sender pays model. [#19]

Qualified Support/Implementation concerns

·         Business models on sender pays, but including the fact, that roaming is needed, data costs will be quite different across mobile carriers and the aggregators costs and agreements are based on the current carriers. These things need to be solved first [#26]

·         Sender pays is good but needs the option of ‘only deliver via WiFi or femtocell when the user gets home’ at 1/100th the cost of ‘deliver immediately via 3G macro network’. [#15]

·         Who pays for AJAX browsers proactively downloading stuff in the background without explicit user request? [#64]

·         Be realistic about sender pays data. It will not take off it is not standard across the market, and the data prices currently break the content business model – you have to compare to the next alternative. A video on iTunes costs 1.89 GBP including data… Operators should either take a long term view or forget about it. [#20]

·         Sender-pays data can be used to do anything the eco-system needs, including quality/HD. It doesn’t yet today only because the carriers don’t know how to provide those. [#44]

·         Sender pays works for big monolithic chunks like songs or videos. But doesn’t work for mash up or communications content/data like Facebook (my Facebook page has 30 components from different providers – are you going to bill all of them separately?) [#53]

·         mBlox: more or less like a free-call number. doesn’t guarantee quality/HD [#8]

Sceptical

·         Stop sender pays because user is inundated with spam. [#23]

o    Re 23: At least the sender is charged for the delivery. I do not want to pay for your SPAM! [#30]

 

Feedback: QoS

A fair amount of the discussion revolved around the thorny issues of capacity, congestion, prioritisation and QoS, although some participants felt this distracted a little from the “bigger picture” of integrated business models.

·         Part of bandwidth is dedicated to high quality contents (paid for). Rest is shared/best effort. [#27]

·         Start annotating the network, by installing the equivalent of gas meters at all points across the network, in order that they truly understand the nature of traffic passing over the network – to implement QoS. [#56]

o    Re: 56 – that’s fine in the fixed world or mobile core, but it doesn’t work in the radio network. Managing QoS in mobile is difficult when you have annoying things like concrete walls and metallised reflective windows in the way [#75]

·         [Stop] being telecom focused and move more towards solutions. It is more than bandwidth. [#25]

·         Stop pretending that mobile QoS is important, as coverage is still the gating factor for user experience. There’s no point offering 99.9% reliability when you only have 70% coverage, especially indoors [#29]

·         Start preparing for a world of fewer, but converged fixed-mobile networks that are shared between operators. In this world there will need to be dynamic model of allocating and charging for network capacity. [#67]

·         We need applications that are more aware of network capacity, congestion, cost and quality – and which alter their behaviour to optimise for the conditions at any point in time e.g. with different codec’s or frame rate or image size. The intelligence to do this is in the device, not the network. [#68]

o    Re: 68, is it really in the CPE? If the buffering of the content is close at the terminal, perhaps, otherwise there is no jitter guarantee. [#78]

§  Re 78 – depends on the situation, and download vs. streaming etc. Forget the word ‘terminal’, it’s 1980s speak, if you have a sufficiently smart endpoint you can manage this – hence PCs being fine for buffering YouTube or i-Player etc, and some of the video players auto-sensing network conditions [#81]

·         QoE – for residential cannot fully support devices which are not managed for streamed content. [#71]

·         Presumably CDNs and caching have a bit of a problem with customised content, e.g. with inserted/overlaid personalised adverts in a video stream? [#76]
 

Feedback: platforms, APIs, and infrastructure

However, the network and device architecture is only part of the issue. It is clear that video distribution fits centrally within the wider platform problems of APIs and OSS/BSS architecture, which span the overall Telco 2.0 reach of a given operator.

·         Too much focus on investment in the network, where is the innovation in enterprise software innovation to support the network? [#70]

·         For operator to open up access to the business assets in a consistent manner to innovative. Intermediaries who can harmonise APIs across a national or global marketplace. [#13]

·         The BSS back office; billing, etc will not support robust interactive media for the most part. [#22]

·         Let content providers come directly to Telcos to avoid a middle layer (aggregators) to take the profit. This requires collaboration and standardization among Telco’s for the technical interfaces and payment models. [#28]

·         More analysis on length of time and cost of managing billing vendor for support of 2-sided business model. Prohibitively expensive in back office to take risks. Why? [#65]

·         It doesn’t matter how strong the network is if you can’t monetize it on the back end OSS/BSS. [#40]
 

Feedback: Business models for video

Irrespective of the technical issues, or specific point commercial innovations like sender pays, there are also assorted problems in managing ecosystem dynamics, or more generalised business models for online video or IPTV. A significant part of the session’s feedback explored the concerns and possible solutions – with the “elephant in the room” of Net Neutrality lurking on the sidelines.

·         Open up to lower cost lower risk trials to see what does and doesn’t work. [#35]

·         Real multi quality services in order to monetize high quality services. [#36]

·         Transform net neutrality issues into a fair policy approach… meaning that you cannot have equal treatment when some parties abuse the openness. [#39]

o    Re 39: I want QoE for content I want to see. Part of this is from speed of access. Net Neutrality comes from the Best Effort and let is fight out in the scarce network. I.e. I do not get the QoE for all the other rubbish in the network. [#69]

·         Why not bundling VAS with content transportation to ease migration from a free world to a pay for value world? [#43]

·         Do more collaborative models which incorporate the entire value chain. [#55]

·         Service providers start partnering to resell long tail content from platform providers with big catalogues. [#59]

·         [Start to] combine down- and up-stream models in content. Especially starts get paid to deliver long tail content. [#60]

·         Start thinking longer term instead of short term profit, to create a new ecosystem that is bigger and healthier. [#62]

·         Exploit better the business models between content providers and carriers. [#16]

·         Adapt price to quality of service. [#21]

·         Put more attention on quality of end user experience. [#24]

·         I am prepared to pay a higher retail DSL subscription if I get a higher quality of experience. – not just monthly download limits. [#38]

·         maximize revenues based on typical Telco capabilities (billing, delivery, assurance on million of customers) [#50]

·         Need a deeper understanding of consumer demand which can then be aggregated by the operator (not content aggregators), providing feedback to content producers/owners and then syndicated as premium content to end-users. It comes down to operators understanding that the real value lays in their user data not their pipes! [#52]

·         On our fixed network, DSL resellers pay for the access and for the bandwidth used – this corresponds to the sender pays model; due to rising bandwidth demand the charge for the resellers continuously increases. so we have to adapt bandwidth tariffs every year in order not to suffocate our DSL resellers. Among them are also companies offering TV streaming. [#82]

·         More settlement free peering with content/app suppliers – make the origination point blazingly fast and close to zero cost. rather focus on charging for content distribution towards the edge of the access network (smart caching, torrent seeds, multicast nodes etc) [#74]
 

Feedback: Others

In addition to these central themes, the session’s participants also offered a variety of other comments concerning regulatory issues, industry collaboration, consumer issues and other non-video services like SMS.

·         Start addressing customer data privacy issues now, before it’s too late and there is a backlash from subscribers and the media. [#42]

·         Consolidating forums and industry bodies so we end up with one practical solution. [#45]

·         Identifying what an operator has potential to be of use for to content SP other than a pipe. [#49]

·         Getting regulators to stimulate competition by enforcing structural separation – unbundle at layer 1, bring in agile players with low operating cost. Let customers vote with their money – focus on deliverable the fastest basic IP pipe at a reasonable price. If the basic price point is reasonable customers will be glad to pay for extra services – either sender or receiver based. [#72]

·         IPTV <> Internet TV. In IPTV the Telco chooses my content, Internet TV I choose. [#79]

·         Put attention on creating industry collaboration models. [#47]

·         Stop milking the SMS cash cow and stop worrying about cannibalising it, otherwise today’s rip-off mobile data services will never take off. [#33]

·         SMS combined with the web is going to play a big role in the future, maybe bigger that the role it played in the past. Twitter is just the first of a wave of SMS based social media and comms applications for people. [#51]

Participants ‘Next Steps’ Vote

Participants were then asked: Which of the following do we need to understand better in the next 6 months?

  • Is there really a capacity problem, and what is the nature of it?
  • How to tackle the net neutrality debate and develop an acceptable QOS solution for video?
  • Is there a long term future for IPTV?
  • How to take on the iPhone regarding mobile video?
  • More aggressive piloting / roll-out of sender party pays data?

Lessons learnt & next steps

The vote itself reflects the nature of the discussions and debates at the event:  there are lots of issues and things that the industry is not yet clear on that need to be ironed out.  The world is changing fast and how we overcome issues and exploit opportunities is still hazy.  And all the time, there is a concern that the speed of change could overtake existing players (including Telcos and ISPs)!

However, there does now seem to be greater clarity on several issues with participants becoming increasingly keen to see the industry tackle the business model issue of flat-rate pricing to consumers and little revenue being attached to the distribution of content (particularly bandwidth hungry video).  Overall, most seem to agree that:

1.     End users like simple pricing models (hence success of flat rate) but that some ‘heavy users’ will require a variable rate pricing scheme to cover the demands they make;

2.     Bandwidth is not free and costs to Telcos and ISPs will continue to rise as video traffic grows;

3.     Asking those sending digital goods to pay for the distribution cost is sensible…;

4.     …but plenty of work needs to be done on the practicalities of the sender-pays model before it can be widely adopted across fixed and mobile;

5.     Operators need to develop a suite of value-added products and services for those sending digital goods over their networks so they can charge incremental revenues that will enable continued network investment;

6.     Those pushing the ‘network neutrality’ issue are (deliberately or otherwise) causing confusion over such differential pricing which creates PR and regulatory risks for operators that need to be addressed.

There are clearly details to be ironed out – and probably experiments in pricing and charging to be done. Andrew Bud’s (and many others, it must be added, have suggested similar) sending-party pays model may work, or it may not – but this is an area where experiments need to be tried. The idea of “educating” upstream users is euphemistic – they are well aware of the benefits they currently are accruing, which is why the Net Neutrality debate is being deliberately muddied. Distributors need to be working on disentangling bits that are able to be free from those that pay to ride, not letting anyone get a free ride.

As can be seen in the responses, there is also a growing realisation that the Telco has to understand and deal with the issues of the overall value chain, end-to-end, not just the section under its direct control, if it wishes to add value over and above being a bit pipe. This is essentially moving towards a solution of the “Quality of Service” issue – they need to decide how much of the solution is capacity increase, how much is traffic management, and how much is customer expectation management.

Alan Patrick, Telco 2.0: ”98.7% of users don’t have an iPhone, but 98% of mobile developers code for it because it has an integrated end-to-end experience, rather than a content model based on starving in a garage.”

The “Tempus Fugit” point is well made too – the Telco 2.0 participants are moving towards an answer, but it is not clear that the same urgency is being seen among wider Telco management.

Two areas were skimmed through a little too quickly in the feedback:

Managing a way through the ‘Pirate World’ environment

The economic crisis has helped in that it has reduced the amount of venture capital and other risk equity going into funding plays that need not make revenue, never mind profit. In our view this means that the game will resolve into a battle of deep pockets to fund the early businesses. Incumbents typically suffer from higher cost bases and higher hurdle rates for new ventures. New players typically have less revenue, but lower cost structures. For existing Telcos this means using existing assets as effectively as possible and we suggest a more consolidated approach from operators and associated forums and industry bodies so the industry ends up with one practical solution.  This is particularly important when initially tackling the ‘Network Neutrality’ issue and securing customer and regulatory support for differential pricing policies.

Adopting a policing role, particularly in the short-term during Pirate World, may be valuable for operators.  Telco 2.0 believes the real value is in managing the supply of content from companies (rather than end users) and ensuring that content is legal (paid for!). 

What sort of video solution should Telcos develop?

The temptation for operators to push iPTV is huge – it offers, in theory, steady revenues and control of the set-top box. Unfortunately, all the projected growth is expected to be in Web TV, delivered to PCs or TVs (or both).  Providing a suite of value-added distribution services is perhaps a more lucrative strategy for operators:

  • Operators must better understand the needs of upstream segments and individual customers (media owners, aggregators, broadcasters, retailers, games providers, social networks, etc.) and develop propositions for value-added services in response to these.  Managing end user data is likely to be important here.  As one participant put it:

    o    We need a deeper understanding of consumer demand which can then be aggregated by the operator (not content aggregators), providing feedback to content producers/owners and then syndicated as premium content to end-users. It comes down to operators understanding that the real value lays in their user data not their pipes! [#52]

  • Customer privacy will clearly be an issue if operators develop solutions for upstream customers that involve the management of data flows between both sides of the platform.  End users want to know what upstream customers are providing, how they can pay, whether the provider is trusted, etc. and the provider needs to be able to identify and authenticate the customer, as well as understand what content they want and how they want to pay for it.  Opt-in is one solution but is complex and time-consuming to build scale so operators need to explore ways of protecting data while using it to add value to transactions over the network.