Strategy 2.0: Google’s Strategic Identity Crisis

Summary: Google’s shares have made little headway recently despite its dominance in search and advertising, and it faces increasing regulatory threats in this area. It either needs to find new sources of value growth or start paying out dividends, like Microsoft, Apple (or indeed, a telco). Overall, this is resulting in something of a strategic identity crisis. A review of Google’s strategy and implications for Telcos. (March 2012, Executive Briefing Service, Dealing with Disruption Stream).

Google's Advertising Revenues Cascade

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Below is an extract from this 24 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 the Telco 2.0 Dealing with Disruption Stream here. Non-members can subscribe here, buy a Single User license for this report online here for £595 (+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 Google at the Silicon Valley (27-28 March) and London (12-13 June) New Digital Economics Brainstorms.

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Executive Summary

Google appears to be suffering from a strategic identity crisis. It is the giant of search advertising but it also now owns a handset maker, fibre projects, an increasingly fragmented mobile operating system, a social network of questionable success, and a driverless car programme (among other things). It has a great reputation for innovation and creativity, but risks losing direction and value by trying to focus on too many strategies and initiatives.

We believe that Google needs to stop trying to copy what Apple and Facebook are doing, de-prioritise its ‘Hail Mary’ hunt for a strategy (e.g. driverless cars), and continue to build new solutions that serve better the customers who are already willing to pay – namely, advertisers.

It is our view that the companies who have created most value in the market have done so by solving a customer problem really well. Apple’s recent success derives from creating a simpler and more beautiful way (platform + products) for people to manage their digital lives. People pay because it’s appealing and it works.

Google initially solved how people could find relevant information online and then, critically, how to use this to help advertisers get more customers. They do this so well that Google’s $37bn revenues continue to grow at double digit pace, and there’s plenty of headroom in the market for now. While the TV strategy may not yet be paying off, it would seem sensible to keep working at it to try to keep extending the reach of Google’s platform. 

While Android keeps Google in the mobile game to a degree, and has certainly helped to constrain certain rivals, we think Google should cast a hard eye over its other competing and distracting activities: Motorola, Payments, Google +, Driverless Cars etc. Its management team should look at the size of the opportunity, the strength of the competition, and their ability to execute in each. 

Pruning the projects might also lose Google an adversary or two, and it might also afford some reward to shareholders too. After all, even Apple has recently decided to pay back some cash to investors.

This may be very difficult for Google’s current leadership. Larry Page seems to have the restless instincts of the stereotypical Valley venture capitalist, hunting the latest ideas, and constantly trying to create the next big beautiful thing. The trouble is that this is Google in 2012, not 1995, and it looks to us at least that a degree of ‘sticking to the knitting’ within Google’s huge, profitable and growing search advertising business may be a better bet than the highly speculative (and expensive) ‘Hail Mary’ strategy route. 

This may sound surprising coming from us, the inveterate fans of innovation at Telco 2.0, so we’d like to point out some important differences between the situations that Google and the telcos are in:

  • Google’s core markets are growing, not flat or shrinking, and are at a different life-stage to the telecoms market;
  • Google is global, rather than being confined to any given geography. There are many opportunities still out there.
  • We are not saying that Google should stop innovating, but we are saying it should focus its innovative energy more clearly on activities that grow the core business.

Introduction

In January this year, Google achieved a first – it missed the consensus forecast for its quarterly earnings. There is of course no magic in the consensus, which is an average of highly conventionalised guesses from a bunch of City analysts, but it is as good a moment as ever to review Google’s strategic position. If you bought Google stock at the beginning, you may not need to read this, as you’re probably very rich (the return since then is of the order of 400%). The entirety of this return, however, is accounted for by the 2004-2007 bull run. On a five-year basis, Google stock is ahead 30%, which sounds pretty impressive (a 6% annual return), but again, all the growth is accounted for by the last surge upwards over the summer of 2007. The peak was achieved on the 2nd of November, 2007. 

As this chart shows, Google stock is still down about 9% from the peak, and perhaps more importantly, its path tracks Microsoft very closely indeed. Plus Microsoft investors get a dividend, whereas Google investors do not.

Figure 1: Google, Microsoft 2.0?

Google, Microsoft 2.0?
Source: Google Finance

Larry Page is reported to have said that “Google is no longer a “search company.” He says its model is now 

“invent wild things that will help humanity, get them adopted by users, profit, and then use the corporate structure to keep inventing new things.”

No longer a search company? Take a look at the revenues. Out of Google’s $37.9bn in revenues in 2011, $36bn came from advertising, aka the flip side of Google Search. Despite a whole string of mammoth product launches since 2007, Google’s business is essentially what it was in 2007 – a massive search-based advertising machine.

Google’s Challenges

Our last Google coverage – Android: An Anti-Apple Virus ? and the Dealing with the Disruptors Strategy Report   suggested that the search giant was suffering from a lack of direction, although some of this was accounted for by a deliberate policy of experimenting and shutting down failed initiatives.

Since then, Google has launched Google +, closed Google Buzz, and closed Google Wave while releasing it into a second life as an open-source project. It has been involved in major litigation over patents and in regulatory inquiries. It has seen an enormous boom in Android shipments but not necessarily much revenue. It is about to become a major hardware manufacturer by acquiring Motorola. And it has embarked on extensive changes to the core search product and to company-wide UI design.

In this note, we will explore Google’s activities since our last note, summarise key threats to the business and strategies to counter them, and consider if a bearish view of the company is appropriate.

We’ve found it convenient to organise Google’s business  into several themed groups as follows:

1: Questionable Victories

Pyrrhic victory is defined as a victory so costly it is indistinguishable from defeat. Although there is nothing so bad at Google, it seems to have a knack of creating products that are hugely successful without necessarily generating cash. Android is exhibit A. 

The obvious point here is surging, soaring growth – forecasts for Android shipments have repeatedly been made, beaten on the upside, adjusted upwards, and then beaten again. Android has hugely expanded the market for smartphones overall, caused seismic change in the vendor industry, and triggered an intellectual property war. It has found its way into an awe-inspiring variety of devices and device classes.

But questions are still hanging over how much actual money is involved. During the Q4 results call, a figure for “mobile” revenues of $2.5bn was quoted. This turns out to consist of advertising served to browsers that present a mobile device user-agent string. However, Google lawyer Susan Creighton is on record as saying  that 66% of Google mobile web traffic originates from Apple iOS devices. It is hard to see how this can be accounted for as Android revenue.

Further, the much-trailed “fragmentation” began in 2011 with a vengeance. “Forkdroids”, devices using an operating system based on Android but extensively adapted (“forked” from the main development line), appeared in China and elsewhere. Amazon’s Kindle Fire tablet is an example closer to home.

And the intellectual property fights with Oracle, Apple, and others are a constant source of disruption and a potentially sizable leakage of revenue. In so far as Google’s motivation in acquiring Motorola Mobility was to get hold of its patent portfolio, this has already involved very large sums of money. Another counter-strategy is the partnership with Intel and Lenovo to produce x86-based Android devices, which cannot be cheap either and will probably mean even more fragmentation.

This is not the only example, though – think of Google Books, an extremely expensive product which caused a great deal of litigation, eventually got its way (although not all the issues are resolved), and is now an excellent free tool for searching in old books but no kind of profit centre. Further, Google’s patented automatic scanning has the unfortunate feature of pulling in marginalia, etc. from the original text that its rivals (such as Amazon Kindle) don’t.
Further, Google has recently been trying to monetise one of its classic products, the Google Maps API that essentially started the Web 2.0 phenomenon, with the result that several heavy users (notably Apple and Foursquare)  have migrated to the free OpenStreetMap project and its OpenLayers API.

2: Telco-isation

Like a telco, Google is dependent on one key source of revenue that cross-subsidises the rest of the company – search-based advertising. 

Figure 2: Google’s advertising revenues cascade into all other divisions

Google's Advertising Revenues Cascade

[NB TAC = Traffic Acquisition Cost, CoNR = Cost of Net Revenues]

Having proven to be a category killer for search and advertising across the  whole of the Internet, the twins (search and ads) are hugely critical for Google and also for millions of web sites, content creators, and applications developers. As a result, just like a telco, they are increasingly subject to regulation and political risk. 

Google search rankings have always been subject to an arms race between the black art of search-engine optimisation and Google engineers’ efforts to ensure the integrity of their results, but the whole issue has taken a more serious twist with the arrival of a Federal Trade Commission inquiry into Google’s business practices. The potential problems were dramatised by the so-called “white lady from Google”  incident at Google Kenya, where Google employees scraped a rival directory website’s customers and cold-called them, misrepresenting their competitors’ services, and further by the $500 million online pharmacy settlement. Similarly, the case of the Spanish camp site that wants to be disassociated from horrific photographs of a disaster demonstrates both that there is a demand for regulation and that sooner or later, a regulator or legislator will be tempted to supply it.

The decision to stream Google search quality meetings online should be seen in this light, as an effort to cover this political flank.

As well as the FTC, there is also substantial regulatory risk in the EU. The European Commission, in giving permission for the Motorola acquisition, also stated that it would consider further transactions involving Google and Motorola’s intellectual property on a case-by-case basis. To put it another way, after the Motorola deal, the Commission has set up a Google Alert for M&A activity involving Google.

3: Look & Feel Problems

Google is in the process of a far-reaching refresh of its user interfaces, graphic design, and core search product. The new look affects Search, GMail, and Google + so far, but is presumably going to roll out across the entire company. At the same time, they have begun to integrate Google + content into the search results.

This is, unsurprisingly, controversial and has attracted much criticism, so far only from the early adopter crowd. There is a need for real data to evaluate it. However, there are some reasons to think that Search is looking in the wrong place.

Since the major release codenamed Caffeine in 2008, Google Search engineers have been optimising the system for speed and for first-hit relevance, while also indexing rapidly-changing content faster by redesigning the process of “spidering” web sites to work in parallel. Since then, Google Instant has further concentrated on speed to the first result. In the Q4 results, it was suggested that mobile users are less valuable to Google than desktop ones. One reason for this may be that “obvious” search – Wikipedia in the first two hits – is well served by mobile apps. Some users find that Google’s “deep web” search has suffered.

Under “Google and your world”, recommendations drawn from Google + are being injected into search results. This is especially controversial for a mixture of privacy and user-experience reasons. Danny Sullivan’s SearchEngineLand, for example, argues that it harms relevance without adding enough private results to be of value. Further, doubt has been cast on Google’s numbers regarding the new policy of integrating Google accounts into G+ and G+ content into search.

Another, cogent criticism is that it introduces an element of personality that will render regulatory issues more troublesome. When Google’s results were visibly the output of an algorithm, it was easier for Google to claim that they were the work of impartial machines. If they are given agency and associated with individuals, it may be harder to deny that there is an element of editorial judgment and hence the possibility of bias involved.

Social search has been repeatedly mooted since the mid-2000s as the next-big-thing, but it seems hard to implement. Yahoo!, Facebook, and several others have tried and failed.

Figure 3: Google + on Google Trends: fading into the noise?

 Google + on Google Trends: Fading Into the Noise?
Source: Google Trends

It is possible that Google may have a structural weakness in design as opposed to engineering (which is as excellent as ever). This may explain why a succession of design-focused initiatives have failed – Wave and Buzz have been shut down, Google TV hasn’t gained traction (there are less than one million active devices), and feedback on the developer APIs is poor.

4: Palpable Project Proliferation

Google’s tendency to launch new products is as intimidating as ever. However, there is a strong argument that its tireless creativity lacks focus, and the hit-rate is worrying low. Does Google really need two cut-down OSs for ultra-mobile devices? It has both Android, and ChromeOS, and if the first was intended for mobile phones and the second for netbooks, you can now buy a netbook-like (but rather more powerful) Asus PC that runs Android. Further, Google supports a third operating system for its own internal purposes – the highly customised version of Linux that powers the Google Platform – and could be said to support a fourth, as it pays the Mozilla Foundation substantial amounts of money under the terms of their distribution agreement and their Boot to Gecko project is essentially a mobile OS. IBM also supported four operating systems at its historic peak in the 1980s.  

Also, does Google really need to operate an FTTH network, or own a smartphone vendor? The Larry Page quote we opened with tends to suggest that Google’s historical tendency to do experiments is at work, but both Google’s revenue raisers (Ads and YouTube, which from an economic point of view is part of the advertising business) date from the first three years as a public company. The only real hit Google has had for some time is Android, and as we have seen, it’s not clear that it makes serious money.

Google Wallet, for example, was launched with a blaze of publicity, but failed to attract support from either the financial or the telecoms industry, rather like its predecessor Google Checkout. It also failed to gain user adoption, but it has this in common with all NFC-based payments initiatives. Recently, a major security bug was discovered, and key staff have been leaving steadily, including the head of consumer payments. Another shutdown is probably on the cards. 

Meanwhile, a whole range of minor applications have been shuttered

Another heavily hyped project which does not seem to be gaining traction is the Chromebook, the hardware-as-a-service IT offering aimed at enterprises. This has been criticised on the basis that its $28/seat/month pricing is actually rather high. Over a typical 3 year depreciation cycle for IT equipment, it’s on a par with Apple laptops, and has the restriction that all the applications must work in a Web browser on netbook-class hardware. Google management has been promoting small contract wins in US school districts . Meanwhile, it is frequently observed that Google’s own PC fleet consists mostly of Apple hardware. If Google won’t use them itself, why should any other enterprise IT shop do so? The Google Search meeting linked above contains 2 Lenovo ThinkPads and 13 Apple MacBooks of various models and zero Chromebooks, while none other than Eric Schmidt used a Mac for his MWC 2012 keynote. Traditionally, Google insisted on “dogfooding” its products by using them internally.

The Google Fibre project in Kansas City, for its part, has been struggling with regulatory problems related to its access to city-owned civil infrastructure. Kansas City’s utility poles have reserved areas for different services, for example telecoms and electrical power. Google was given the concession to string the fibre in the more spacious electrical section – however, this requires high voltage electricians rather than telecoms installers to do the job and costs substantially more. Google has been trying to change the terms, and use the telecoms section, but (unsurprisingly) local cable and Bell operators are objecting. As with the muni-WLAN projects of the mid-2000s, the abortive attempt to market the Nexus One without the carriers, and Google Voice, Google has had to learn the hard way that telecoms is difficult.

And while all this has been going on, you might wonder where Google Enterprise 2.0 or Google Ads 2.0 are.

5. Google Play – a Collection of Challenges?

Google recently announced its “new ecosystem”, Google Play. This consists of what was historically known as the Android Market, plus Google Books, Google Music, and the web-based elements of Google Wallet (aka Google Checkout). All of these products are more or less challenged. Although the Android Market has been a success in distributing apps to the growing fleets of Android devices, it continues to contain an unusually high percentage of free apps, developer payouts tend to be lower than on its rivals, and it has had repeated problems with malware. Google Books has been an expensive hobby, involving substantial engineering work and litigation, and seems unlikely to be a profit centre. Google Music – as opposed to YouTube – is also no great success, and it is worth asking why both projects continue.

However, it will be the existing manager of Google Music who takes charge, with Android Market management moving out. It is worth noting that in fact there were two heads of the Android Market – Eric Chu for developer relations and David Conway for product management. This is not ideal in itself.

Further, an effort is being made to force app developers to use the ex-Google Checkout system for in-app billing. This obviously reflects an increased concern for monetisation, but it also suggests a degree of “arguing with the customers”.

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

  • On the Other Hand…
  • Strengths of the Core Business
  • “Apple vs. Google”
  • Content acquisition
  • Summary Key Product Review
  • Search & Advertising
  • YouTube and Google TV
  • Communications Products
  • Android
  • Enterprise
  • Developer Products
  • Summary: Google Dashboard
  • Conclusion
  • Recommendations for Operators
  • The Telco 2.0™ Initiative
  • Index

…and the following figures…

  • Figure 1: Google, Microsoft 2.0?
  • Figure 2: Google’s advertising revenues cascade into all other divisions
  • Figure 3: Google + on Google Trends: fading into the noise?
  • Figure 4: Google’s Diverse Advertiser Base
  • Figure 5: Google’s Content Acquisition. 2008-2009, the missing data point
  • Figure 6: Google Product Dashboard

Members of the Telco 2.0 Executive Briefing Subscription Service and the Telco 2.0 Dealing with Disruption Stream can download the full 24 page report in PDF format hereNon-Members, please subscribe here, buy a Single User license for this report online here for £595 (+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: AdSense, AdWords, Amazon, Android, Apple, Asus, AT&T, Australia, BBVA, Bell Labs, Boot to Gecko, Caffeine, CES, China, Chromebook, ChromeOS, ContentID, David Conway, Eric Chu, Eric Schmidt, European Commission, Facebook, Federal Trade Commission, GMail, Google, Google +, Google Books, Google Buzz, Google Checkout, Google Maps, Google Music, Google Play, Google TV, Google Voice, Google Wave, GSM, IBM, Intel, Kenya, Keyhole Software, Kindle Fire, Larry Page, Lenovo, Linux, MacBooks, Microsoft, Motorola, Mozilla Foundation, Netflix, Nexus, Office 365, OneNet, OpenLayers API, OpenStreetMap, Oracle, Susan Creighton, ThinkPads, VMWare, Vodafone, Western Electric, Wikipedia, Yahoo!, Your World, YouTube, Zynga

Technologies and industry terms referenced: advertisers, API, content acquisition costs, driverless car, Fibre, Forkdroids, M&A, mobile apps, muni-WLAN, NFC, Search, smart TV, spectrum, UI, VoIP, Wallet

Full Article: Apps & Appstores: Litmus Vs Apple Appstore

Summary: As O2 UK’s Litmus developer proramme matures into a global corporate project for Telefonia, we analyse the business model challenges it faces in becoming a vibrant community for developers and a value driver ofr the company.

Back in March, we said that O2’s Litmus developer site was “better than the Apple App Store”. Quite a claim, as it turned out. We based it on the deep integration of Litmus with the range of social and business enablers it provided in addition to the O2 network APIs. As well as a generous revenue share and quick payment, Litmus offered access to O2’s billing system to help cash collection, crowdsourced testing from Mob4Hire, Web-hosting services, and the tantalising prospect of access to an internal Telefonica venture capital group.

How is Litmus doing now?

In terms of product quality, Litmus’s recently added some highly interesting APIs. For example: the ability to query the current status and capabilities of a device, whether the user has sufficient credit to make a payment, if they have an inclusive data plan, whether they are in a WLAN hotspot, and whether or not they are currently roaming.

The importance of this kind of contextual data – call it Level 1 context – for delivering an excellent user experience with mobile applications and content is hard to overestimate, and it avoids most of the political issues that dog some other forms of context, like user behaviour and social graph data (call them Level 2 context). Overall then, the potential quality of application looks encouraging.

But how about quantity? At the moment, there are 36 pages of apps on sale at Litmus, plus three more for testing; at 10 apps to the page, that’s 390 apps. Many of them are versions of the same application for different devices or localisations, so the count of active projects is rather less than that. It’s also true that a lot of people submit their applications to every app store going, sensibly enough, so there is quite a bit of duplication.

So far, this is a respectable try, but it’s nowhere near Apple’s app count. However, as we’ll see later on, stacking up apps in an app store isn’t the only strategy available.

A further indicator on the quantity of development activity is that the forums at o2litmus.co.uk look worryingly quiet. Another traditional measure of activity at an open-source project is the traffic on the mailing list; there doesn’t seem to be that much going on. This is something Litmus has in common with the other mobile dev platforms – the Symbian and Forum Nokia ones are patchy at best. Perhaps this point from The Information Architecture of Social Experience Design‘s list of anti-patterns for Web sites applies:

“a Potemkin Village is an overly elaborated set of empty community discussion areas or other collaborative spaces, created in anticipation of a thriving population rather than grown organically in response to their needs”.

So, why aren’t we seeing much more development activity at Litmus? It’s a big question, especially as Litmus is meant to be under active development. What are the warning signs of a community that might end up looking like this?

litshot.png

The critical challenge is getting to sufficient scale, which is vitally important to the success of platform business models like Litmus. O2 UK has 18 million subscribers; if 10% are conscious of apps, that is an addressable user base of c1.8 million.

Further, it’s probably true that iPhone owners tend to be power users, being a self-selected group of early adopters. (According to Ray da Silva of Vodafone, iPhone users exhibit 7 times greater usage than the closest rival group, BlackBerry users.) And O2 has the exclusive right to distribute iPhones in the UK, so the bulk of O2’s power users are probably concentrated in its population of iPhones. Those 1.5 million O2 iPhone users have the App Store to go to, which is integrated with the hardware and software and prominently placed on the device. If our estimates are close, that leaves about a fifth of that number, or 300 thousand or so who might use Litmus.

So, Telefonica / O2 faces a strategic dilemma. How should it balance investment in creating and serving the huge (but ultimately Apple’s) iPhone community and the nascent and home-grown Litmus eco-system?

And, as we’ve often pointed out, telcos consistently overestimate the degree to which their subscribers constitute a real community or want to have any affinity with their operator. Apple, at least, can claim to be the proud owner of a cult, an image it works extremely hard to maintain. Probably no other hardware vendor in mobile can claim that, and the OS vendors aren’t much better off although Symbian tries hard.

This is important, because active developer communities tend to be driven by a smallish core group of members. Recruiting new members of this group is critical for long term survival. On the other hand, the problems, ideas, feedback, and money coming into such a community usually originate in another community core group – the user elite. The line between the power users and the developer community is necessarily fuzzy, but it’s crucial that you have enough people in the user community who are passionately engaged with the product to support the developer core group.

Fragmentation is another challenge resulting from insufficient scale; it’s a serious problem if you have to keep refactoring your code to work on dozens of different devices and OS platforms. Equally, being fragmented between operators is no better; in terms of scale, developing for Symbian is going to beat developing for O2 UK.

Put together, these issues add up to a serious overall challenge to the viability of Litmus in its current form as anything other than a test of limited scale and ultimately limited value.

Litmus Responds…

So, clearly it was going to be interesting when James Parton and Jose Valles Nunez, from Litmus and Telefonica’s Open Innovation group respectively, dropped into the Telco 2.0 offices.

The first interesting point that arises is that the Litmus group within Telefonica is very keen not to be considered an appstore. You might think this is a brave decision; everyone in the industry is obsessed with them since Apple’s big hit, and a week doesn’t go by without someone launching one – whether an operator, a vendor, a third-party store like Handango or Symbian’s app warehouse, or a gaggle of hackers doing an unofficial one for iPhone apps that Apple don’t like.

The obvious corollary to that is “well, what is it then?” Parton argues that the real role of Litmus isn’t as a first-line product, but rather as a way of crowdsourcing decisions about which applications to promote to the mass market through O2 Active – a form of “co-creation” with the community of power users and developers. Rather than relying on the judgment of product managers in Slough, the idea is to serve up new ideas to a self-selected group of neophiles and to see what sticks. Litmus is hoping that this will both provide useful feedback and also reduce churn by binding their user elite into the company more closely.

So far, they report that the extra features like hosting and testing haven’t been much used, and were perhaps a case of “over-engineering” the product – most of the developers involved are primarily interested in Litmus as a route to market, whether as an app store or as a sort of X-Factor for applications that might make it to the official O2 deck. However, they are keenly concerned about recruiting more developers and about the perception of a lack of critical scale.

Scope for Business Model Innovation

So perhaps Telefonica, and the industry as a whole, should be looking for other organising principles for developer communities – whether to build scale in their own right or just to get to ‘critical mass’ in the communities? Rather than being operator- or vendor- specific, perhaps they should be application-specific or problem-specific?

The main forces that create these communities are either technological opportunity – ‘we can do something new!’ – or else an urgent problem – ‘how can we fix this?’ Examples of opportunity-based communities include the vigorous groups that grew up around major programming languages, or the Linux kernel. These exist because the possibilities of the technology attracted people with all kinds of interesting problems and, quite frequently, just raw curiosity. This is also the case for the iPhone, which opened up all the possibilities of mobile development, whilst preserving the relevance of existing Apple developers’ skills and offering a simple path to market.

Shared problem communities start with a very specific need; I need to get data out of a Web hosting firm that is about to shut down, or visualise water management information for northern Senegal without needing to spend $10,000 a seat, or find an alternative to Microsoft Internet Explorer. The first of these led to Archiveteam, the second to Agepabase, and the third to Mozilla. Exasperation with the telecoms vendors’ products for enterprise voice was what inspired the creation of Asterisk.

Salesforce’s Force.com is a successful example of a problem-specific developer platform; you’re using Salesforce and you have a problem that involves CRM, so off you go to Force.com. You’re trying to solve your problem using voice? Perhaps you might want to try Ribbit, which is an opportunity-based developer platform.

And this makes sense; after all, solving the problem is where the economic value emerges, and it’s the application of broad general purpose commodity technologies to very specific business problems that we want all those developers to bring to the show to extend the value.

Litmus: Neither fish nor fowl…?

But there’s a disconnect here relating back to Litmus; communities that form around the possibilities of a particular technology tend to be generalist, global, and attached to the technology rather to any particular operator or even vendor. Communities that form around a problem are more particular. Neither of these fits Litmus, although you could perhaps say that it’s about the possibilities of telco APIs in general.

It’s all rather reminiscent of J. P. Rangaswami’s notion that the more general-purpose the technology, the more appropriate it is for open source because it can scale better; a technology-motivated community needs breadth and scale.

So, while there is often value in keeping a test tightly managed as a centre of innovation and learning as O2 UK appear to have done, perhaps Telefonica / O2 will eventually be better off looking at enterprise problems and being less centred on the O2 brand name, or else broadening the possible addressable market by rolling Litmus out to the whole of Telefonica, if possible, including the Latin American markets as well. Brazil has one of the world’s most vigorous hacker communities – they invented Commwarrior, the first mobile worm, after all. Surely there’s innovation to be had there? And it’s absolutely vital to the success of the whole project that it finds a sufficiently large user elite of its own to support the developer core group.

At the moment, though, at least going by the content of a recent call the Mobile Entertainment Forum held, O2 seems to be mostly interested in using the Litmus APIs for content, rather than applications. For example, the key use case for their roaming status API is that content providers can avoid serving content licenced in one territory into another. This is fair enough as content applications may be part of the solution for Litmus, but we’re slightly concerned that they may be stepping into the vortex of content obsession, like so many other people in the industry.

Our view is that, as much as we like many elements of Litmus, in its current form and scale Litmus may well show some useful test results but probably won’t develop into a successful platform business. Building a much bigger user base should therefore be Telefonica / O2’s top priority for Litmus – even if the developer community is the key target audience. No amount of good new apps can deliver this in its current form and broader success will take good implementation of the kind of radical business model innovation we’ve outlined here.

One option would be to look in the other direction. The existing version of Litmus is targeted on consumers; what about enterprises, or small businesses/power users? This would require a different approach to signing up both developers and customers – in fact, it would be rather more app-store or app-market-like than the current “X-Factor for developers” model, although perhaps there could be a version in which the customers’ problems competed for solutions from the developers. In fact, according to Jose Valles Nunez, Telefonica is indeed considering a “business class Litmus” in the foreseeable future.

A further question is one of credibility. Attracting developers to use a platform requires their confidence that it really will be promoted and that it will stick around – no-one wants to put effort into something that might disappear in a few months’ time. Several hosted Web application environments have already done this. At BT, spending money on Ribbit was intended to act as what biologists call a costly signal – a signal that is credible precisely because it requires a real investment. Perhaps the first few “picks” for the mainline O2 Active lineup, or the first Telefonica Ventures investment, out of Litmus will light the blue touchpaper?

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

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

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

Nokia Services: project proliferator

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

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

Aims

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

Historical lessons

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

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

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

The operator relationship – root of the problem

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

What would a Telco 2.0 take on this look like?

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

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

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

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

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

Conclusions: turn to small business?

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

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

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

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

Next Steps for Nokia and telcos

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

  • Really successful social hardware facilitates existing social networks

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

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

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

Full Article: Voice telephony, death or glory?

At our November Telco 2.0 brainstorm, the second session concentrated on the business opportunity in the core voice and messaging business. Here we review the key messages, and explore some of the future business model scenarios.

Telcos have consistently abandoned their core product, and are ignoring new business models, whilst pursuing fools’ gold in media content. The timing of this discussion is rather apposite. Despite our belief in Vodafone’s long-term strength, they have just announced that their core voice business has stagnated:

The performance of the company’s European operations suffered from the tough economic climate with margins decreasing from 38.2% to 36.2% on revenues that were down 1.1% on an organic basis. The company blamed ongoing price pressure on core voice and messaging services.

As we said before, if you don’t improve your core product at all since launching digital networks, and assume two-sided Internet business models won’t have any effect on you, you get all you deserve. Please see our Voice & Messaging 2.0 report?]

Re-thinking dialling, voicemail and freephone for 2-sided markets

The lead-in to the session was by Chief Analyst of STL Partners, Martin Geddes. His thesis is a simple one: telcos have consistently abandoned their core product, and are ignoring new business models, whilst pursuing fools’ gold in media content. The old model — charging users for software services that have no marginal cost or barriers to entry — is dying. That doesn’t stop initiatives like Rich Communications Suite (RCS) from trying.


Martin Geddes, Chief Analyst, STL Partners

To illustrate future business models he gave three examples of how money could be made in future. Each of these focused on different aspects of the consumer to call centre interaction. As you may remember, customer care is one of the key B2B2C value-added services in a Telco 2.0 platform. [For full details, see our report The 2-Sided Telecoms Market Opportunity.]

The first of these was from a Canadian start-up we’ve profiled before, called Fonolo. It exquisitely demonstrates that the value is in integration of telephony and the Web, as well as moving from the call itself to the set-up of the interaction. We asked their CEO, Shai Berger, to tell us more in this video clip:


Shai Berger, CEO, Fonolo

Note that their current business model is a mixture of advertising and end-user premium fees. This is being positioned as a traditional consumer VAS, with a sprinkling of two-sided markets via advertising. The question, however, is who benefits more: the consumer, or the call centre? We think that it’s the latter, and the consumer is the price-sensitive side. The call centre wants the maximum rate of self-care, high customer satisfaction, and the web site offers the ability to do all kinds of enhanced multi-modal interactions that a 0-9*# keypad can’t do well. Even basic things like showing where you are in the queue, and a picture of the person you’re talking to, would make for a far better user experience.

Therefore in our two-sided market world, we’d get telcos to distribute and promote this tool (on their fixed, mobile and on-device portals). They would then sell these enhanced capabilities to call centres.

The second example Martin gave was around outbound calling from call centres. Today the typical experience is something like the following. The call centre operator has to wait for the phone to ring, finds it goes to voicemail (up to 80% of calls to business users go to voicemail), and then leaves a message asking the user to call back to complete the business process. By the time the user gets the message, the call centre may be closed. Or the user simply never responds. So you’re burning labour on leaving these messages, in a process that is both ineffective and inefficient. According to Oracle, customer service representatives making outbound calls typically spend 20-30 minutes per hour talking to customers. The rest is wasted.

A better experience would be simply to deposit a VoiceXML document directly into the user’s voicemail system. “The product you have requested is now in stock. Press one to have it shipped immediately, two to reschedule your delivery, three to cancel.��? The business process completes right their inside your voicemail system. And the telco collects and order of magnitude more revenue than they would get from a few cents of termination fee.

The third and final example was more futuristic, looking at how Paypal-like services could be brought from the Internet to telephony, taking out the errors, cost and fraud on today’s information and transactional exchanges to call centres.

These were just a few examples on how to re-imaging telephony to service the needs of call centres. There are many more such examples, and many more business processes to integrate. Telephony could easily become a growth engine again for telecoms, if only telcos would wake up to the new two-sided business model.

BT: From phone company to business communications platform

The next speaker was JP Rangaswami from BT. Excluding the (important) access line revenue, BT only makes a small fraction of its revenue from telephony. Nonetheless, it has embarked on a multi-billion pound programme to create the ultimate voice and communications platform with its 21CN network initiative. Under JP’s guidance, BT has also recently bought Ribbit, a platform that extends telephony integration to Web developers. Clearly BT understands there’s life in being a “phone company��? yet (as long as you’ve a two-sided business model, naturally).


JP Rangaswami, Managing Director, BT Design

What JP proposed is that voice is a very much a feature, not the product. Using a Dali image to emphasise the strangeness and difference of the world we find ourselves in, he told his story through the history of two other media: the printed word, and photography.

In both of these cases, we’ve seen a mass democratisation and de-centralisation of the technology. Printing presses were centralised, and printing became an industry unto itself. It was a tool of control. For a while, there was a central printing shop in every company to do reprographics. Now, we see a “Print this page��? icon on your screen, and the printing press under your desk can smudge some ink on paper fibre for you in a moment, at a cost low enough you don’t even think about it. “Print��?, therefore, has simply been embedded into every other application. Likewise, imaging has gone from an industry into a feature. You don’t need to go twice to the photo shop, once to drop off your films, and again to pick up your prints. “Upload image��? is a standard feature of many web applications. It’s two clicks to share one from your photostream.

The message is that the model is undergoing fundamental change, and voice is following the same trajectory. Calls will increasingly be launched from within Web applications. Whoever can capture that context, enrich those interactions, and (particularly) ensure business processes complete will make the money. Carrying the data from A to B and counting minutes is not the model.

BT therefore clearly understands the nature of future business models, even if they are keeping their cards close to their chest in terms of execution. If their CEO can explain this to investors in a way they can grasp, and they can demonstrate some real revenues, then BT is seriously onto something.

Voice as a spice, not the meal

Our third presenter, Thomas Howe, is an independent consultant and blogger, and brings a hands-on perspective to using telco voice and messaging APIs to build a business.


Thomas Howe. (Apparently Barack wears a Thomas Howe tie.)

Thomas spoke about the new business model he sees for telcos. He sees the value is increasingly in knowing things about the customer, not doing things like moving bits around. Doing has become cheap and easy due to continued exponential improvements in technology. It’s hard-to-replicate data that provides business advantage, and telcos have that by the bucket load. In particular, telcos can combine the data with the network to offer new capabilities. It’s not particularly useful to know someone’s latitude and longitude. It is very useful to know if someone is at home, for example to take a delivery. That means understanding “someone��?, “at��? and “home��? — i.e. who are you, where are you, and what is “home��?? (This reflects our analysis on the seven questions any telco platform must answer.)

Going to market

In the attendee feedback, there were three clear messages:

  • People like the ideas, and see the value in these new capabilities that telcos can offer businesses who want to take friction out of interacting with their customers.
  • Everyone wants to know pricing, volume and revenue models.
  • There are concerns over privacy, brand positioning, and ability of telcos to execute co-operatively.

For readers interested in getting answers to these questions, and how to execute these ideas, we’ll be diving into these issues in our research in the run-up to the next Telco 2.0 brainstorm in the spring.

To summarise, existing voice platform initiatives like Parlay/OSA are network-centric, and what is needed is a business process centric approach. There are a few global commerce platform emerging, and none of them are from telcos. Yet there are already great telco successes in two-sided markets, such as SMS short codes and premium SMS. Telcos have to continue to build on these to service a wider range of business processes and upstream customers.

Meanwhile, astute attendees will have picked up the protestations of earlier keynote speaker Werner Vogels, CTO of Amazon. “And finally — our telecoms platform. Don’t worry, this is no threat to you.��? But he would say that, wouldn’t he?

Full Article: Vodafone, too much data and not enough vo and fone?

As there’s a change in leadership occurring at Vodafone, it’s a good time to reflect on the direction of the large convoy of opcos and investments being led by the good ship Newbury. Arun Sarin has stepped out of his asbestos business suit, albeit scorched by the flames of investors and board members, safe in the knowledge that his mission to vanquish more timid enemies is won. Although they don’t say it aloud, The Economist notes that the core of this success was clinging on to markets where vertical integration is turning a profit (USA, emerging markets), and exiting those where is isn’t doing so well (Japan), whilst cost-cutting elsewhere the inevitable detritus of a decade of hyper-growth.

However, as the more acerbic tongues at The Register point out, rather choppy waters lie ahead. The business is rapidly maturing, cost cutting reaches its limits, and new revenue streams (entertainment content, advertising, data) are either slow to ramp up or come with significant supplier costs that dilute margins.

According to their corporate history website, the name Vodafone is derived from ‘voice and data phone’. True or not, the conundrum of whether ‘voice is just data’ persists to this day. So as Vittorio Colao becomes fleet admiral, our burning question is: what to do about the stagnating core product? Along with its peers, Vodafone has conspicuously failed to significantly enhance its voice telephony offer, beyond offering better coverage. We don’t think that’s going to be a long-term winning position as access becomes hyper-abundant, and people’s time does not. Rather than ask how data services can replace lost voice revenue, ask how data can be used to rejuvenate that voice business. And as the biggest player in the international scene, Vodafone is very well placed to do something about it.

Telephony is built on false assumptions

The chart below (from our recently published Consumer Voice & Messaging 2.0 Report) compares the cost of telephony and labour. We show the per minute cost in the USA of using a telephone (fixed or mobile), along with hiring someone (high school or college graduate). What it tells us is that the ‘scarcity’ used to be in the telephone network, and now it is in our time and attention.

Only a decade ago, it was worth paying a graduate for an hour if it would have saved you from making an hour’s worth of mobile phone call.

Today, we barely factor in the cost of calling into our lives. Yet we are buried in voice messages, missed calls, emails and texts. Delivering ever more data to the user is not the same as creating ever more value. The value comes from brokering the right relationships, helping interactions occur at the right time and medium, eliminating unwanted intrusions, automating flows of information, and making users productive.

“Ask not how data can replace lost voice revenue, but how data can rejuvenate the personal communications experience.��? Satisfying people’s need to collaborate, chatter, and communicate should be central to every operator strategy. Here’s why…

Not a new problem

Mobile telephony is built off the same product template as fixed telephony, with the same assumptions and problems baked in from the 19th century. From the very beginning, problems have been evident. When Bell called Watson in that first call, the result wasn’t “oh, ****, he’s gone out for an afternoon in the pub��?. No, Bell had pre-arranged for Watson’s to be there ready at the other end. It was a bit of a fraud, to hide the absence of presence, availability or scheduling features.

We see these problems still today. You call me, but I just fail to answer in time, so you go to my voicemail. I see a missed call, and call you, not knowing your talking to my voicemail. As you’re already in a call, speaking to my voicemail, I get your voicemail. Why on earth doesn’t the phone network just connect us together?

This particular instance is an example of a failed rendezvous, and we examined the context and unfilled user needs in more depth in this previous post. Many of today’s short phone calls are manual transfers of presence, location and availability data that should ideally be eliminated. Why can’t I request a call from you, rather than only interrupt you? Why can’t I tell you’re calling me back about the message I left a week ago? Sadly, operators are too well rewarded for terminating calls of zero or negative value.

Voice: one product, many business models

As with all telcos, there are three inter-linked business models that Vodafone needs to support. These require very different features.

The first is its retail offer. This takes hardware from the network equipment providers, plus software from various innovators, and packages it up as the core bundle offer or as an add-on value-added service. This supply chain is slow, costly and inflexible today, and their Betavine effort is only a small step towards what’s really needed.

There’s still plenty of mileage though in selling conveniently packaged communications. We’re not yet at the point where “if it’s software, it must be given away for free��?. The users see the benefit to themselves, and are willing to pay for it. A good example at the moment is SpinVox, who offer a voicemail to text transcription service. Note how their own marketing copy says: “SpinVox has saved me at least two hours a week [our emphasis] of listening to often irrelevant voicemail.��? (And contrast this with the primary purpose of most mobile media content products, which is to fill dead time.) We’ll dive into the challenges and opportunities for retail products a little more below.

Next up are the wholesale products of the operator. We feel there is a massive hole here in most operators’ strategic approach, with a few honourable exceptions. Voice is already becoming just one facet of many applications and products, and operators aren’t making it easy to embed it in. Wholesale products need to be broader in scope (e.g. to include voicemail, push to talk, and 3rd party network integration), as well as deeper in integration (e.g. simple 3rd party trouble ticketing, provisioning of offers sold through non-operator channels).

Finally, there are the two-sided markets, which we’ve written about here. The telephone remains a wonderful way of consumers and enterprises interacting — think of it as ‘v-commerce’ — but there is a huge amount of friction and inefficiency involved. Whilst so much effort is being expended on entering mobile advertising, hardly any is being lavished on building new revenues on top of freephone numbers, call centres and interactive messaging.

Voice as a platform, not a product

We promised to come back to that retail proposition. Ten years ago, mobile phone penetration was in the low single digits. Today, more than half of humanity has one. A decade hence, the experience will also be transformed again. For example, your address book or contact list will be dynamic: ordered by who you ought to be talking to, giving real-time presence and availability data, and probably infused with messages from companies with whom you have ongoing commercial relationships. Mobile will be the ‘to go’ portion of the PC experience, not some separate world.

However, there is unlikely to be a one-size-fits-all evolution of the public telephone service. Instead, we move from an era of mass production to one of mass customisation. There are too many innovative applications, too many niches and customer needs, for any one company to address them all. Instead, operators need to take a leaf out of the Telco 2.0 book and focus on two things: providing distribution for these services (and integration with the core offer), as well as enabling a bunch of high-margin value-added services that the upstream partners pay for, not the downstream end users. If someone is a Facebook fanatic, help that partner get their experience into the user’s hands.

This requires synchronising a lot of moving parts of the puzzle: handsets, network, operational support, etc. The need for putting together a complete experience, rather than just piece parts, is becoming received wisdom, with the Apple iPod, iTunes PC client and music store trio being the canonical example. It’s hard to do, and it’s still early days. Apple have barely moved the needle with the iPhone — the only concession to the voice service is visual voicemail. (And they’ve made a mess of the SMS client.) It does nothing to address the underlying issues of why people are sending those messages, and how to either eliminate them, or make them more effective. Nokia’s Ovi is resolutely focused on the content side of the business, not communications.

As the biggest player, Vodafone has more leverage over handset suppliers and software platform vendors. Pick up the phone to Qualcomm. Whatever magic they’ve done for 3, ask for a bit to be sprinkled over the Vodafone handset range. We’d also expect an operator like Vodafone to produce handset and service offerings much more tightly coupled with the online services that users increasingly route their conversations through. On the corporate side, IBM, Microsoft and Avaya are obvious targets for closer integration.

One good sign is Vodafone’s acquisition of Danish social media start-up Zyb. This is completely the right direction, and we’d like to see the gas pedal pressed hard to roll this kind of “address book 2.0��? capability burned into as many handsets as possible.

This is also the time to make the most out of close relations with Verizon Wireless. Platforms need scale, new voice service features need scale, so why not become the de facto leader? Don’t wait for the standards bodies, make it a fait accompli.

Immediate action required: group communication

Whilst these long-term changes unfold, there a re short-term problems with the voice and messaging products, most notably in the pricing of services that compete against Internet offerings. Vodafone UK have cleverly priced ‘informational’ chatter differently from ‘social’ chatter with the ‘stop the clock’ promotion. After 3 minutes, you don’t rack up any more charges. This aligns value with pricing, and we like it.

The problem is that the online tools encourage users to communicate in groups, and to form conversations and communities. Voice and SMS pricing don’t align well with this. Why should a three-way call cost more? The users don’t see it that way. Why does sending an SMS to five people cost five times a much? Why does replying to a message cost the same an initiating the conversation? Why can’t I send Twitter status updates (with no termination charges) for free, to encourage more texts and calls?

There are many ways in which the traditional pricing assumptions of telephony and messaging don’t fit into our current communications landscape. Because Vodafone has shied away from being the price leader, it has more slack to play with here. You can afford to lose some money on termination fees to other operators if those charges have become illogical in the users’ minds. Or take a leaf from GupShup and use adverts to make group communications have no extra charges.

Be proud to be the phone company

Sometimes it feels like being a phone company is like an embarrassing medical condition nobody wants to admit to having. Voice communication will remain central to the human condition for as long as we’re around. Satisfying the need for people to collaborate, chatter, and communicate should be central to every operator strategy. Sadly, it too often ends up being delegated to the network equipment providers or handsets vendors, who tend to lack the skills or incentives to build complete services. If we had a shiny new R&D group, we’d be making the personal, social, human communications experience the top priority.

There are some carriers already making tentative moves towards a better telephony future. We like products like the H3G SkypePhone, but feel that there ought to be a lot more such examples. Embarq is making some useful moves with its eGo landline phone service. Verizon has made a good effort with iobi, but is utterly closed to outside innovation. Telekom Austria has some interesting softphone experiments on the go. Qwest has Q.Home on the launchpad. BT remains a bit of a dark horse here too.

Our own research found nearly 70 start-ups working on new voice and messaging services. (These are all documented in the report.) We’re sure there are more. None are really integrated with the telco platform. The opportunity to exceed the users’ expectations is there, and the business model — retail, wholesale and 2-sided platform — will bring in the cash to anyone who cares to execute on it.