Voice & Messaging 2.0: New API Use Cases

Summary: ‘Communications-Enabled Business Processes’ (CEBP) are a key application for voice and messaging APIs. This Briefing Report illustrates three new real world examples of integrating communications into end-user business applications using web services to access telco APIs. (February 2010, Foundation 2.0, Executive Briefing Service)


‘Communications-Enabled Business Processes’ (CEBP) is an optimisation technique used by business process designers that involves integrating real time communications such as voice messaging, online chat and SMS with existing software frameworks. It is a developer / end-customer application of telco APIs in Telco 2.0 business models.

The Maturity Path of Voice APIs

In general, enterprise CEBP projects do not create new business processes or areas of business. Instead, they extend existing legacy applications making them more efficient and faster, and very often with higher overall quality.  As a powerful addition, CEBP projects provide business metrics allowing managers to optimise processes in real time. From a technology perspective, CEBP is a blend between two normally disparate worlds: the real-time, arcane and difficult technology of the telephone and the thorny, legacy filled and customised enterprise software.

Three New ‘Use Cases’

This report describes three distinct CEBP implementations and opportunities:

  • an in-store feedback service
  • a decision support application
  • a resource tracking opportunity

The in-store feedback service uses phones and text messaging to collect comments and complaints from retail customers using any cell phone.  The decision support application provides mobile and remote decision makers the information they require to make critical business decisions without having to be at their desk. The resource tracking opportunity shows how phones can be used to monitor and manage the use of enterprise resources quickly, easily and at scale.

Telco 2.0 ‘Take-Out’

  • The field of ‘Communications-Enabled Business Processes’ (CEBP) represents an important near-term market opportunity for telcos building business models that develop core voice and messaging APIs.
  • Building a successful Developer Programme is critical to the successful application of CEBP because of the wide variety of enterprise customers and processes to which it is applied.
  • The three detailed ‘Use Cases’ described in this report illustrate some of the many opportunities for Telecoms Operators and others to create new value in the enterprise market by building the appropriate ecosystem of APIs, Developer Programme (technical and commercial support), and Developer Community.


The term Communications Enabled Business Process (CEBP) is relatively new, but the need is as old as business itself. CEBP is an optimisation technique used by business process designers that involves integrating real-time communications such as voice messaging, online chat and SMS with existing software frameworks.

In general, enterprise CEBP projects do not create new business processes or areas of business. Instead, they extend existing legacy applications making them more efficient and faster, and very often with higher overall quality. In addition, CEBP techniques allow managers to measure business processes in real time, providing visibility into key business metrics that would be otherwise unavailable. From a technology perspective, CEBP is a blend between two normally disparate worlds: the real-time, arcane and difficult technology of the telephone and the thorny, legacy-filled and usually customised enterprise software.

Using CEBP techniques, system integrators and enterprise developers can realise productivity gains typically unavailable using other technology approaches, providing strong motivation for them to invest in such projects. Of course, dynamic connections between businesses and customers using phones are not new; the existing contact centre market is huge and mature.

CEBP is the next natural step in the development of this market, driven by advances in Internet and integration technologies, and can be viewed as roughly equivalent to the movement away from computer punch cards towards tape drives and hard disks: instead of requiring human beings to be present for every interaction, some business to human communications can be automated.

To read the full Executive Briefing report, covering…

  • The Evolution of Enterprise Business Processes
  • Voice: the Universal User Interface
  • CEBP 1.0 – and its Limits
  • The Rise of CEBP 2.0
  • Corn and the food-chain: a Metaphor for Voice
  • In-Store Feedback – ‘Use your Mobile Now’
  • How CEBP addresses current retail store limitations
  • Key Benefits of the service to consumers and retailers
  • Implementing the In-store Feedback Solution
  • Building the In-Store Feedback business case
  • Immediate Decision Support
  • How CEBP addresses current system limitations
  • Key Benefits to Managers and Business Analysts
  • Implementing the Service
  • Building the Business Case
  • Resource Tracking
  • Problems Solved and Business Case Drivers
  • How it Works
  • Real World Implementations
  • Telco 2.0 Conclusions & Recommendations

Members of the Telco 2.0 Executive Briefing Subscription Service can download the full Executive Briefing report here. Non-Members, please  email contact@telco2.net or call +44 (0) 207 247 5003.

Full Article: New Opportunities in Online Content Distribution

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

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


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

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

Figure 1: 2-sided business model framework


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

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

Defining 2-sided distribution

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

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

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

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

Figure 2: Examples of 2-sided Telco distribution





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

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

Premium SMS (carriage-only)

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

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


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

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

Breaking down the opportunity

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

  • Distribution through the same user device as the Telco core services:
  • Distribution through a separate dedicated device (generally part of upstream third-party provider’s offer)
Figure 3: Main Distribution Opportunities Schematic

The “opportunity blocks” in more detail:


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


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

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

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

Application area



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

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

Mobile Offload:
Fixed operator
service to MNOs

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

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

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

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

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

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

Low latency: Real-time cloud

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

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

Very large file
transfer (XXGb)

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

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

[1] Maybe Not Quite So Net Neutral

Guaranteed income?

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

Full Article: Telenor’s Voice 2.0 Strategy – ‘Mobilt Bedriftsnett’ Case Study

Summary: Telenor’s new ‘Mobile Business Network’ integrates SME’s mobile and fixed phone systems via managed APIs, providing added functionality and delivering greater business efficiency. It uses a ‘two-sided’ business model strategy and targets the market via developers.

Members can download a PDF of this Note here.


The enterprise is the key field for new forms of voice and messaging; it’s where the social and economic value of bits exceeds their quantity by the greatest margin, and where the problems of bad voice & messaging are most severe.

People spend hours answering phone calls and typing information into computers – calls they take from people sitting behind computers that are internetworked with the ones they sit behind. Quite often, the answer is to send the caller on to someone else. Meanwhile, other people struggle to avoid calls from enterprises.


It’s got to change, and here’s a start: Mobilt Bedriftsnett or the ‘Mobile Business Network’ from Telenor.

‘Telenor 2.0’

Telenor are a large, Norwegian integrated telecoms operator, and a pioneer and early adopter of some Telco 2.0 ideas. As long ago as 2001, their head of strategy Lars Godell, was working on an early implementation of some of the ideas we’ve been promoting. They also have an active ‘Telenor 2.0′ strategic transformation programme.

Content Provider Access – CPA – established a standard interface for the ingestion, delivery, billing, and settlement of mobile content of any description that would be delivered to Telenor subscribers, and was the first service of this kind to share revenue from content sales with third parties and to interwork with other mobile and fixed line operators, years before the iPhone or even NTT’s pioneering i-Mode. Later, they added a developer sandbox (Playground) as well.

So, what would they do when they encountered the need for better voice & messaging? The importance of this line of business, and its focus on enterprises, has been part and parcel of Telco 2.0 since its inception (here’s a note on “digital workers” from the spring of 2007, and another on better telephony from the same period), and we’ve only become more convinced of its importance as a wave of disruptive innovators have entered the field.

We spoke to Telenor’s product manager for charging APIs, Elisabeth Falck, and strategy director Frank Elter; they think MB is “our latest move towards Telco 2.0”.

Voice 2.0: despite the changing value proposition…

In the Voice & Messaging 2.0 strategy report, we identified a fundamental shift in the value proposition of telephony; in the past, telephony was scarce relative to labour. That stopped being true between 1986 and 2001 in the US, when the price per minute of telephony fell below that of people’s time (the exact crossover points are 1986 for unskilled workers and landline calls, 1998 for graduates and mobile calls, and finally 2001 for unskilled workers and mobile calls).

Now, telephony is relatively plentiful; this is why there are now call-centre help desks and repair centres rather than service engineers and local repair shops. It’s no longer worth employing workers to avoid telephone calls; rather, it’s worth delivering services to the customer by phone rather than having a field sales or service force. The chart below visualises this relationship.


…and changing position in the value chain…

We also identified two other major trends in voice – commoditisation and fragmentation.

Voice is increasingly commoditised – that is to say, it’s a bulk product, cheap, and largely homeogenous. These are also the classic conditions of a product in perfect competition; despite the name and the ideological baggage, this isn’t a good thing, as in this situation economic theory predicts that profit margins will be competed away down to the absolute minimum required to keep the participants from giving up.

The provision of Voice is also increasingly fragmented and diverse – there are more and more producers, and more and more different applications, networks, and hardware devices incorporate some form of telephony. For example, games consoles like the Xbox have a voice chat capability, and CRM systems like Salesforce.com can be integrated with click-to-call services.

As a result, there’s less and less value in the telephone call itself – the period between the ringing tone and the click, when the circuit is established and bearer traffic is flowing. This bit is now cheap or free, and although Skype hasn’t eaten the world as it seemed it might in 2005, this is largely because the industry has reacted by bundling – i.e. slashing prices. Of course, neither the disruptors nor the traditional telcos can base a business on a permanent price war – eventually, prices go to zero. We’ve seen the results of this; several VoIP carriers whose business was based on offering the same features as the PSTN, but cheaper, have already gone under.

The outlook of Telco 2.0 Executive Brainstorm delegates as far back as 2007 demonstrates the widespread acceptance of these trends in the industry, and the increasing proliferation of diverse means of delivery of voice as show in the following chart.


… Voice is still the biggest game in Telcotown…

So why bother with voice? The short answer is that there are three communications products the public gladly pays for – voice, SMS, and IP access.

Telenor’s CPA, one of the most successful and longest-running mobile content plays, is proud of $100m in revenues. In comparison, the business voice market in Norway is NOK6.9bn – $1.22bn. Even in 10 years’ time, voice will comprise the bulk of Telco revenue streams. However grim the prospects, defending Voice is only optional in the sense that survival is optional.

Moreover the emergence of the first wave of internet voice players – Skype, Vonage, etc., and the subsequent fight back by Operators, demonstrates that there is still much scope for innovation in voice and messaging, and that the option of better voice and messaging is still open.

…although the rules are changing…

Specifically, the possible zone of value is now adjacent to the call – features like presence-and-availability, dynamic call routing, speech-to-text, collaboration, history, and integration with the field of CEBP (Communications-Enabled Business Processes). There may also be some scope for improving the bearer quality – HD voice is currently gaining buzz – although the challenge there is that the Internet Players can use better voice codecs as well (Skype already does).

…and the Enterprise market is where the smart money is

The crucial market for better voice & messaging is the enterprise, because that’s where the money is. Nowhere else does the economic value of bits exceed their quantity and cost so much.

For large enterprises, the answer will almost certainly come from custom developments. They are already extensive users of VoIP internally, and increasingly externally as well. They tend to have large customised IT and unified communications installations, and the money and infrastructure to either do their own development or hire software/systems integration firms to do it for them. The appropriate telco play is something like BT Global Services – the systems integration/managed services wing of BT.

But using the toolkit of Voice 2.0 is technically challenging. It’s been said that free software is usually only free if you value your time at zero; small and medium-sized businesses can never afford to do that.

Telenor’s ‘Mobile Enterprise Network’: Mobilt Bedriftsnett

Mobilt Bedriftsnett (MB) is Telenor’s response to this situation, aimed at Small and Medium Enterprises (SMEs). Its primary benefit is to improve business efficiency by extending the functions of an internal PBX and/or unified communications system to include all the companies’ mobile phones.

Telenor’s internal business modelling estimates the cost of CRM failures – missed appointments, rework of mistakes, complaints, lost sales – to a potential SME customer at between $500 and $2,000 a year. This is the economic ‘friction’ that the product is designed to address.


The Core Product is based on Telenor APIs…

The product is based on a suite of APIs into Telenor infrastructure, one of which replicates a hosted IP-PBX, i.e. IP Centrex, solution. It’s aimed at SMEs, and in particular, at integrating with their existing PBX, unified communications, and CRM installations. There’s a browser-based end user interface, which lets nontechnical customers manage their services.

There is also considerable scope for further development, and MB also provides four other APIs, which provide a click-to-call capability, bulk or programmatic SMS, location information, and “Status Push”. This last one provides information on whether a user is currently in coverage, power level, bandwidth, etc, and will be extended to carry presence-and-availability information and integrate with groupware and CRM systems in Q1 2010.

…and integrated with PBX/UC Vendor Client Solutions

Extensive work has been carried out with PBX/UC vendors, notably Alcatel-Lucent and Microsoft, to ensure integration. For example, one of the current use cases for the click-to-call API permits a user to launch a conference call from within MS Outlook or a CRM application. The voice switch receives an event from the SOAP API, initiates a call to the user’s mobile device, then bridges in the target number.

The ‘two-sided’ Enterprise ‘App Store’

MB is also the gateway to a business-focused app store, which markets the work of third-party software developers using the MB API to their base of SME customers. This element qualifies it as a two-sided business model. Telenor is thereby facilitating trade that wouldn’t otherwise occur, by sharing revenue from its customers with upstream producers and also by bringing SMEs that might not otherwise attract any interest from the developer community into contact with it. Developers either pay per use or receive a 70% revenue share depending on the APIs in use.

Telenor are using the existing infrastructure created for CPA to pay out the revenue share and carry out the digital logistics, and targeting the developer community they’re already building under their iLabs project. So far, third-party applications include integration with Microsoft’s Office Communication Server line of products, integration with Alcatel-Lucent and some other proprietary IP-PBXs, and a mobile-based CRM solution, WebOfficeOne.

Route to Market: Enterprise ICT Specialists

In a twist on the two-sided business model, MB services are primarily marketed to systems integrators, independent software developers, and CRM and IP telephony vendors, who act as a channel to market for core Telenor products such as voice, messaging, presence & availability, and location. This differs quite sharply from their experience with CPA, whose business is dominated by content providers.

Pricing is based on a freemium model; some API usage is free, businesses that choose to use the CPA payments system pay through the revenue sharing mechanism, and ones that don’t but do use the APIs heavily pay by usage.

Technical Architecture: migrating to industry standards

Telco 2.0 has previously articulated the seven questions concept – seven key customer questions that can be answered using telecom’s operator’s data assets as shown in the following diagram.


Telenor’s API layer consists of Simple Object Access Protocol (SOAP) and Web service interfaces between the customer needs on the left of the diagram, and a bank of service gateways which communicate with various elements of in the core network on the right.

At the moment, the click-to-call and status push interfaces are implemented using the proprietary Computer-Support Telecoms Applications (CSTA) standard, in order to integrate more easily with the Alcatel-Lucent range of PBXs. So far, they don’t implement Parlay-X (or OneAPI as the GSMA calls it), but they intend to migrate to the standard in the future. Like Microsoft OCS, Asterisk, and much else, the industry standard IETF SIP is used for the core voice, messaging, and availability functions.


Early days, high hopes…

Telenor is unwilling to describe what it would consider to constitute success with Mobilt Bedriftsnett; however, they do say that they expect it to be a “great source of income”. MB has only been live since June 2009, and traffic to CPA inevitably dwarfs that to the MB APIs at present.

…and part of a bigger strategic plan

Mobilt Bedriftsnett makes up the Voice & Messaging 2.0 element of Telenor’s transformation towards Telco 2.0. The other components of ‘Telenor 2.0’ are:

  • CPA, the platform enabling 3rd party mobile content transactions
  • the iLabs/Playground developer community
  • increasing strategic interest in M2M applications
  • a recently launched Content Delivery Network (or CDN – a subject gaining salience again, after the recent Arbor Networks study that showed them accounting for 10-15% of global Internet traffic )
  • Mobile Payments, Money transfer and Banking at Grameenphone in Bangladesh.

Lessons from Telenor 2.0

With Mobilt Bedriftsnett, Telenor has carried on its tradition of pioneering Telco 2.0 style business model innovations, though it is relatively early to judge the success of the ‘Telenor 2.0′ strategy.

At this stage of market development, Telenor’s approach therefore shows three important lessons to other industry players.

1)     They are taking serious steps to create and try ‘two-sided’ telecoms business models.

2)     The repeated mentions of CPA’s role in MB point to an important truth about Telco 2.0 – the elements of it are mutually supporting. It becomes dramatically easier to create a developer community, bill for sender-pays data, operate an app store, etc, if you already have an effective payments and revenue-sharing solution. Similarly, an effective identification/authorisation capability underlies billing and payments. Telenor understands and is acting on this network principle.

Full Article: Mobile Advertising and Marketing: Text-based Local Search Use Case

Summary: This new “Use Case” shows a practical and detailed new application of Telco 2.0 ideas to Digital Marketing, including the customer experience and outline business case.

The Executive Summary is below, and the full report can be downloaded here.

Executive Summary

A multi-operator text-based mobile search service offers a good opportunity for Telcos to gain a fast and strategic toe-hold in the online advertising and marketing industry;

Operators in the UK could generate annual revenues of $660 million in three years if they launched a pan-industry text-based local search solution in concert with local directory companies;

Such a solution is attractive because:

  • SMS is already a successful format for marketing which offers ubiquity to brands;
  • Internet search is already large and growing but the needs of SMEs seeking to market their products and services to local searchers are currently inadequately served by the mobile channel because solutions are only available to smartphone users;
  • The mobile industry has already collaborated to deliver several of the requirements for a ubiquitous text-based search solution including short codes;
  • Search is ‘pulled’ by the user and so avoids several concerns around the use of customer data;
  • Operators can use unique assets to support the service including location, customer device knowledge as well as SMS delivery, to enhance the value of the service;

For 90% of users in most markets that do not possess a smartphone, search on the mobile is a poor experience because it is expensive, there are few terms they can use to search, there are no cross-operators short codes in use and little product marketing is undertaken;

There are two major changes needed to improve current solutions for users of basic devices:

  1. Make the service free to for the user (ad-funded);
  2. Allow third-party directory companies (such as Yell.com) to supply the service to all users, supported by operators because they have existing advertising relationships, database management and search skills, as well as the product marketing skills to promote the service;

Operators could support third-party service providers and protect the privacy of their customers by anonymising customer data before it is passed to directory companies. In this way, operators would also protect their own commercial interests because a directory company would never gain access to individual subscriber data, such as a customer’s telephone number, and so would not be able to disintermediate the operator;

The service provider (directory company) could charge advertisers both for and SMS listing and for a ‘click-through’ (or a text requesting additional information);

The optimum revenue model for operators appears to be a revenue share with directory companies as this offers the biggest upside to operators and reduces the risk to directory players;

Advertisers would benefit from such a solution as they would get the opportunity to market to 100% of the mobile subscriber base and reach local customers that are searching for their product or service;

Directory companies would benefit from a new revenue stream at a time when their print business is coming under pressure;

Operators would benefit from a new revenue stream requiring low investment, as well as the learning gained from collaborating on a service that leverages customer data. They would also be well-positioned to retain control of the end customer relationship;

Finally, consumers would benefit from a free local search solution being available on any mobile.

Full Article: Handsets – Demolition Derby

Summary: ‘Hyper-competition’ in the mobile handset market, particularly in ‘smartphones’, will drive growth in 2010, but also emaciate profits for the majority of manufacturers. Predicted winners, losers and other market consequences.

This is a Guest Note from Arete Research, a Telco 2.0™ partner specialising in investment analysis.Arete Members can download a PDF of this Note here.

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

Handsets: Demolition Derby


Arete’s last annual look at global handset markets (Handsets: Wipe-Out!, Oct. ’08) predicted every vendor would see margins fall by ~500bps. This happened: overall industry profitability dropped, as did industry sales. Now everyone is revving their engines with vastly improved product portfolios for 2010. Even with 15% unit and sales growth in ’10, we see the industry entering a phase of desperate “hyper-competition.” Smartphone vendors (Apple, RIMM, Palm, HTC) should grab $15bn of the $23bn increase in industry sales.

Longer term, the handset space is evolving into a split between partly commoditised hardware and high margin software and services. Managements face a classic moral hazard problem, incentivised to gain share rather than preserve capital. Each vendor sees 2010 as “their year.” Individually rational strategies are collectively insane: the question is who has deep enough pockets to keep their vehicles in one piece.
Revving the Engines. Every vendor is making huge technology leaps in 2010: high end devices will have 64/128GBs of NAND, 8-12Mpx cameras, OLED nHD capacitive touch displays, and more features than consumers can use. Smartphones should rise 50% to 304m units (while feature phones drop 21% in units). As chipmakers support sub-$200 complete device solutions, we see a race to the bottom in smartphone pricing.

Software Smash-Up. The rush of OEMs into Android will bring differentiation issues (as Symbian faced). Beyond Apple, every software platform faces serious issues, while operators will use “open” platforms to develop their own UIs (360, OPhone, myFaves, etc.). Rising software costs will force some OEMs to adopt a PC-ODM business model, while higher-margin models of RIM and Nokia are most at risk.

Finally, the Asian Invasion. Samsung, HTC and LGE now have 30% ’09E share, with ZTE, Huawei, MTEK customers and PC ODMs all joining the fray. All seek 20%+ growth. Motorola and SonyEricsson are being forced to shrink footprint, and shift risk to ODM partners. Nokia already has an Asian cost base, but lacks new high-end devices outside its emerging markets franchise. Apple looks set to claim 40% of industry profits in ’10, as other OEMs fight a brutal war of attrition, egged on by buoyant demand for fresh products at record low prices.


Forget Defensive Driving

Our thesis for 2010 is as follows: unit volumes will rebound with 15% growth, with highly competitive pricing to keep volumes flowing. This will be driven by highly attractive devices at previously unimaginably low prices. Industry sales will also rise 15%, by $23bn, but half of the extra sales ($11bn) will be taken by Apple. Industry margins will remain under pressure from pricing and rising BoM costs. Every traditional OEM, smartphone pure-play, and new entrant are following individually rational strategies: improve portfolios, promise the moon to operators, and price to gain share. Those that fail to secure range planning slots at leading operators will develop other channels to market. Collectively, the industry is entering a period of desperation and dangerous self-belief. There are few incentives to exercise restraint for the likes of Dell (led by ex-Motorola management), Acer (the consistent PC winner at the low-end), Huawei and ZTE (which view devices as complementary to infrastructure offerings) or Samsung (where rising device units help improve utilisation of its memory and display fabs). Motorola and SonyEricsson must promote themselves actively, just to find sustainable business models on 4% share each.

Table 2 shows industry value; adjusted for the impact of Apple, it shows a continuous 4-5% decline in ASPs (though currencies also play a role). The challenge for mainstream OEMs (Nokia, Samsung, LGE, etc.) is to win back customers now exhibiting high loyalty after switching to iPhone or Blackberry. Excluding gains by Apple and RIM, industry sales are on track to fall 13% in ’09. Apple, RIM, Palm and HTC will collectively account for $15bn of our forecast incremental $23bn in industry sales in ’10E.


Within this base, we see smartphones rising from 162m units in ’08 (13% of the total) to 304m units, or 23% of total ’10E shipments. At the same time, featurephone/mid-range units will drop by 21% in ’09 and 21% again in ’10.

Key Products for 2010

  • Both SonyEricsson and LGE have innovative Android models coming in 1H10, LG with distinctive designs and gesture input, and a new SonyEricsson UI and messaging method.
  • Nokia’s roadmap features slimmer form factors, but a range of capacitive touch models will not come until 2H10. It will update the popular 6300/6700 series with a S40 touch device in 1H10.
  • Samsung has its usual vast array of product, and plans for 100m touch models in ’10 underlining the extent of their form factor transition.
  • Motorola’s line-up will focus on operator variants, with a lead device shipping in 2Q10, but a number of operators think Motorola lacks distinctive designs and see little need for Blur.
  • RIM will not change its current form factor approach until 2H10, when it moves to a new software platform to enhance its traditional QWERTY base. It faces commercial challenges around activation and services fees with carrier partners.
  • We expect Apple to reach lower price points and also launch CDMA-based iPhones in ’10.
  • HTC must also reduce its costs to address mid-range prices.
  • Every vendor plans to widen its portfolio with several “hero” models in 2010; if anything the window to hype any single launch is narrowing.

Main Trends

Discussions with a wide range of operators, vendors and chipmakers about 2010 device roadmaps point to an explosion of attractive products – a few trends stand out:

  • Operators are now deeply engaging Chinese vendors. Huawei and ZTE have Android devices coming, while TCL and Taiwanese ODMs offer low-end devices. Chipmakers confirm Android devices will drop under $100 BoM levels by YE10. This will pressure both prices and margins. The value chain is shifting rapidly to more compute-intensive devices, with Qualcomm and others enabling Asian ODMs to be active in new PC segments with smartphone-like features (touch, Adobe Flash, 3G connectivity, etc.) in large-screen form factors, to leverage their LCD base.
  • All devices will become “smartphones.” Samsung and Nokia are opening up APIs for mass market phones. The smartphone tag (vs. dumb ones) will be applied to devices of all sorts, the way we formerly spoke of handsets. By the end of 2010, all devices (except basic pre-paid models) will be customisable with popular applications (e.g., search, social networking, IM, etc.) even if they lack hardware for video content (i.e., memory and codecs) or mapping (GPS chipsets). Open OS devices should rise 50% to 304m units, 23% of the total market.
  • Pure play smartphone vendors (RIMM, HTC, Palm) must transition business models to emulate Apple (i.e., linking devices with services and content). Launching lower-cost versions of popular models (RIMM’s 8520, HTC’s Tattoo, Palm’s Pixi) implicitly recognises how crowded the high-end ($400+) is becoming. This will get worse as Motorola and SonyEricsson seek to re-invent themselves with aspirational models, and Android devices hit mid-range prices in ’10.

Fearless Drivers

We had said before that key purchase criteria (design, features, brand) were reaching parity across OEMs, splitting the market into basic “phones” (voice/camera/radio) and Internet devices. The former has room for two to three scale players: Nokia, Samsung, and a third based on a PC-OEM model using standard offerings (e.g., Qualcomm or MTEK chipsets). LG and ZTE are both seeking this position, from which SonyEricsson and Motorola retreated to focus on Internet devices. This does not mean mobile devices are now commodities, like wheat or steel. The complexity of melding software and hardware in tiny, highly functional packages is not the stuff of commodity markets. But we see a split where a narrow range of standard hardware platforms will accommodate an equally narrow set of software choices. Mediatek is blazing a trail here. Some operators (Vodafone, China Mobile, etc.) aim to follow this model for pre-paid and mid-range featurephones. Preserving software and services value-add for consumers in a market where hardware pricing is fairly transparent is a challenge for all OEMs.

This model is not confined to the low-end: In Wipe Out! we said Motorola (among others) would adopt an HTC/Dell model (integrating standard chipsets/software and cutting R&D). This is happening, with Motorola no longer trying to control its software roadmap, having fully adopted Android. SonyEricsson is following suit, with initial Android devices coming in 1Q10.

Recent management changes make it even more likely SonyEricsson gets absorbed into Sony to integrate with content (as its new marketing campaign pre-sages). Internet devices will become even more fragmented by would-be new entrants in ’10. In addition to Nokia, Apple, RIMM, HTC and Palm, LG and Samsung intend to build a presence in smartphones, as do Huawei, ZTE and PC ODMs. We had expected LGE or Samsung to consider M&A (i.e., buying HTC or Palm) to cement their scale or get a native OS platform. We forecast the shift to Internet devices would bring 27m incremental units from RIM, HTC, and Apple in ’09E. This now looks like it will be 21m units (partly due to weaker HTC sales), a growth of 58% vs. an overall market decline of 6%.

Growth: Steaming Again

After a long string of rises in both units and industry value, the global handset market retreated in ’09. We see risk of a weaker 1H10 mitigated in part by trends in China (3G) and India (competition among new operators). The industry had already scaled up for 10-20%+ growth during the ’05-’08 boom; most vendors have highly outsourced business models and/or partly idle capacity, meaning they could produce additional units relatively quickly. Paradoxically, 15% unit and sales growth will further encourage aggressive efforts to gain share.

Our regional forecasts are in Table 3. Emerging markets are two-thirds of volumes in ’09E and ’10E, and will lead growth – at ever lower price points – as they adopt 3G. Market dynamics vary sharply between highly-subsidised, contract-led markets (i.e., the US, Japan/Korea, and W. Europe) and pre-paid-led emerging markets (China, India, E. Europe, MEA and LatAm). In the former, operators are driving smartphone adoption; while price erosion helps limit subsidy budgets, we see growth in handset market value. As Table 4 shows, mobile data handsets hit 10%+ of EU operator sales, but are not yet driving operators’ sales growth.



In emerging markets, the growth in value is led by further volume increases for LCHs. In ’05, we saw an inflection point around Low-Cost Handsets: Every Penny Counts (July ’05) and A Billion Handsets in ’07? (Aug. ’05). Since ’05, there were 1.2bn handsets shipped in China and India alone. LCH chipsets now sell for <$5, with only Infineon and Mediatek actively supplying meaningful volumes. The ongoing mix shift to emerging markets and weak sales of mid-range devices in developed markets were behind the 13% decline in industry value in ’09E, excluding Apple’s sales. Of the extra 170m units we see shipping in ’10E, 105m come from emerging markets, with ~50m sold in China and India.

Costs: Relentless Slamming

In Wipe Out!, Arete laid out four areas where costs might rise in ’09 and beyond, as the source of structural pressure on industry margins. None of these costs are easing or receding. First, the chipset market is increasingly concentrating. TI is exiting, ST-Ericsson continues to lose money, Infineon recovered but still lacks scale in 3G, and Mediatek dominates outside the top five OEMs. This leaves Qualcomm in a de facto leadership position in 3G. This structure does not support meaningful cost reduction for OEMs. Intel may seek an entry to disrupt the market (see Qualcomm v Intel, Fight of the Century, Sept. ’09) but this is unlikely to happen until ’11. Memory may be in short supply in ’10, while high-end OLED displays still face shortages. Capacity cuts and losses at smaller component suppliers in ’09 limit how much OEMs can save. Outsourced manufacturers like Foxconn, Compal, Jabil, BYD, and Flextronics have low margins and poor cash flow. OEMs want to transfer more risk to suppliers that have little room to cut further.

Second, feature creep also thwarts cost reduction efforts: packing more into every phone is needed to stimulate demand, but adds cost. There are rising requirements in the mid-range, going from 2Mpx to 3.2/5Mpx camera modules, and adding touch, more memory, and multi-radio chipsets (3G, WiFi, BT, FM, etc.). Samsung already offers a 2Mpx touchscreen 2G phone for <$100 on pre-paid tariffs.

Third, software remains the fastest-rising element of handset costs. In Mobile Software Home Truths (Sept. ’09), we discussed how software was adding costs, but how many OEMs were struggling to realise value from software investments? Adopting “licence-free” or open source software does not necessarily reduce these costs: it must still be managed within industrial processes. Yet saving licence costs will be the argument used by OEMs forced to limit the number of platforms they support, as Samsung did by recently indicating it would abandon Symbian. We understand WinMo efforts have been largely mothballed at Motorola and SonyEricsson, even as LG is increasing its spend around Microsoft. Costs are also rising for integration of services, while Software costs are not falling; vendors are just shifting them from handset bill-of-materials (BoM) to other companies’ R&D budgets.

Finally, marketing costs are also rising. Vendors must provide $10m-50m per market of above-the-line marketing support and in-store promotions, to get operators to feature “hero” products. Services adds costs for integration and (often-overlooked) indirect product costs (testing, warranty, logistics, price protection in the channel). SG&A must rise to educate users about new services. OEMs cannot retain or win customers in a mature market without more marketing.

The case for services remains simple and compelling: Nokia’s 33% gross margin on €65 ASPs yields €22 gross profit per device, or €1/month over a two-year lifetime. This is the only way to offset further pressure on device profits. The drive to launch Services is another cost OEMs must bear, with a longer payback than that of 12-18 month design cycles for devices.

Margins: Beyond Fender Benders

When Motorola has lost $4bn since ’07 and SonyEricsson may lose as much as €1bn in ’09, we are no longer talking about minor dents. Gross margins for both are already low (sub-20%). The most notable feature of the past few years was how exposed some vendors were when extensions of hit products (or product families) fell flat. SonyEricsson went from 13% 4Q07 margins to breakeven by 2Q08, and RIM saw group gross margins drop 1000bps. Only Nokia (at 33%), RIM, Apple and HTC have gross margins above 30%. Few OEMs managed to raise gross margins after seeing them decline, though we see SonyEricsson and Motorola seeking to do so by vastly reducing their scope of activities.

Having an Asian low-cost base is a necessary but not sufficient condition of survival. Nokia is already the largest Asian producer, with the industry’s two largest plants (in China and India) giving it the lowest cost structure (i.e., the lowest ASPs, but consistently among the highest margins). Few OEMs other than Nokia make money selling LCHs (i.e., sub-€30). Nokia made ~60% of industry profits in ’08, but will be surpassed in profits in ’09 by Apple, which should make 40% of industry profits in ’10, while Nokia has 25%. It is also worth noting that we forecast margins to fall at nearly every vendor in ’10, though Motorola and SonyEricsson must end large losses, and Nokia will benefit for IPR income within its Devices margin.


Software: Mutual Destruction?

The mobile industry is rapidly adopting the IT industry’s software as a service (SaaS) model. The handset is becoming a distribution platform for services and content; vendors aim to monetise a “community” of their device users. Yet for all the attention it gets, software is a means to an end, and not part of the product. Beyond RIM and Apple, only Nokia can afford its own smartphone platform R&D (i.e., Symbian), yet we see Nokia itself moving closer to Microsoft. Money alone cannot solve software or services issues; if so, Nokia’s industry-leading €3bn R&D budget would have yielded more success, while Apple would not have grabbed as much profit share with a $1.3bn group-wide R&D budget.

No vendor yet excels at ease-of-use for multiple applications (voice, SMS, music, video, browsing, navigation, etc.). RIM offers best-in-class messaging, but falls short in other use cases. The iPhone’s Web experience allowed it to overcome shortcomings in multi-threading and voice/text. Samsung has few services to accompany its sleek designs or high-spec displays and cameras. Just going to 70-100m touch-screed devices in ’10 will not resolve ease-of-use issues.

A number of vendors risk getting addicted to “free” software platforms where others reap the benefits (e.g., Android). Few OEMs have embraced regular updates of components (media players, browser plug-ins, etc.) to meet changing requirements. This is Apple’s edge (and in theory Microsoft’s, but it has not managed handset software efficiently). The current slowdown will only hasten moves to abstraction of hardware and software, long the case in PCs. What is the point of OEMs having their own “developer programmes” (e.g., MOTODEV, Samsung Mobile Innovation, SonyEricsson Developer World, etc.) if they adopt Android? To escape high software costs, some vendors are adopting a PC-OEM model: sub-20% gross margins, 1-5% R&D/sales, with little control over how services are implemented on devices.

When the Dust Settles…

After turmoil and consolidation in ’06, industry margins were robust in ’07, then plunged in ’08. Yet a hoped-for recovery in ’09 has given heart to a range of weaker players, sealing the industry’s fate.

Even with a resumption of growth, rising costs and hyper competition look set to put pressure on margins. The precipitous impact of this may not be seen until 2011; for now, managements are not inclined to call it quits, or admit they lack a services or software play. The handset market is hardly gone ex-growth, but its rules and value chain are shifting, as seen in Apple and Google staking their claims.

The market looks to be falling less than the $11bn we forecast for ’09 (“only” $9bn), but it is Apple’s incremental sales that are changing the dynamics most. We are no fans of M&A, but would welcome moves to remove industry capacity. There are few obvious options, beyond HTC and Palm. We also think Samsung and LGE would benefit from deals that might open up their insular corporate cultures. Nokia has showed how difficult it is for an OEM to assemble a portfolio of Services offerings: none are yet best-in-class. Our verdicts on the key questions for vendors are listed in the following table: We see room for two to three scale players in LCHs/feature-phones (Nokia, Samsung and one other following a PC-OEM model). Smartphones will grow even more fragmented and hotly contested. We are not certain whether the others – SonyEricsson, LGE, Motorola, ZTE, HTC, and Japanese vendors – will emerge from 2010 in one piece.


Richard Kramer, Analyst
Arete Research Services LLP
richard.kramer@arete.net / +44 (0)20 7959 1303

Brett Simpson, Analyst
Arete Research Services LLP
brett.simpson@arete.net / +44 (0)20 7959 1320


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Full Article: Mobile Software Platforms – Rapid Consolidation is Forecast

Summary: New analysis suggests that only only three or four mobile handset software platforms will remain by 2012. 

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

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

Mobile Software Home Truths

Wireless Devices


Amidst all the swirl of excitement around mobile software, some dull realities are setting in.  As the barn gets crowded with ever more exotic breeds (in alphabetical order: Android, Apple OSX, Blackberry, LiMo, Maemo, Moblin, Symbian, WebOS, WindowsMobile), there is a growing risk of fragmentation and consumer confusion.  We see some unglamorous “home truths” about mobile software getting lost in the weeds.


Few, if any, vendors make money from mobile software.  Microsoft makes $160 of gross profit per PC while mobile software is moving royalty-free. The few pure plays (like Opera) rely on sales of services around their software.  Mobile software only gets leverage from related services (often a single one).  These must be tightly linked to devices, e.g., e-mail (Blackberry), e-books (Kindle), music (iTunes) or gaming (XBoxLive), with resulting communities controlled by their choice of software; few services work equally well on all devices (e.g., search, YouTube).


AppStores are not (yet) content stores. OEMs must link themselves with cloud services (like Motorola’s new BLUR platform) or offer their own (e.g., ITunes, Ovi, etc.).  Individual developers find it hard to make money through AppStores: if even one were making $10m in sales, it would be widely publicised.  Exclusive or “sponsored” applications like navigation or content-like games should fare much better.


We see room for only three to four platforms by 2012.  The pace of innovation, R&D cost, and need for customisation (for hardware, operators and languages) invites consolidation.  Supporting OEMs and reaching out to developers is costly and labour-intensive; only over time might HTML5 browsers supplant device-specific applications.  No platform is so productised as to simply hand over to licensees (be they OEMs or operators).


Every smartphone will support one (or more) AppStores.  We do not know how many services or what content AppStores 2.0 might offer, or how they will be made relevant to consumers.  The most popular applications should work on every smartphone, even as some devices (like INQ) are optimised for versions of Facebook, Amazon, Twitter, Skype and other popular digital brands and services. AppStores may help OEMs build relationships with users of those services, though both vendors and operators will try to control billing.


All phones are becoming smart.  So-called smartphones get attention as a growth segment in a declining handset market, but “dumbphones” (using proprietary software like Nokia’s S40, Samsung SHP/TouchWiz or LG’s S-Class) are getting more sophisticated.  The costs of the two are converging. Featurephones will soon also support AppStores and Internet services.


Table 1: Platform Penetration





Symb. v9.3+/S60



S60 goes mid-range

Apple OSX



Incl. iPod Touch

B’berry OS 4.5+



Doubling OS base




From >10 OEMs

WinMo 6+



Transition to Win7

Palm WebOS



Limits w/o licensing




Platform for LCHs

Source:  Arete Research estimates. 


Hard Graft

The costs for developing and maintaining complex software platforms are increasing.  There are no shortcuts to the sheer volume of work, especially in building on legacy code bases and supporting operator requirements, or developing language packs.  Every platform faces significant roadmap issues. Some handset OEMs are building adaptation layers to port a range of applications to their own branded UIs.  Just supporting multi-core chipsets for handling streaming or managing financial transactions needs additional processing power to deal with security and viruses.  Yet it requires software re-writes and poses power management challenges (i.e., tripling or quadrupling processing will drain batteries faster).


We long predicted video would become as ubiquitous as voice, i.e., with devices designed around handling video traffic.  There are a wide range of solutions to cope with streaming video, including in software (i.e., Flash or Silverlight) rather than via hardware optimisations. Apple patented technology around adaptive bit rate codecs to handle streaming in its forthcoming iPhones.  All platforms need to support over the air (OTA) updates, embrace graphics-rich applications, handle HD content, and comply with an array of USB drivers and accessories.


It is also not clear whether application downloads are a novelty or a mass market phenomenon. Discovery and recommendation engines need to be improved on most platforms, and marketing must focus on what applications offer. The gap between legacy platforms and an over-the-air customisable user experience is a wide one, and will not be resolved by AppStores, fresh UIs, or moves to go open source. Widget and webkit technologies could bring similar UXs across multiple devices.  Most developers will not need access to lower layers or optimise applications for specific hardware.  Over time, HTML5 browsers could supplant device-specific applications (e.g., GMail runs on an iPhone as a web application, as does WebOutlook on Android), but OEMs are unlikely to embrace this approach.  This also does nothing to extend billing or allow for collection of detailed customer analytics.


At the same time, operators’ selection criteria are moving from form factors to user experiences.  Operator UX teams now number in the 100s of staff, even if they fake a fragmented approach: Vodafone-subsidised devices currently support Android Market, Blackberry AppsWorld, OviStore and iPhone AppStore, and runs its own developer programme (Betavine). Few telcos develop native applications, but mostly use ones that run in Java, Webkit, Widgets, etc. Only a few (e.g., Verizon Wireless) offer customised UI.


While Apple and Google get the most attention (as pioneers of the AppStore concept, and for providing a shop-front for the open source community), Nokia and Microsoft have pivotal roles to play.  Both offer unprecedented scale (in handsets and computing software), even if both are fast followers.  We do not see Nokia’s commitment to Ovi or Symbian wavering. Though Microsoft’s successive versions of WindowsMobile failed to get traction beyond 10-15m units p.a., we expect a renewed push around Windows7 in 2H10. The MSFT/Yahoo search deal could be a blueprint for closer collaboration with Nokia. With its resources (a $9.5bn R&D budget) and assets (enterprise installed base, XBox, HotMail, and Bing), Microsoft could offer handset OEMs revenue share deals. LGE already committed to ship 50+ Windows models by 2012.


Figure 1: Product Differentiation?

arete%20mob%20soft%203%20nov%202009.jpgSource: Arete Research.

Content, Not Applications

An AppStore is not a content store, yet.  The next battle will be to add intelligence and filtering to AppStores, and tightly integrate content with platforms (as with iTunes, Kindle, Zune HD, or Comes With Music).  There are limits to how many applications consumers are likely to use, whereas there is a wide range of content to access via mobile devices.  To handle this, mobile devices also need integration with home CE/PC products. Samsung, for one, aims to provide “three screen” offerings spanning TVs, PCs, cameras, and handsets. There will be efforts by Sony, Apple, Samsung and others to make a single harmonised software platform that spans a wide range of video-capable devices.


Figure 2: Putting Software at the Centre of a CE “User Experience”


Source:  Arete Research.


With multi-radio (e.g., 3G, WiFi and Bluetooth) integration and voice recognition, mobile devices could become a control point to reach “virtualised” content.  This is a longer-term “cloud computing” angle to mobile software, handling access to and storage of personal content.  OEMs will need to offer tight integration with cloud services, or offer their own “stores of content.”


Apple and Google designed platforms with PCs in mind, and drew developers from the vastly larger desktop world.  They benefit from programming in AJAX, whereas Symbian uses a range of older object-oriented languages.  Yet in both handset and PC worlds, OEMs, not developers, create devices.  They are the gatekeepers for software and AppStores, managing the flow of any OTA updates that might alter the UX.  Adobe has provided a good model, with regular updates of its popular Flash and Acrobat software.  Yet user expectations of handset stability will get re-set if devices regularly need updates like PCs do.

Too Much Choice?

The number of companies vying to become the platform of choice is staggering, and itself a problem. Beyond the ones we discuss below, we can add Intel (with its Moblin effort), Palm’s WebOS (which remains device-specific) and the range of Linux variants (like the Nokia-sponsored Maemo, LiMO, and components developed under the OMTP).  The latter shows how limited group initiatives have been: OMTP involves VOD, TMOB, TI, TEF, AT&T, and others, but all of these compete for exclusivity with operator-subsidised devices that will never be OMTP-compliant.  None of the above options are yet mass market (i.e., likely to top 10m+ units in ’10).  Just to confuse matters further, there are other applications environments (e.g., BREW) as well as “component” vendors like Opera, Access, and Adobe.  We look at leading platforms below:


Apple’s OSX

Apple excelled at innovating around the UX and using animation to mask some of the iPhone’s early weaknesses (lack of multi-threading, slow image processing).  Apple’s marketing anticipated the market’s direction with its focus on applications, and Apple’s PA Semi unit will help it be first to market with multi-core processing (supporting streaming video).  Apple is still attracting developers with the clarity and simplicity of its SDK, and by testing and proving in each layer of stack via PC products.  We expect OSX to be extended to CE products, and also for Apple to bring AppStores to the PC.

Google’s Android

For a two-year-old platform, Android got ample OEM support, following up its G1 (a.k.a. the Android Developer Phone) with subsequent releases Cupcake/Android v1.1, with the Éclair release being v2.0. Android aims to be binary forward compatible, i.e., existing applications written for G1s will run on new devices without modifications.  Developers create Android Virtual Devices with the SDK to run applications for a range of devices. Development and emulator debug time is far shorter in Android compared with Symbian.

Despite OEM support, Android’s governance remains fuzzy.  Android is open-sourced licensed, but not an open source project: a small (~300 staff) team controls the developer ecosystem and Android Market distribution. It has not productised source code or offered post-sales software management tools, and has limited support for operator-compliant packs, libraries of hardware drivers, and language variants. Some developers say Android is slow to respond to change requests and to accept code modifications.  In exchange for access to Android Market, Google requires OEMs to bundle Google Apps and supply usage analytics from devices.  One key commercialisation partner, WindRiver, was bought by Intel, while another, Teleca, started an Android Feature Club to resolve common integration issues.  Android’s end-game is unclear: is it a hedge against Microsoft or Apple controlling end-devices?  A Trojan Horse for Google services?  Or will it become an independent company with license fees?  If operators don’t need devices “with Google,” then Android may fragment into many custom UIs.


Nokia’s Symbian

After a decade under a shifting set of parents, the rump of Symbian was bought by Nokia and made an open source project, including Nokia’s own S60 UI.  Symbian/S60 was initially developed for phone functions, and saw limited traction for downloads under cumbersome tree and branch menu structures. Many developers feel Nokia/Symbian offers too many choices (native Symbian code, J2ME, FlashLite, Web runtime and Python), each with limitations and compatibility issues. The S60 browser is based on webkit, but lacks HTML5 support.  Nokia’s decision to open source Symbian/S60 has stalled its development, as Symbian re-writes and tests third-party software in its 40m line code base.  It will be difficult to make major improvements to Symbian (i.e., to support multi-core processors) during this process.


When Nokia ships Direct UI in mid ’10, Symbian will effectively break its backwards compatibility.  Whether it also moves to a completely new release (v.10 from v.9.6) is still open. This may alienate developers that have to re-develop for a new platform and comply with Nokia’s new Direct UI (based on QT).  They also must resolve whether Symbian horizon is sufficient as a publishing tool, or if Nokia can get other OEMs to use OviStore, which still lags rivals on many fronts.  Nokia hopes Symbian will present a credible alternative to Android in mid-2010 when it is fully open source/EPL licensed, with Nokia assuring a large market.


Microsoft’s Windows

Windows Mobile 6.5 traced a long evolution from the Pocket PC OS, but still uses an older WinCE 5 kernel.  Microsoft recognised its failings by bringing in new management for Mobile, acquiring Danger (designers of the Sidekick device), and engaging LG as a mass market OEM alongside long-term supporter HTC.  We see 6.5 as simply a stopgap solution until Microsoft brings the innovation seen with its ZuneHD UI and leaner Win7 platforms to mobile.  Microsoft is also offering its software in a reference design called Pink, and may tweak its long-held license fee model with PC-like terms (rebates, discounts and marketing support). This may gain traction among Chinese OEMs, after Taiwanese and US OEMs failed to ramp WinMo to volume.  It is too early to rule out a now-dormant Microsoft, given its scale in computing and revival with Win7.

RIM’s Blackberry OS

In a world moving more “open,” RIM keeps its OS development in-house, stressing the need for security and compression. Yet RIM must evolve the BlackBerry’s UI and bring more developers to its AppsWorld platform, as well as open up its charging model beyond PayPal to embrace operator billing. BlackBerry’s application environment works on a J2ME framework with proprietary extensions, which adds fragmentation and compatibility issues. However, the security and bandwidth compression so valued by enterprises may limit performance for consumers, as applications traverse its NOCs via RIM’s proprietary browser.  RIM’s premium pricing still relies on its messaging franchise, which faces challenges from ActiveSync and efforts to bring push e-mail to mass market price levels. Rivals may not match Blackberry’s UX, but some segments may be less sensitive to RIM’s security and delivery than the price of handsets.  While RIM stresses incremental upgrades for its AppsWorld, we hear they are undertaking an extensive OS re-write to support new multi-core chipsets.


Down to Earth

This space gets too much attention for the revenue it directly generates.  Mobile software is a means to an end, and the end is selling devices and Internet services.  The cost of development will narrow the number of platforms by 2013, but not before the sheer number of options bewilder consumers who know about them and frustrate others wishing to get simple access to specific content. Given how rapidly key hardware costs are falling, and how sophisticated mid-range software platforms are becoming, all phones will become smartphones of some sort. Who wants to own a dumbphone?


AppStores will evolve to offer a range of content and services, with a major battle brewing over billing and data on consumer usage.  Every device will support some AppStores and work with a range of Internet brands and services.  Some content will be packaged and tightly linked to specific devices.  The Holy Grail in all this mobile software will be its extension to ranges of other CE products.  There is ample reason to scoff at the hype around mobile software — for its marginal economics and inevitable fragmentation — but no doubt as to its future role as a control point for more valuable content and Internet-based services and brands.






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Full Article: Amazon 2.0: Four Levels of Strategic Business Model Transformation

Download a PDF copy here.

Summary: Amazon’s stock continues to beat the bull market. Its success is based on a four level transformation to a ‘two-sided’ strategy. What are the lessons for would-be platform players in all parts of the Telecoms, Media, Technology sector?


Amazon is a company Telco 2.0 studies closely. Their achievements in terms of logistics, cloud computing, open APIs, and two-sided business models provide great examples of business model innovation. We thought it would be useful to analyse the lessons from their strategy and performance in the build up to our AMERICAS event in Orlando, 9th-10th December 2009.

In this note, we review Amazon Marketplace and Amazon Web Services as successful examples of transition from one-sided to two-sided business models.

Amazon’s Stock Performance

The chart below shows Amazon’s performance against Vodafone, one of the better performing Telecoms stocks since 2005

Amazon, Vodafone Stocks and the S&P 500, and Amazon’s ‘Two-Sided’ Activities 2005-2009


Since mid-2007, Vodafone’s stock value has broadly followed the S&P500. In contrast, Amazon’s stock has seen a massive increase in the last three years in particular despite the crunch-crash in 2008.

Of course, stock graphs are immensely volatile, driven by both internal and external factors, and ultimately few trends are permanent. However there can be little doubt that Amazon has built a very strong business, and key to their success has been a transition from a one-sided “retailer” model, to a ‘two-sided’ business model. Amazon’s Marketplace service produces 5% of revenues and 30% of profits according to the Harvard Business Review.

The Trading Hub Strategy

Amazon’s success is based on a fundamental economic insight; two-sided businesses are common whenever there is a role for a trading hub, a business which helps bridge the gaps of asymmetric information and facilitate trade by creating liquidity. In this role, they tend to exhibit increasing returns to scale – the more people use a stock exchange, the better the prices are likely to be – and therefore tend to become both big, and lasting.

Paul Krugman won the Nobel Prize for Economics by applying the logic of increasing returns to scale to economic geography; in a famous example, he concluded that the Erie Canal was responsible for the emergence of New York as the metropolis of the eastern US. Although the canal was only briefly used before the railways rendered it obsolete, it meant that New York was the only port with a direct connection to the Great Lakes and therefore the Midwest – and therefore, that the railway would go to New York.

Transient changes can therefore have very lasting effects on the map of the economy. Similar processes are visible in the development of stock exchanges, container ports, and Internet exchange points. Amazon CTO Werner Vogels describes the business as a “flywheel”, driven by two factors – selection, and low prices.

Amazon’s “Flywheel” for Platform / ‘Two-Sided’ Business Models


Source: Werner Vogel’s Amazon presentation to the Telco 2.0 Executive Brainstorm, 2009

Levels of Strategic Transformation

In this note, we describe Amazon’s transition from a pure retailer to a ‘two-sided’ business model through four ‘levels’. Part of the Amazon’s success is that they continue to improve at each ‘level’ rather than remaining fixed in competence achieved at a certain point in time.

Level One: Building Scale and Excellence in One Market

Amazon is best known to everyone, except for very hardcore cloud developers, as a bookshop. The story of how it created an industry-beating logistics system to fulfil orders is beyond the scope of this note, but it’s worth noting that there’s a circular, reciprocal relationship between two-sidedness and scale – one of those “flywheels”. Being the biggest bookshop on the Internet obviously made them a much more interesting proposition for upstream partners, and gave them bargaining strength with the existing wholesale industry.

A Screenshot of Amazon’s Early Home Page, c 1994


Source: Infonova Presentation to EMEA Telco 2.0 Brainstorm, Nov 2009

The key element here was Vogels’ notion of “selection” – the ability to find the products you wanted among a bigger and easier to navigate range of products. Economies of scale in Amazon’s distribution and its operational technology meant that the marginal cost of stocking another title was drastically lower than it was for the competition. Holding more titles meant that readers are more likely to find what they are looking for. It also means that there was more scope for fancy recommendation mechanisms, to help readers find and buy other relevant products.

This was Amazon’s 1.0 period – the keys to its success were scale and investment in logistics, a simple but effective operational excellence strategy. That goes for digital logistics as well.

Level Two: Users Sell and Recommend Amazon Products

The next step, however, would represent a real change in the business model. This was the affiliate program. Amazon users were invited to sign up for a service in which they would be rewarded for promoting books (and other products). They could do this by linking to the product’s page, using a crafted URI so that Amazon could track the source of the referral, by incorporating Amazon-branded adverts for the product into a Web page, or by putting out a wish list of products on a Web page. In a more sophisticated version of the same model, they provided an API for other e-commerce sites to integrate Amazon products into their own processes.

In exchange for this, they would get a percentage commission every time Amazon made a sale. This bears a considerable resemblance to Google’s advertising model; a low-impact, quick signup service that uses the Web’s grammar of links to access an inventory of advertising space that was both gigantic, cheap, and of high quality.

Qualitative improvements in distribution came from the fact that readers tend to share books with people they think will appreciate them. So rather than struggle to target groups of people with advertising, the affiliate model gets the customers to seek out people they know to be possible prospects. Rather than Amazon struggling to work out how to reach the home-rocketry community, instead, the home rocketeers would bring Amazon to their community.

We’ve often recommended this model to Telco 2.0 clients. As organisations get bigger, it becomes harder for them to maintain customer intimacy. To some extent, they can compensate for this by gathering large volumes of data and analysing it, in order to identify demographic groups in the customer base. Amazon invests heavily in this, and uses this analysis to provide the recommendations its users get every time they call in, but recognizes that there are limitations to the benefits of behavioural marketing. Amazon’s strategy thus uses a mix of its own analysis and the deeper knowledge of the affiliate community to tread a line that is both effective and careful to respect customers’ sensitivities and permissions.

A major Web2.0 trend across many industries is the resulting ‘mass self-customisation’. Rather than try to guess the needs of many small user groups, re-configure your processes so that the users can specify their own needs, tastes and recommendations. In this case, Amazon used an open API to enable such mass customisation and gain access to tens of thousands of audiences self-selected to be possible customers for whatever products were being promoted. This is effectively a customer participation strategy.

At the time it was introduced, the Amazon Customer Review was a Revolutionary Innovation – even now few retailers do it as well 


Source: Amazon.com

Level Three: Amazon Sells Users’ and Others’ Products

The next step was to do the inverse of Phase Two. Having pushed Amazon products into other e-commerce properties and recruited its users as a salesforce to grow the consumer base, Amazon now started pulling other businesses’ products into its logistics, sales, marketing, and reporting system. This was the beginning of Amazon Marketplace and yet another set of APIs were provided to hook up other businesses’ workflow into Amazon’s.

To a nontrivial extent, this involved blurring the distinction between consumer and producer – another major driver in Telco 2.0 scenarios. Small businesses could now benefit from a massive IT and distribution system they could never have imagined developing themselves and couldn’t have afforded to buy into. The pricing model was the direct inverse of the affiliate program; Amazon got free advertising from the affiliates until a sale occurred, then they paid out a percentage commission. Now, the Marketplace upstream customers got free advertising, marketing, reporting, and warehousing until a sale occurred; then they paid a percentage commission to Amazon.

Amazon Marketplace Expands “Selection” – the range of Inventory Choice – especially valuable in “long tail” retail items


Source: Amazon.com

In a sense, this is analogous to the developer community and revenue-sharing in Telco 2.0.

Level Four: Amazon creates new products and services by leveraging core assets in new ways

Having created the IT infrastructure to support their own and others directly compatible retail services, Amazon have gone a step further to create new IT based products and services based on their immense and powerful IT infrastructure.

Examples include S3 the simple storage service, the Cloudfront CDN (Content Delivery Network), and EC2 the Elastic Compute Cloud.

S3, for Simple Storage Service, was the first of Amazon’s IT products. It provides online data storage – essentially a huge virtual hard disk – through a Web service API, at prices which reflected their immense economies of scale and which worked on a pay-as-you-go basis. It was an immediate hit, especially with the growing community of Web-video sites – suddenly, Web sites that became popular didn’t immediately get replaced by “Bandwidth Exceeded” pages. It also had the advantage that the data was distributed across Amazon’s network of data centres, which offered a degree of redundancy; although like all cloud computing, it requires a lot of confidence in the operator.

Cloudfront is a basic content-delivery network, which provides geo-localised caching of heavy media files stored in S3. Its pricing is targeted at fairly low-volume users like image hosting or software distributions; its technical strategy is that of a “macro-CDN” with servers located at major Internet exchanges, rather than an Akamai-like deployment into ISPs’ own networks.

But the most important of these products for the future was EC2, for Elastic Compute Cloud, which provides computing power on similar terms to those under which S3 provides storage. This was the first of the public clouds, and Amazon rapidly developed other products based on it, such as the SimpleDB cloud database, the VPC private cloud, and Elastic MapReduce, which provides the Hadoop system for analysing massive datasets in cloud form. EC2 has rapidly become a preferred option for rapid development and scaling of Web applications.

Better Wholesale

All this had the effect of generalising Amazon from a bookshop to a huge transaction-processing and logistics operation. As a side-effect, the IT infrastructure expanded to the point where it became a line of business in itself, enabling the AWS cloud computing services.

With this capability available, the next step was to offer it as a service to other transactional Web sites and businesses; it is one of the company’s proudest achievements that a large proportion of sales through EBay are actually shipped through Amazon’s transport system. Perhaps less well known is that some very significant retailers possessing their own logistics, web presence, and stores, are using Amazon Web Services to manage it all. This is why the system has an API for cash registers although Amazon.com obviously doesn’t deal in cash.

Again, the importance of better wholesale is something we frequently stress.

Conclusion and Lessons for Would-be Platform Players

Amazon’s evolution from 1.0 to 2.0 has taken place through a succession of waves, which roughly match key concepts in Telco 2.0. Building the logistics and IT systems drove down costs and created a systems architecture that provided for future innovation, and specifically for user-driven innovation. The affiliate, review, and recommendation systems are valid responses to fragmentation, commoditisation, and mass customisation, and they are powered by customer participation.

Amazon Marketplace essentially creates the economic element of an external developer community for Amazon and the cloud computing products create the technical element. The final confirmation of their excellence is that other major retailers are using their systems as wholesale services.

Amazon’s strategy can be seen as a blueprint for any retail lead business (such as a Telco) to transform itself from a pure retailer to a ‘two-sided platform player’.

Strategic Transformation Level

Key steps and lessons for Would-Be Platform Players (e.g. Telcos, Software Platforms)

Level One: Building Scale and Excellence in One Market


  • A strategic focus on ‘flywheels’ – cycles that enhance value creation
  • Design to serve both existing and newly recognised needs with your offering (e.g. search, recommendation, participation)
  • Sufficient scale gives a leading advantage in customer choice
  • Scale, and operational excellence build a low cost, flexible core platform

Level Two: Users Sell and Recommend Your Products


  • Strategic focus on increasing customer participation, e.g.in recommending and selling your products
  • Investment in data analysis to maximise intelligent retailing
  • APIs are opened to allow customers and others to distribute your offerings to new markets in new ways
  • Commercial arrangements and service enablers allow 3rd parties to lubricate and catalyse the process

Level Three: You Sell Users’ and Others’ Products


  • Strategic focus on building transaction volume
  • More transactions add immediate margin
  • More transactions drive strategic unit costs down
  • More inventory provides more choice
  • More choice attracts and keeps more customers

Level Four: Create new products and services by leveraging core assets in new ways

  • Re-assessment of strategic assets
  • Create new products and services leveraging market value and defraying costs of core assets

Full Article: Where to Co-operate, Where to Compete

You can download the full 25 page Briefing in PDF format here. The Executive Summary and Table of Contents are reproduced below.

Summary: An in-depth analysis of Google’s strategy and objectives overall and in particular in relation to the Telecoms industry, with recommendations of where to compete and where to cooperate.

Executive Summary

Google is not just a search engine, nor is it just a media or a software company. It is, first and foremost, a massive advertising brokerage, which uses two-sided business models to maximise both the creation of ad inventory and the accuracy with which it matches targeted ads to content. 

A major driver of Google’s success is its investment in infrastructure – it spends almost twice as much CAPEX as its closest competitor, Yahoo! The combination of two-sidedness and infrastructure has led to the creation of a business with immense market share, stable and sizeable margins, and strong cash flow.

Like many successful ‘two-sided’ business models, Google employs two out of three generic approaches to charging described further in the report – charging merchants for transactions and services. Its success is enhanced by synergies with its free enabling services for merchants such as Google Adwords and Google Analytics, and by the growing end-user market reach of new and acquired applications such as Google Maps, Google Voice, Gmail, YouTube and the Chrome browser.

The frequent criticism that Google is unfocused is dismissed. Instead, we argue, Google’s investments reflect:

  • Google’s aims to increase the share of time that people spend on its sites, and the total time people spend on the Internet overall (at the expense of other media)
  • a conscious strategy of experimentation
  • a policy of creating capabilities for future development as a deterrent to competitors from entering businesses vital to Google’s success. We characterise these deterrents as ”submarines”.

We see two major areas of conflict between Telcos and Google: communication services and advertising. In particular, Google is probably the largest single strategic threat to operator voice and messaging businesses. Its ability to reinvent its own versions of operators’ supposedly “unique” capabilities should not be underestimated. Right now, Telcos’ have unrivalled raw data on consumer behaviour, but Google is seeking to build its own direct relationship with consumers as it makes a play for the mobile advertising brokerage business.

Even so, Google is the Telcos’ friend in the sense that its portfolio of user-friendly services is driving mobile Internet usage and new sales of mobile data tariffs.  We conclude that Telcos should adopt a policy of ‘co-opetition’, fighting fiercely in some areas and partnering in others.

We recommend that Telcos should co-operate with Google in these areas:

  • Adopt, but customise, Android. Android is essentially an aircraft carrier for Google’s communications services, but Telcos can neutralise the short-to-medium term threat by customising this highly open platform. Android smartphones will also drive sales of mobile data tariffs and act as a counterweight to Apple and Nokia. But Telcos should be alert to any moves by Google to exert tighter control over Android.
  • Telcos should work with Google to combine the impressive and hard to replicate Google Maps and Street View apps with Telcos’ location data and Call Detail Records (CDR) to produce compelling, personalised services. 
  • As its revenue growth slows, Google may start trying to sell more services to consumers, which would help the whole Internet ecosystem move to a more sustainable business model. Telcos should encourage such a move, perhaps by providing white-label authentication and billing systems.

We recommend that Telcos should compete with Google in these areas:

  • Telcos’ voice and messaging services need to at least match the ease-of-use and rich functionality of Google Voice.
  • Telcos are well positioned to claim a major share of the mobile advertising brokerage business, but Google is unlikely to let that happen without a fight, so Telcos may be forced into head-on competition.
  • Unless Telcos can provide faster and more accurate location information than Google, much of the value could be sucked out of the promising market for location-based services.
  • Telcos need to ensure their networks and billing systems, rather than the Internet or a Google platform, underpin the nascent mobile payments and mobile banking markets.
  • Telcos’ ‘Golden Asset’ underpinning many of the potential future business models is the wealth of customer data available through their Call Detail Records (CDR) and billing systems. Understanding consumers’ behaviour will be the key to victory in the voice, messaging and advertising brokerage markets. It is vital that Telcos recognise and value this data, and do not inadvertently permit Google to accumulate it.
  • Neither should Google be allowed to attract a disproportionate share of the time and attention of mobile apps developers and thereby dominate the mobile apps market in the way that Microsoft came to win the PC software market.

Table of Contents

Understanding Google’s business

  Google – the infrastructure company

  Google: A Classic Two-Sided Business Model

Strategies for Two-Sided Markets

  Approach One: making money out of transactions

  Approach Two: sell services to the crowd

  Approach Three: charge for access

  The power of combinations

Criticisms of Google’s Strategy

  Social Networking: Has Google missed the boat?

  What about the dark fibre, Google Checkout, radio spectrum bids?

  Google Changes Sides?

Google versus Telcos: SWOT Analysis

  Who Knows What About Consumers

  Location: Searching for an Edge

  Google’s Communication Services

  Google Talk: Softly, Softly

  Google Voice of Doom?

  Wave goodbye to push email?

  Android: An Aircraft Carrier for Google Services

  More of a threat than an opportunity

  Google – The Extraterrestrial

  The Advertising War of 2011

Recommendations for Action

  Ignore, Fight, Partner?

  Conclusion: Co-Optition is the way forward

Full Article: QQ: China’s Monster ‘Facebook’ – on a screen near you soon

Summary: An analysis of QQ.com – a profitable Chinese social networking and instant messaging service with 1 billion usernames, 75 million peak concurrent users, and plans to grow beyond China.


The world is full of fast-growing, hyper-fashionable social networking and user-generated content plays. Almost to a man, they lack one thing – profits, or even revenues. An English-speaking technology media and analyst/investor community obsessed by the US West Coast has practically ignored QQ.com, one example of spectacular success, because it’s Chinese.

A Profitable and Valuable Social Network

At the 30th of June, Tencent (QQ’s owners) had thrown off RMB993 million (US$145 million) in free cash in six months, even after spending RMB1.9bn in CAPEX and a further RMB593 million in financing costs. For comparison, Facebook went marginally cashflow positive for the first time in August and isn’t yet profitable.

The bottom line is impressive too; at the last count, Tencent’s gross margin was at 67.3% and net margin was 41.75% – this smashes HP’s investment criterion of “fascinating margins”, i.e. 45% gross, and Iliad’s 70% ROI on new fibre deployment. We previously estimated the gross margin for October 2008 as 63.5%, so it appears that things have consistently been going well for QQ.

The shares (listed in Hong Kong) have gone from HK$60 to 120 since April, showing that this performance is also attracting plenty of demand from investors – albeit at a somewhat toppy price/earnings ratio of over 50.

Nearly a Billion ‘Users’

There were 990 million user identities on QQ as at the 30th of June, 2009. Given the current growth rate, the billionth user will almost certainly be announced in the next quarterly results – but a nontrivial percentage of these are inactive, are multiple aliases, or are spambots. [NB. This is true of all IM communities except, perhaps, for the 17 million users of IBM Lotus Notes Sametime inside their enterprise firewalls, as we pointed out in the Consumer Voice & Messaging 2.0 strategy report.]

As impressive as this is, instant messaging user bases are usually only weakly bound to the service, they are usually non-paying, and many people have multiple usernames. A more useful metric is peak concurrent users – the maximum number of users simultaneously logged in during the period in question. To be counted, a user name has to be active in that they are online, so it’s reasonable to deduce that they exist. It doesn’t prove that they are a human being (or for that matter a useful application rather than a pest); however, whether or not a logged-in user is human, they are consuming system resources.

So, measuring peak concurrent users provides us both with better data on uptake and a more useful indicator of capacity related costs. It’s a standard telecommunications engineering principle to “provision for the peak” – that is to say, it’s useless to build a network with only sufficient capacity for the average traffic, as 50% of the time it will be congested and probably non-functional through overload. To be available, the system must supply enough spare capacity to handle the peaks in demand. Peak load determines scale, and hence cost.

In 2008, at various times, QQ’s parent company Tencent claimed to have between 355 and 570 million users. At the end of June, 2009, the user count stood at 990 million – so the nominal user base had roughly doubled. In 2008, peak concurrent users were 45.3 million, growing to 65 million in June 2009. According to QQ.com’s live statistics readout (you can watch it grow in real time here), the record at time of writing was 79 million. According to Alexa, 3.26% of global Web users visited one of the various qq.com sites in September 2009.


For comparison, Skype’s all-time peak concurrent user count is 15 million, although it has the advantage of using user-provided infrastructure, whereas QQ has a client-server architecture and therefore a constant need for rack-space.

Not just users, but Paying Users

In 2007, out of 12 million peak concurrent users, 7.3 million had spent money with QQ, or to put it another way, 61% of verifiable QQ users were buying value-added services. (How many mobile operators can claim that?)

In March, 2009, we thought it unlikely that this high proportion would continue to pay as the service grew – and that it was quite possible that the 7.3 million earlier payers were dominated by early adopters and power users, so that future recruits would be less committed to the community, less geeky, and lower-income.

However, when Tencent’s Q1 results appeared at the end of March, 36.9 million users had purchased value-added services during the quarter, growing at a monthly rate of 8.4% to reach 40 million by the end of June. This latter figure was against a concurrent user base of 65 million, meaning that 62% of concurrent users were paying users.

We think this is an impressively high proportion at such volumes, and suggests that the revenue may scale reasonably well as it grows penetration further. As one might expect the cost model of such a volume business to scale efficiently, this implies further prospects of profitability. It is likely that such thoughts are one of the influences on the aforementioned growth in QQ’s share valuation.

So, how did they do it?



In our Serving the Digital Generation Strategy Report, we identified a list of key factors that anyone who wants to attract the customer of the future would have to address, which together describe what we call the participation imperative. Specifically, four axes define the customer’s aims:

  1. To interact socially with a peer group
  2. To personalise and customise their environment
  3. To express creativity – e.g. user generated content
  4. To maintain privacy/anonymity or seek notoriety

These require and depend upon four key affordances:

  1. Portability – broad ability to work across multiple PCs, mobiles
  2. Payments – virtual currencies, transactions
  3. Feedback – ratings, comments, discussion, personalisation, hackable APIs
  4. A directory – to find other people

We assess that QQ hits 7 out of 8 criteria squarely. Really, the only one they don’t cover is privacy – although they do have rich presence-and-availability control, it’s in the nature of such a community that going offline could be a noticeable act, and there have been problems with the Public Security Bureau (Chinese secret police).

NB. The Customer of the Future can be a complex and powerful character. When the Shanghai PSB demanded that QQ filter references to the Diayou islands (a controversial nationalist cause in China), the ensuing user revolt caused even the PSB to back off.]

QQ caters to user creativity and the need for personalisation much more deeply than most social networks with the possible exception of Facebook. Although officially proprietary, the system API is documented and QQ, the company, positively encourages a hacker ecosystem of interesting new applications. This goes some way beyond the skins and avatars most socnets offer. Similarly, you can’t offer more effective feedback to more advanced users than the ability to tinker with the works. Portability is well catered for – there are multiple client applications, SMS integration, various mobile clients, and the Web site.

Print your own Digital Money

QQ’s in-world digital currency is no trivial add-on. QQ derives revenue from selling applications, other in-game goods, and extra services such as a blog, games, and a streaming music service, in return for its internal digital currency. This market creates a sink for the digital currency, and therefore gives it value, which creates a further demand for it as a gift and reputation good. It shares revenue from the store with the creators of in-game goods, thus feeding user creativity.

In Telco 2.0 terms, QQ’s business model is collecting money from the downstream side and subsidising the upstream partners, in order to encourage the creation of saleable goods and the purchase of digital currency. In return for their participation, users get the core functions of the directory and the messaging layer to service their peer group and burnish their on-line identity.

In-World Currency dwarfs Advertising

Although QQ also does contextual advertising, its core business is the in-world economy. We remarked back in March that the ad business was overshadowed by the VAS business, and this is even more true now. Online advertising grew just under 10% year-on-year, but now makes up just 9% of total revenues, falling from 11%. Internet VAS revenues were up 107% and mobile VAS was up 38%.

In part, this is the unavoidable downside of being hackable; advertising is a tax on your attention, so some people will want to be rid of it. Just as many Mozilla Firefox users install Adblock Plus to screen out Web advertising, multiple unofficial QQ clients exist that strip the ads. But if the users buy the clients from the QQ Store, who’s complaining?

QQ’s ‘Two-Sided’ Business Model Strategy

We’ve identified three types of generic ‘two-sided’ business model strategy, and concluded that the most successful companies were those who operated at the creative edge between each type.

  • Strategy One involves giving away services before and after a transaction, and collecting a percentage of the transaction. Think Amazon – or a casino.
  • Strategy Two involves giving something away to create a trading hub, then selling something to the crowd. Think of the original Lloyds’ Coffee House – it didn’t write marine insurance itself, it sold coffee to the insurance brokers, who came for the liquidity and rumours, and stayed for the coffee.
  • Strategy Three involves selling access for third parties to the trading hub – like BAA plc renting shops at Heathrow Airport, or Google giving away a whole range of services in order to create inventory it can sell adverts next to.

QQ would initially appear to straddle Strategies Two (selling to the crowd) and Three (charging for access) in the two-sided business model. But the domination of in-world trade over advertising in its P&L statement suggests something else – much of what it sells to the crowd originates in the crowd. Isn’t this an example of the Amazon-like Strategy One, facilitating transactions in return for a turn on the deal? If so, they’ve brought off the impressive feat of exploiting creative ambiguity between all three.

Next: your market?

Where does QQ go from here? The answer appears to be “right here” – in August 2009, Tencent launched an English-language portal (imqq.com). Interestingly, the site is marketed directly at business, which is an extension of a strategy shift they have already undertaken in China. For some time, Tencent has been marketing a version of the client at business users which borrows the look-and-feel of Microsoft Live Messenger (apparently being boring can be a valid strategy).

The business version of QQ is paid for – sensibly in our view, Tencent don’t expect small companies to be spending much time trying to achieve legendary status in the QQ user community. As (supposed) serious, responsible adults, they’re meant to have a secure identity and reputation already, so they’re not likely to contribute that much to the in-world economy by trying to burnish them. Therefore, a traditional, one-sided model is being used to derive revenue from this submarket.

Conclusion: Watch with Care

Our conclusion is at this stage that the Telcos who aren’t yet familiar with QQ should keep a close watch on them in both home and away markets. At a minimum there’s a lot to be learned from how this smart and complex operator employs the ‘two-sided’ business models. At other extremes are competitor threat and partner opportunity scenarios that we’ll be looking at in more depth in our future analysis.

Even though there are a lot of mobile industry execs with scars from trying to transplant successes from (usually) Japan into WENA (Western Europe & North American) markets, complacency would be extremely unwise faced with a potential competitor that has demonstrated such a deft grasp of two-sided business models, such a close understanding of user needs, and such a solid base of competence in high scalability Internet engineering.

And Finally…

Bill Gates recently gave a speech in which he claimed that two out of the five most profitable firms in China “don’t pay for their software”. He was telling the truth, in a sense; a quick “curl -i im.qq.com” demonstrates that Tencent isn’t paying a penny for its server software – the site is served with Apache running on BSD Unix machines. That may not be what Bill meant, but perhaps he should have.

Full Article – Case Study: how to grow when your core market shrinks

Summary: Only the fit survive market changes, and evolving the business model to adapt is key. Strategy lessons for telcos and vendors alike from Boungiorno, a content aggregator that evolved to beat the shrinking portal services market. :


As traditional revenue streams come under threat, operators are starting to look at new business models. But how should they make the transition? The case of Buongiorno provides some clear lessons as it has successfully moved from being an aggregator of basic mobile content to a strategic partner of operators seeking to deepen their retailer capabilities and their customer intimacy.

For Operators, building such CRM capabilities will help maximise the value of the existing business model and provide a stepping-stone to new sources of value. It will provide operators with substantial near-term revenue growth as they will be able to offer more appropriate content and applications to their customers and will open up a $125+ billion medium-term growth opportunity by helping other upstream service providers interact more effectively and efficiently with their customers via a Telco platform.

Buongiorno’s success

Buongiorno has successfully circumvented the decline experienced in ringtones and other portal services since 2007, it’s core market only a few years ago, and moreover has continued to grow.


As well as promoting greater customer interaction, Buongiorno has employed a systematic and sustained acquisition strategy that has clearly added substantial revenue to the business over the last several years (including around €130m from iTouch in the 2008 figures). It is not realistic therefore to suggest that all of Buongiorno’s success is derived from its increased customer interaction strategy.

Nonetheless, the company has successfully repositioned itself from being a content aggregator to being a strategic partner of operators seeking to deepen their retailer capabilities and their customer intimacy, and fundamentally changed it’s position and role in the value chain – which is the key strategy parallel for Telcos.  We analyse Boungiorno’s repositioning and transformation strategy below.

Background History – the fundamental problem of growing in a shrinking market

Buongiorno was founded in 1999 as a content aggregator for the mobile market, providing a distribution platform for developers and media companies, and acting as a wholesale provider for operators. The company usually ‘white labels’ its services so that operators can use their own brand when retailing to their customer base. It initially focused on basic mobile content such as music, games, video, wallpaper and ring tones. Buongiorno enjoyed strong growth in its early years. However, by 2004 management could see that revenue growth from many of these basic services was going to slow down for four principal reasons:

  • Alternative ways of downloading content for free or more cheaply – peer-to-peer networks on PC followed by sideloading on to the device;
  • Excessive pricing of ring tones by operators and other retailers;
  • Hidden subscription charges for some services – reflected in fines being levied on some content providers;
  • More sophisticated devices that enabled, for example, ring tones to be created from music stored on the device.

The company therefore then faced the same problem as operators increasingly do now: how to generate greater revenues from end users at a time when revenue growth from core services was starting to dry up?


Strategic Solution: A focus on being a better retailer

In 2004-5, Buongiorno management decided that in addition to the existing assets (content and a technology platform) the company needed to grow its CRM and marketing capabilities. This would better enable them to support operators seeking to strengthen their relationship with customer bases that were spending increasing amounts of time and money off-portal. In so doing, they would also provide pull through for Buongiorno content.

The company had launched an advertising and digital promotion company, Buongiorno Marketing Services, in 2002 but the focus of the much bigger Consumer Services company now also shifted towards database building and management, CRM and consultancy, all underpinned by a flexible technology platform.

The first part of the strategy was to introduce CRM capabilities to the content platform so operators could better understand the buying patterns of their customers. This enabled operators to automatically provide targeted advertising and marketing, including personalised offers based on users’ past purchasing and click histories. Buongiorno thereby aimed to help operators be more relevant to their customers to encourage on-portal activity and increase loyalty, resulting in:

  • Increased ARPU;
  • More inactive users converted into buyers;
  • Reduced customer churn;
  • Reduced off-portal activity.

Example Operator Retail Campaigns: O2 ‘Extras’ and ‘Top-Up Surprises’

Buongiorno helped O2 in the UK create O2 Extras, an opt-in ‘club’ that provides update texts, bespoke advertising, free downloads and location-based services for its 1m+ members. The results below are clearly impressive, showing a tangible difference in value for O2 between O2 Extra customers and the rest.


[NB What is not clear fom this data is whether the behaviour of members changed after they joined the club. To some extent it is possible that the club’s success is predetermined – those people that use O2’s portal more and are more loyal to the company sign up for O2 Extras thereby confirming their value rather than the incremental benefit of being part of an opt-in club. It is also possible that the club has tied in more deal sensitive users who are more likely to churn. Overall, we believe that the club has tangible benefits but would advise further analysis to quantify the benefits for clients considering implementing a similar programme.]

The second move by Buongiorno was to enable greater interactivity via their platform, allowing operators to respond immediately to consumer behaviour with contextually relevant offers using pre-defined business rules. Boungiorno says that this enables operators to implement a simple but powerful concept: ‘Customers Do X and Get Y’. The aim is to further increase customers’ interactions with the operator by incentivising specific customer behaviours. Operators define what the reward (or penalty) is as well as the behaviour to be targeted.

O2’s Top-Up Surprises, a popular campaign in the UK that rewards the consumer with a prize whenever they put money on their pre-paid balance, uses Buongiorno’s ‘Instant Mobile Marketing’ platform. O2 offers prizes that are tiered according to the amount the consumer spends (bigger prizes for topping up more than £15), so that spending is ‘encouraged’. It cleverly contains the cash cost of the programme by mainly offering ‘network prizes’ consisting of minutes, texts and browsing time and only having a few ‘headline-grabbing’ prizes such as cash, cars and computer games.

The results of the Top Up Surprises campaign are not public but, according to O2, it has been ‘hugely successful’ and has demonstrated a clear business benefit from building some excitement into a relatively unfulfilling and mundane activity. The fact that O2 chose to extend the campaign beyond its planned timescale and invest £5.5m in a marketing campaign to support it would seem to bear this out.

Future Strategy: Options to develop a two-sided business model

Several products are currently being heavily marketed through the Top-Up Surprises campaign including Nintendo DS, Sony TVs, Toshiba laptops, Marks and Spencer vouchers and even a Toyota car. There is clearly an option for O2 (and other Instant Mobile Marketing platform operators) to charge brands for access to their customers through the interactive marketing campaigns. Getting this right would enable operators to generate more value from both sides of the platform. In other words, there are two available pricing models and O2 is currently only exploring the first.



Buongiorno’s story suggests that the road to Telco 2.0 should be via ‘Telco 1.5’. In other words, the focus for Telcos should be on developing the skills that will be valuable for upstream customers initially for themselves.  If they can make their retail offerings better by being able to target and customise offerings more effectively, then this can later be translated to the offerings of third-parties.  Becoming a best practice retailer, like Amazon, and developing a meaningful two-sided business model, like Google or Microsoft, will not be achieved overnight.  Operators need to become good retailers first and then add the second upstream revenue source.

…for Operators

The initial focus of operators should be on developing a stronger, more interactive and more profitable relationship with existing customers via:

  • Developing better CRM and data mining skills so operators have a clearer understanding of what customers want. Operators need to be able to answer the questions that Amazon, Tesco, Walmart, etc. wrestle with every day:  What has this customer bought in the past?  What does this tell us about what they might buy in the future?  What does their demographic profile tell us about their attitudes and needs?  How can we capture preference information from them to better understand how we can service them?;
  • Creating a longer term strategy for generating revenue from upstream players in a way that does not cannibalise existing end user revenues or, put another way, that creates more value across both customer groups than can be achieved from one group alone. This is a key point for all two-sided platform players.  For example, Google generates more value by making its search engine free to searchers than it would by charging them.  Why?  Because a free search engine (and other Google products) generates massive usage of the Google search engine which results in high value to merchants and advertisers.  If Google charged for search then the volume of searchers would rapidly diminish and Google would lose advertising revenues.  Operators need to consider their pricing strategy very carefully as a two-sided platform player – where should they continue to charge the user and where should they give up revenue from the end user in order to derive greater value from the upstream customer?

…for Vendors and Enablers

There has always been a fine line between ‘leading edge’ and ‘bleeding edge’ in telecommunications, and all vendors and enablers of future Telco success need to ensure that they are relevant now and not just promoting solutions for the future. This is even more important in the current economic climate.

Having said this, 94% of delegates at a plenary jointly hosted by Telco 2.0 and the Telemanagement Forum agreed that innovation and revenue growth as well as operational efficiency should remain a priority throughout the recession. In other words we cannot forget the future as we struggle with the present.

Vendors and enablers need to focus on continuing to solve the immediate ‘pressing concerns’ of operator management including churn prevention, ARPU growth and cost reduction, while also developing a strong thought leadership and position about how operators can win in the medium term.  They must:

  • Develop solutions that are flexible enough to be ‘forward compatible’ and support future operator business models, including two-sided models, at low incremental cost…
  • …and deliver solutions that make operators better retailers NOW – including improved customer interactivity and intimacy.  This will drive near-term revenues for operators and enable them to build a business case for investment that is not based on ‘jam tomorrow’ – something which will not get through investment committees in the current economic climate.

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?


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?

Serving the Digital Generation

Report Summary: This 120 page Strategy Report focuses on the ‘Digital Generation’ – the cohort which has grown up with new applications and technologies – whose behaviour will ultimately drive the future shape of the Telco business.

The report is a ‘must read’ for CxOs, strategists and product managers seeking to evolve telcos to succeed with the next generation.

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The Needs Gap – a strategic threat to Telcos

The report shows that there is a deep disconnect between Telecos and the Digital Generation.

The Digital Generation wants:

  • Communication to be free
  • To express identity and content
  • To move seamlessly between media
  • To connect with their social groups
  • New applications, fast

Telcos want:

  • ARPU
  • To connect calls and lines
  • To control as much as possible
  • To minimize capital investment
  • Years to develop new products and services

The Digital Generation has integrated some technologies and applications with their lives and discarded the rest – those that don’t fit – rapidly. Many other applications and services familiar to our readers (Facebook, QQ, Apple, Google, etc) now serve some of the needs that Telcos alone used to serve.

Telcos have generally been slow to produce services that meet the needs and expectations of these customers. Unchecked, this will ultimately lead to the disintermediation of the telcos from their ultimate source of value – their customers. This is a strategic threat not just for the youth segment but ultimately across all generations. This report outlines the threat, the urgent need for change, and a framework to support that change.

Report – Key Points

  • Definition of the digital generation – youth-oriented but aging fast
  • Key digital generation needs and behaviours – the need for participation
  • Drivers of service value for these customers – supporting interaction and self-expression
  • A new approach to product development – the Customer Participation Framework
  • The economics of end user participation – driving ROI from customer interactions
  • User participation and the two-sided business model – kicking off Telco 2.0 strategies
  • Social forces shaping young people’s actions – a risk culture
  • Age, gender and national variations in the Digital Generation – similarities and differences
  • Attitudes to technology – only a means to an end


Overview of the Customer Participation Framework


Fig 1 Overview of the Customer Participation Framework


Fit with Telco 2.0 Business Model Innovation Strategies

In previous STL Part.ners’ reports the focus has been on how Telco assets could be used to open new revenue streams from upstream service providers wanting to interact with end-users. Reports such as the 2-Sided Telecoms Market Opportunity have focused upon the business opportunity of how operators could reduce digital friction and protect themselves from over the top providers eager to circumvent the operator and gain access to the end-user directly.

In this report we shift the focus to examine end-users and their behaviours, explaining how:

  1. Operators can improve their retail offering to these customers by better meeting their needs;
  2. Operators can increase the value of their assets by better engaging with these customers and, in so doing, how they can enhance the value of the two-sided business model.

Serving the Digital Generation focuses on why and how young people are adopting digital and communication technologies into their lives. By doing this, STL Partners can help Telco industry management better anticipate, and respond to, the main drivers and unmet needs of tomorrow’s Telco 2.0 customer. What we may regard as quirky segmented behaviour today (blogging, twittering, social networking, for example) is, in fact, mass consumer behaviour tomorrow. Here STL Partners gives an insight into mass-market behaviours for a new breed of customer, which will shape the future of the communications and media sectors.

This report explains this behaviour and explores how the desire to participate represents a new opportunity for Telco value creation. To realise this opportunity, we have developed a new framework for future product development and services, The Customer Participation Framework (CPF). Developed initially as a template for validating new service or application ideas, the CPF is a tool that can be used to support different phases of the product or service innovation process:

  1. At concept initiation, to validate ideas against customer needs;

  2. During the development and trial phase, to ensure usability issues are properly addressed;

  3. In the execution phase, as a means of feedback iteration and a measurement of success.

The CPF framework can help operators increase the value of the Telco Value-Added Services platform and lead to entirely new ways of defining, evaluation, developing and marketing Telco services (retail) to both upstream service providers/partners and end users.We believe that The Customer Participation Framework represents an opportunity for operators to increase the value of their platforms and retail strategies and thus help to realise the $375billion two-sided business opportunity outlined in the 2-Sided Telecoms Market Opportunity and the Future Broadband Business Model reports.

Who is this report for?

The report is for senior (CxO) decision-makers and business strategists, product managers, strategic sales, business development and marketing professionals acting in the following types of organisations:

  • Fixed & Mobile Operators – to set and drive product development and strategy.
  • Vendors & Business Partners – to understand customer need and develop winning customer propositions.
  • Regulators and Standards Bodies – to inform strategy and policy making.

Strategists and CxOs in IT and Investment Companies may also find this report useful to understand the future landscape of the Telecoms and related industries, and to help to spot likely winning and losing investment and operational strategies in the market.

Key Questions Answered

  • What is driving the behaviour of the digital generation and what does this segment value in products and services?
  • Which companies are best meeting the needs of these customers? What can operators learn from them?
  • What is the short and longer term benefit to operators of meeting these needs?
  • How should operators and vendors go about developing products and services that achieve this?

Background – The need for a new innovation process in telecoms

During the period of rapid growth when markets were emerging, the process of product or service development for Telcos was driven by a focus on network roll out, capacity issues, spectrum licences, supply chains, vendors, traffic forming, the regulatory environment and so on.

This was understandable. Uptake of Telco services was rapid and the challenges of meeting demand immense. Innovation was predominantly in hardware, which required long development cycles, massive investments and a stable regulatory environment. Everything was tested to destruction to ensure robustness and the ability to scale. The industry thrived, driven by some outstanding innovations in core networks, capacity handling etc.

Today, however, as markets mature and become saturated, this approach to innovation has run its course.

Increasingly, core propositions and networks are being commoditised and new services are being developed and delivered by others over the Telco infrastructure. Operators are under increased pressure to:

  1. Hold onto market share (or put more negatively, prevent churn) as an overriding consideration. Operators strive to increase customer retention and ‘stickiness’ on existing core services;
  2. Find new revenue streams – outside of the core personal communications services.

But to build stronger customer experience and innovate in new spheres, requires a shift in focus from being Telco-centric to customer-centric. Placing end-user engagement and participation at the forefront of what Telcos do requires a cultural revolution.

It means a change in processes and the revaluation of core assets.This report focuses on what areas of innovation operators should seek to focus on in their existing retail operations, as well as the core enabling services that form a cornerstone of the future business models.

A move from Telco-centric to customer-centric innovation

Fig 2 Telco-centric vs. Customer-centric

Case Studies, Companies and Services

Detailed Case Studies:
Blyk, Buongiorno, Cartoon Doll Emporium, Facebook, Maplestory, Mo1, Mobagetown, Puppyred, QQ.

Companies and Organisations Covered:
Amazon, Blyk, Buongiorno, Cartoon Doll Emporium, Ebay, Facebook, Firefox, LinkedIn, Livejournal, Maplestory, Mo1, Mobagetown, O2, Orange, Puppyred, QQ, Skype, Xanga, YouTube, Zygo

Summary of Contents

  • Introduction
  • Executive summary
  • Defining the Digital Generation
  • A Framework for Future Service and Product Development
  • Kids and Communication
  • The Changing Contours of Childhood
  • Digital differences: Age, gender & nation
  • Making technology their own

The Research Process

We interviewed senior marketing and product development executives in a dozen operators to fully understand the how the current innovation process is managed and what evaluation criteria are adopted when developing potential new propositions, products and services. This helped us to identify the shortcomings of current innovation approaches, rooted in a tradition of network deployment and subscriber acquisition.

For our other stream of research, we drew on the extensive body of existing industry and academic research into young people’s use of digital communications technology and their adoption of social software. We looked at what they are doing with technology and how adoption has occurred (including exploring nine case study examples).

Research Format

  • 120+ page manuscript document

This report is now available to members of our Telco 2.0 Research Executive Briefing Service. Below is an introductory extract and list of contents from this strategy Report that can be downloaded in full in PDF format by members of the executive Briefing Service here.  To order or find out more please email contact@telco2.net, call +44 (0) 207 247 5003.

Full Article: LTE: Late, Tempting, and Elusive

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

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

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

For further information please contact:

Richard Kramer, Analyst
+44 (0)20 7959 1303

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

Wireless Infrastructure


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

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

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

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

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

Reaching for the Grapes

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

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

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

Source: Arete Research

LaTE for Operators

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

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

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

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

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

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

Tempting for Vendors

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

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

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


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

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

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

Elusive Economics

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

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

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

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

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

Figure 2: Deflation and Delays in Successive Technology Generations


Source: Arete Research

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

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

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

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

Coping with Traffic

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

Is There a Role for WiMax?

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

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

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

Will Anyone Get the Grapes?

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

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

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

For further information please contact:

Richard Kramer, Analyst
+44 (0)20 7959 1303


For important disclosure information regarding the companies in this report, please call +44 (0)207 959 1300, or send an email to michael.pizzi@arete.net.

This publication was produced by Arete Research Services LLP (“Arete”) and is distributed in the US by Arete Research, LLC (“Arete LLC”).

Arete’s Rating System. Long (L), Neutral (N), Short (S). Analysts recommend stocks as Long or Short for inclusion in Arete Best Ideas, a monthly publication consisting of the firm’s highest conviction recommendations. Being assigned a Long or Short rating is determined by a stock’s absolute return potential and other factors, which may include share liquidity, debt refinancing, estimate risk, economic outlook of principal countries of operation, or other company or industry considerations. Any stock not assigned a Long or Short rating for inclusion in Arete Best Ideas is deemed to be Neutral. A stock’s return potential represents the difference between the current stock price and the target price.

Arete’s Recommendation Distribution.  As of 31 March 2009, research analysts at Arete have recommended 20.9% of issuers covered with Long (Buy) ratings, 14.9% with Short (Sell) ratings, with the remaining 64.2% (which are not included in Arete Best Ideas) deemed Neutral. A list of all stocks in each coverage group can be found at www.arete.net.

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Full Article: Mobile Broadband: Urgent need for new business models

Summary: While the market for mobile broadband services (3G/WiMax/Dongles/Netbooks etc.) is growing explosively, today’s telco propositions are based on out-moded business models which threaten profitability. Telco 2.0 proposes innovative retail and wholesale approaches to improve returns.

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

Executive summary & recommendations

At present, the majority of mobile broadband subscribers are engaged through traditional monthly contracts, typically over 12-24 month periods. This is true for both standalone modems and especially embedded-3G notebooks. There are also some popular prepaid offerings, especially in markets outside North America.

However, further evolution is necessary. Many consumers will not want another monthly commitment, especially if they are infrequent users. Operators will be wary of subsidising generic computing devices for the non-creditworthy.

We expect a variety of new business models to emerge and take a significant share of the overall user base, including:

  • Session-based access, similar to the familiar WiFi hotspot model;
  • Bundling of mobile broadband with other services, for example as an adjunct to fixed broadband or mobile voice services;
  • Free, guest or “sponsored” mobile broadband, paid for by venue owners or event organisers;
  • “Comes-with-data-included” models, where the upfront device purchase price includes connectivity, perhaps for a year;
  • Two-sided business models, with mobile access subsidised by “upstream” parties like advertisers or governments, rather than direct end-user payment.

Transition to these models will not be easy. There are question marks about the convenience of using physical SIM cards, especially for temporary access. Distribution, billing and support models will need re-evaluation. Definitions and metrics will need re-evaluation. Terms like ARPU and “subscription” will have less relevance as conventional “subscribers” drop to perhaps 40% of the overall mobile broadband user base. Operators and vendors need to face up to these challenges as soon as possible.

Figure 3: Mobile broadband can support both subscription & transient models


Source: Telco 2.0

Recommendations for mobile operators & retailers

Business models and business planning

  • Calculate your production cost per GB of data based on the real cost of adding extra new capacity, rather than just using up the “sunk costs” of current radio assets;
  • Reinterpret mobile broadband business plans based on potential capex reductions and delayed capacity upgrades during recession;
  • Develop a broad range of business models / payment options, including long-term contracts, prepaid accounts, session-based services, bundles and mechanisms for enabling “free” or “sponsored” connections. Do not think solely in terms of “subscribers” as most future users will not have “subscriptions”;
  • Examine “two-sided” Telco 2.0 business models as mechanisms for gaining mobile broadband revenue streams, for example through advertisers and governments.

Marketing and distribution

  • Be extremely careful about marketing mobile broadband as a direct alternative to DSL / cable. You may also need those wired broadband lines for future femtocells or WiFi offload;
  • Be realistic about the future mix of dongles vs. embedded modules. Customers (and salespeople) like dongles, so despite the theoretical attractions of embedded, don’t kill the golden goose. Instead, look at ways to add value to the dongle proposition;
  • Partner with large IT services and integration firms to deliver mobile broadband solutions to the enterprise, rather than point products.

Network planning

  • In dense areas, spectrum and network capacity is generally too valuable to waste on those users who are not “truly mobile”;
  • Only use application-specific traffic management if you are prepared to openly publish details of your network policies. Vague terms on “fair usage” are likely to be counter-productive and challenged by law and the Internet community;
  • Consider potential scenarios around new high-bandwidth applications appearing across the user base (e.g. high-definition video, enhanced always-on social networking etc). Put in place strong links between your device, web application and radio network departments to anticipate effects.

Technology planning

  • Look at the evolution of devices and software to understand likely opportunities & threats in the way they use the network (e.g. always-on connection whilst “off”, background applications pulling down traffic in “quiet” periods, new browser types or video codecs etc);
  • Push vendors and standards bodies towards mechanisms for enabling session-based access for mobile broadband. This may need compromises on SIMs or roaming / multi-operator partnerships.


  • Develop a separate, arm-length, wholesale division able to offer mobile broadband to MVNOs, Internet players, device/content vendors or vertical-market specialists on a non-discriminatory basis.

Recommendations for network equipment suppliers

Business models and business planning

  • Better understand the mix of traffic by device type on operator customers’ networks, as this will drive their future upgrade / enhancement plans. A move to PC-dominated networks may need very different architecture to phone-oriented designs;
  • Develop network-upgrade business cases against realistic growth in device types, application consumption and changing usage patterns.

Product Development

  • Look at new managed service opportunities arising around the MID and “mobilised” broadband consumer electronics device ecosystems, for example in content or application management, service and support etc;
  • Look at mechanisms for supporting non-SIM or multi-SIM models for mobile broadband, especially for users with multiple devices;
  • Optimise backhaul and network-offload solutions to cope with expected trends in mobile broadband. Integrate WiFi or femtocells with “split tunnel” architectures to “dump traffic onto the Internet”;
  • Develop data-mining and analytics solutions to help operators better understand the usage models for mobile broadband, and customise their networks and offerings to target end users more effectively.

Marketing and distribution

  • Be wary of over-hyping network peak speeds in marketing material, rather than increasing overall aggregate network capacity;
  • Position WiMAX networks as ideal platforms for innovative end-to-end device, connectivity and application concepts.

Recommendations for device & component vendors

Business models and business planning

  • Consider issues around macro-network offload, specifically the ability to easily recognise and preferentially connect via femtocells or WiFi;
  • Expect the MID, consumer electronics and M2M markets for mobile broadband to be fragmented and possibly delayed by recession. Focus on partner programmes, tools and consulting/integration services to enable the creation of new device types and business models;
  • Do not expect markets with a heavy prepay bias for mobile phones to be enthusiastic about long-term contracts for notebook-based mobile broadband;
  • Be very wary about operator software acting as a “control point” on the notebook, especially in terms of application monitoring / blocking / advertising. As handsets become more open, there are few arguments for PCs to become closed;
  • Anticipate support questions around issues like network coverage, signal strength etc. and have processes in place to deal with these;
  • Consider new business models for WWAN-enabled notebooks supported by advertisers, content or Internet companies, governments etc;
  • Support WiMAX as well as 3G / LTE in new device platforms – it seems likely that some WiMAX operators will be more open to experimentation with new business models, as they have less legacy to protect from cannibalisation.

Product Development

  • Add value to dongles by supporting other functions like GPS, video, memory, WiFi, MP3 etc. Also use physical design to differentiate and make external modems seen as “cool”;
  • Encourage the development of “free” / 3rd-party paid models for mobile broadband to drive modem adoption among users unwilling to pay for access themselves;
  • Consider developing your own portfolio of value-added services that can exploit the WWAN connection – e.g. managed security and backup;
  • Everyone with a WWAN-enabled notebook or MID will have a mobile phone as well. Endeavour to make them work well together and exploit each other’s capabilities;

Marketing and distribution

  • Encourage operator partners to support a broader range of business models to extend the addressable market to customers unwilling to sign 24-month contracts for mobile data;
  • Look at channels for temporary modem rentals / provision to venue or event delegates;
  • Examine non-operator routes to market for “vanilla” modules and modems, and support this usage model. For example, set up a web portal with methods highlighting how to acquire temporary SIM+data plans in different countries;
  • Push OS suppliers towards richer APIs in connection managers that can tell applications various characteristics about the network being used, signal strength, macro vs. femtocell, maybe even measured latencies and packet loss. Maybe also expose details of alternative radio bearers;
  • Push module vendors towards pricing models that are geared into future service uptake / expenditure;
  • Work closely with software vendors to ensure optimised performance of connection managers, browsers and other application environments;
  • Look at bundling opportunities via operators, for example phone + netbook combinations.

© Copyright 2009. STL Partners. All rights reserved.
STL Partners published this content for the sole use of STL Partners’ customers and Telco 2.0™ subscribers. It may not be duplicated, reproduced or retransmitted in whole or in part without the express permission of STL Partners, Elmwood Road, London SE24 9NU (UK). Phone: +44 (0) 20 3239 7530. E-mail: contact@telco2.net. All rights reserved. All opinions and estimates herein constitute our judgment as of this date and are subject to change without notice.

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



  • Simon Torrance, CEO, Telco 2.0 Initiative



  • 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


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.


·         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]


·         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.

Full Article: Enterprise Services 2.0: Mastering communications-enabled business processes; Executive Briefing Special


NB A PDF version of this Executive Briefing can be downloaded here.

This special Executive Briefing report summarises the brainstorming output from the Enterprise Services 2.0 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: Devices 2.0, Content Distribution 2.0, Retail Services 2.0, Piloting 2.0, Technical Architecture 2.0, and APIs 2.0. In addition there is 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. Over the next few weeks we will produce additional ‘Analyst Notes’ with some of these more detailed responses.

NOTE: The presentations referred to in this and other reports, some videos of the presentations themselves, and whole series of post-event reports are available at the event download site.

Access is for event participants only or for subscribers to our Executive Briefing service. If you would like more details on the latter please contact: andrew.collinson@stlpartners.com.


Background to this report

Enterprises are rapidly extending their use of the internet and mobile to promote, sell, deliver and support their products and services and manage their customer and supplier relationships. However, companies involved in the ‘digital economy’ still face substantial challenges in doing business effectively and efficiently. Telcos have a unique mix of assets (user data, voice and messaging, data and connectivity capabilities) that can be re-configured into platform-based services to help reduce the friction in everyday enterprise business processes: Identity, Authentication and Security , Marketing and Advertising , Digital Content Distribution , Offline Logistics, Transactions (billing and payments), Customer Care.

Research from the Telco 2.0™ team has identified significant potential market demand for these services which could generate new profitable growth opportunities and increase the value of the telecoms industry to investors and government.

Brainstorm Topics

  • What assets should operators be leveraging to help enterprises?
  • What would a platform to support improved customer relationships for enterprises look like?
  • What ecosystem is needed to deliver telco platform services to enterprises?
  • Best practice use cases and case studies
  • Cutting-edge developments in voice-Web integration

Stimulus Presenters and Panelists

  • Joe Hogan, CTO and Founder, Openet
  • Laurence Galligo, VP Communications, Oracle
  • Glenda Akers, SVP, Telecommunications, SAP
  • J.P. Rangaswami, MD, BT Design
  • Werner Vogels, CTO, Amazon
  • Thomas Howe, CEO, Jaduka



  • Simon Torrance, CEO, Telco 2.0 Initiative


  • 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

How to create profitable QoS, bandwidth, and network usage services

Joe Hogan, CTO, Openet said that things happen slowly at telcos, but they also have short memories. Looking back at the beginning of AOL, they provided modems, services, proprietary browsers, and content in their walled garden. Eventually, though, they had a disastrous experience with over-the-top (OTT) players; people started independent ISPs, and you could use your own e-mail and Mosaic or later, Netscape, which was actually better.

The lesson is that, if you try to own the entire value chain, you will be disaggregated. For telcos and ISPs today, the equivalent is the dumb pipe phenomenon. We’re now seeing RFPs from operators for serious intelligent pipe projects. We expect them to start coming from cable, and from mobile operators who are seeing their dongles used as broadband access.

I think not having a policy management system will be unusual in 24-36 months time; we need throttling, subscriber management, and deep packet inspection.

The second part of our strategy, he said, is to work with the OTT players. We need to impose controls on users who are essentially abusing the service, but only in a back to back relationship with the OTTers, so as to open up the network even if significant controls are imposed. For example, if someone uses all their bandwidth in the first three days in the month but goes to Hulu, and Hulu has a relationship with the network, they can still see the video anyway. As a result, we need a highly dynamic infrastructure.

So we’ve formed a new relationship with Cisco – making sure that the infrastructure does stay smart. If you’re a bandwidth hog, you will get shaped; unless you’re on a web site with a relationship.

Policy management, then, is a strategic piece of infrastructure for vertical revenue sharing and competition. In IMS parlance, it’s the PCRF that is responsible; this means that it must be able to process a significant volume of real-time decisions. We’re looking at 3,000-5,000 transactions a second.

J.P. Rangaswami, MD, BT Design: ”The old model worked and we were good at it, but the only way we could learn about the new model was by experimenting”

Looking ahead, the cable industry’s Canoe is the VISA for advertising – a standard for the technical aspects of ad insertion, for the business model, and for the accounting, reporting and management information system. It requires the infrastructure to provider subscriber- and context-aware charging rules, integrated, context-aware policy management (so it can improve QoS in appropriate contexts), multi-dimensional rating & charging, multiple balances for subscribers (general balance, service-specific balance, points balance), notifications/advice of charge, re-direction, and comprehensive auditing and reporting to support customer service. It needs to provide high performance and be essentially invisible to the subscriber.


Exploring the e-citizen opportunity

Laurence Galligo, VP, Communications, Oracle, presented results from a survey which suggested there was strong support for Telco 2.0 among Oracle customers. Who, she asked, has had a bad experience interacting with the public sector recently? Oracle has put a lot of focus into this recently under Smart City, their project to support improved citizen experience with government services.

For example, there is the SNEN – Single Non Emergency Number. A single point of contact for a whole range of government services outside the emergency-response sector. Value estimated at $1.2bn in five years.

We implemented this as 311 for New York City – the single point of contact led into an integrated ”citizen service centre”. This requires a lot of the underlying Telco 2.0 capabilities – to make it work, we need to authenticate the citizen, to federate their data, to carry out e-commerce transactions, to provide location-based services, and to route voice and messaging intelligently.

The result was an unified government platform – including networking, location-based services and GIS, voice and CTI, CRM, reporting, and transaction-processing systems. Working with a system integrator or software company, the Telco could become a leading partner for government in delivering better citizen services.


Enabling the Transition to Customer Self-Care

Glenda Akers, SVP, Telecommunications, SAP said that the mobile phone had become the preferred route for individuals to interact with organisations. But call centres were horribly inefficient – there is a need to balance quantity – the rate at which calls are processed – and quality – the outcome of the calls, and many fail at this. CTI systems are frequently very poorly integrated – hence there are lots of mistakes and much routing of calls between multiple call centres.


According to an Accenture study, 40% of agents’ time was spent dealing with calls that had gone to the wrong call centre.

And 60-70% of call centre costs are accounted for by labour; anything that can reduce the number of calls is therefore a good deal. Human agents are far too valuable to spend their time just looking up information from the database, so query-only calls must go. So – there is a clear business need to make self-care much better.

High priority sectors are those which have high volumes of traffic, complex queries, distributed resources, and which need to handle contact through multiple channels. Specifically, telecoms/IT itself, finance, retail, media, health, transport, government, unions.

BusinessObjects Mobile is the widgetry interface for SAP’s enterprise workflow systems. Some use cases are bank accounts, bills, energy usage statistics. Mostly, they are query-only, or they have a few one-click controls. The iPhone showed the way, now we want to spread it to many other devices. Web-based, so only a minimal degree of configuration required.

Telcos could provide this as a hosted service, using their identity, billing, voice switching, and device management capabilities, and perhaps also their call centres.


The Front Line of Communications-Enabled Business Processes

Thomas Howe, CEO, Jaduka said that Jaduka, his new company, differs from the Thomas Howe Co. in that it does more voice mashups for more people. Communications-enabled business processes – it’s about making processes faster and more efficient by including real-time communications, which may be voice but may not. There is a traditional heavy approach, using dialers, IVRs and call centres. This involves either heavy CAPEX, or else heavy OPEX on long term systems integration or outsourcing contracts.

The alternative is to do it on the Web. Think of it as long-tail delivery – many small applications, dealing with highly specific tasks. But the needs involved are more like the short head – because many, many enterprises have the same or similar problems.  An important, but underestimated market for CEBP is within the enterprise. Many companies lock out suppliers, customers, other stakeholders and even employees in the field from their systems. CEBP breaches this –  it extends the enterprise IT system outside the firewall.

Traditionally, there have been about 10 voice apps and about 10,000 nonvoice apps. The difference is that group 1 wouldn’t exist without voice but group 2 would. That doesn’t mean, though, that group 2 wouldn’t benefit from voice.

There are 4 fundamental CEBP services, out of which the others are constructed – Notifications, Diary, Click to Call, and Conferencing.

Consider the Ribbit/Salesforce app that lets salesmen leave voice messages into the CRM system an example of the Diary. Click-to-Call allows you to add metadata to the raw voice file. For narrowcast messaging: this means leaving a particular message for a particular person. It’s better than snailmail, and has a similar role to e-mail in e-commerce. But everyone has a phone number, and you can find them. E-mail isn’t the same.

Werner Vogels, CTO, Amazon.com: ”You can’t keep the whole value chain in your own hands – you’ve got to be part of the chain and take your one cent!”

Unique telco contributions here are: intelligent routing, determination between mobile and fixed numbers, information about which number is best, ability to switch between text and voice.

Voicesage did a solution for a furniture delivery service. Using notifications, confirmations, and post-delivery checks, they achieved a 10-fold reduction in missed deliveries. This reduced truck rolls, but also reduced inventory and accounts receivable. And they also made the customers happy. The solution is software-as-a-service, so there is no capex upfront. And it creates lots of interesting metrics.

Assume an average delivery cost of $70 for furniture in the US; 40,000 deliveries, of which 4% fail. There is an opportunity for a $120,000 saving at a cost of 50 cents a trip. This means additional carrier revenue of $20,000 at over 90% margin. There are appliance sales of $20bn a year in the US, 50 million deliveries per day.


But there are thousands of segments, thousands of distributors, and thousands of applications. In reality, serving these will require about a 50/50 split between ready-made solutions and custom development.  Value creation requires vertical expertise being applied to horizontal capabilities. One example would be using voice messaging to monitor congestive heart failure patients. .

Software as a Service is great for customers, but not so good for systems integrators. Their business model is getting more complicated. We, the developers, want to share revenue with the integrators – but they struggle with the idea. But do they want to be cut out entirely?

We’ve stopped using the term “price per minute”  – instead, we refer to value based pricing. This is the natural way for Telcos to monetise things like location, billing, and voice and to reintroduce variable (value-based pricing) into their business models.


Participant Feedback


Undoubtedly, some of the more ‘glamorous’ Telco 2.0 propositions revolve around advertising, content and entertainment. New business models from operators and Internet players in the consumer space garner much of the attention of Telco executives and media commentators. Blyk, YouTube, iPlayer, music downloads and P2P video distribution sit at the top of the agenda in terms of driving new revenue opportunities and evolving cost models. Approaches like “sender pays” data are primarily aimed at those sending large chunks of “content”.

Yet historically it has been the corporate marketplace which has driven much of operators’ traffic and profits, through large voice volumes, national and international data networks, and value-added services like system integration and hosted applications. Much of the current hype around Cloud Computing and software-as-a-service is solidly enterprise-driven, while two-sided business models involve deriving extra revenues from large ‘upstream’ organisations rather than consumers. Even the mass-market mobile operators will need to learn to engage with (and sell to) corporate technology representatives.

Although it is possible to see the long-term roadmap of “exposed” network and device capabilities taking friction out of business processes, it seems that the initial group of service options are rather more prosaic. It should be relatively easy to build on existing communications platforms like call centres and customer-service platforms, extending B2C interactions in more intelligent ways.

Feedback (Verbatim comments): The money is in the enterprises

The feedback from the event highlighted some general agreement that the enterprise market offers significant opportunities.

  • Great service examples, how do we show the value based on actual cases and savings, also need to consider the green angle [#22]
  • Great explorations of the dual sided biz models. [#27]
  • This is a good case that shows how Telco assets can be put to use. Helping customers and businesses to interact better is also a good way to diffuse new services to consumers B2B2C. [#10]

Feedback: Where do telcos fit?

But significant doubts remain as to the precise value that the Telcos can contribute, or their fit in the enterprise technology value chain. This is not surprising, especially in mobile, where many operators have shown limited interest in integrating with corporate IT and business processes, often just focusing on bulk sales of phones and minutes.

  • Is this not just supporting opening the networks to monetisation of long tail applications utilising Open APIs?. [#6]
  • In all the cases we heard the value was in the application not the Telco services, and no obvious reason why the Telco should capture the application. Where is the Telco 2.0 value in all this? [#7]
  • rgd. 7: the question: what is Telco service in the future? The Telco service will include traditional services as well as applications and process support. [#11]
  • <How are those examples being translated into service provider revenue and business, maybe in the cloud? [#12]
  • In a flat cost / head count world, what do you stop as an operator to free up people to develop these services with enterprises; governments etc who are often slow in decision making? [#19]
  • Ref 19: this is where vendor expertise matters. Don’t reinvent the wheel. [#36]
  • Telco’s own self care offerings are not mature or sophisticated so although they could help enable this their ability to market/offer this seems like a stretch. [#25]
  • Re: 7 agree, at a high level, is business process outsourcing a function for a Telco to enable/extract value. [#26]
  • USP of Telco’s unclear. Could all be done by an ASP using Telco wholesale products? [#23]
  • How does this all integrate across the value chain? [#38]
  • Customer service platforms used internally by Telcos should be generic-ised, extended and then exposed to third parties, a bit like the Amazon web services strategy. [#40]
  • CIOs at large Telcos are, now more than ever, in need of cojones (balls). They need to take risk or the Telco 2.0 will not be realised. They have the old school PTT mentality. this make take a generation to achieve. [#54]
  • <What is the value added Telco2.0 services that these applications need? Examples didn’t focus on this core question [#32]
  • How will a Telco in these situations deal with enterprise customers who use a different access provider? E.g. if you’re the Telco supporting e-citizens for local govt, do you have to wear lots of interconnect costs to communicate with those citizens using competing cell phone providers? [#49]
  • re 49, good point. we need to coordinate activity or the costs became prohibitive. banks solved this for credit cards and ATMs so it is possible [#51]

Feedback: Jaduka & Communications-enabled Business Processes

A regular speaker at Telco 2.0 events, “Mr Voice Mashup” Thomas Howe received a lot of attention at his new gig as Jaduka CEO

  • >At first I was bored the Jaduka presentation, but after thinking about it, it was the best example of real world Telco 2.0. [#35]
  • What is Jaduka’s business model, how do they make money, it was not clear in the presentation? [#9]
  • What is Jaduka’s view on reselling, sharing customer data with partners is this beginning to happen? [#28]
  • Where does Jaduka see the money coming from, voice apps, data apps, SMS apps, what are the sweet spots?
  • [#15]One wonders whether we are missing some opportunities to span from Jaduka type capabilities with Bondi type standards to ensure that there is a logical hand-shake with the end customer.
  • [#37]Does Jaduka create a database of user identities mapped to phone numbers that works across carriers? This would be a powerful resource to enable anonymous communications and business processes. [#42]
  • What are Jaduka’s requirements to Telcos in terms of API and other interfaces in order to enable Telcos to build appropriate wholesale offering? [#43]
  • What can Telcos offer a company like Jaduka for them to make new services? What should Telcos standardize of new APIs to allow a company like Jaduka to reach as many users as possible? [#18]

Feedback: Customer care opportunities beyond call centres

But although there is interest in Voice 2.0 and mashups, it remains unclear what services are there beyond next generation contact centre-type applications

  • Machine to machine is an amazing opportunity but business process engineering is more difficult than expected. [#24]
    •     re:24 BPR is only part of the problem, legacy infrastructure and proprietary black box end-to-end are holding us back. There needs to be an internal conversation within the Enterprise to rethink the application of technology against new business models. [#47]
  • Some good stuff but maybe too much is just call centre + a bit more. Interesting but hardly revolutionary. [#46]
  • Not enough focus on more advanced assets like GPS in phones, pushing widgets to devices etc. There’s a lot more than just advanced call centres. [#44]
  • What is a little disappointing is the low level of Telco 2.0 insight and vision amongst these enterprise protagonists compared to the entertainment and content people. Is this because there is less Telco 2.0 opportunity here, or because they’ve thought less about it? [#56
    • re 56 – I think it’s because in the enterprise there’s an issue that most Telcos, especially mobile, don’t really understand the detailed business processes at their corporate customers, so it’s difficult to come up with solutions that exploit Telco assets. Also there’s a big mass of SI’s and VARs/ISVs and outsourcers who sit much closer to the customer than the big apps providers. [#58]


Feedback: Telco 2.0 for Government 2.0?

Taken as a whole, it is exceptionally difficult to target the whole enterprise marketplace. The IT industry tends to sell its offerings through offering industry-specific teams, which take general software or service components and tune them for the requirements of particular verticals. Telcos will need to fit their “two-sided” offers (or just basic single-sided hosted options) into a similar structure, except for the most “vanilla” horizontal service elements. The event threw up some doubts that new upstream customers could be reached easily. One approach that seemed to resonate was Oracle’s pitch around a central contact point for all local government services, or a “311” number in US parlance.

  • These apps need detailed use cases and expertise for the verticals. Where would a Telco get this knowledge or would they partner with these type of companies, we heard from today? [#16]
  • I love the 311 idea. This is like a special 0800 number to the local government call centre. [#34]
  • I don’t think the SAP proposition works well for consumers – who wants to download a customer service app for their gas/electricity company to their mobile phone? [#41]
  • At what size does this make sense as a municipal opportunity for a Telco? 3 million residents? More? [#45]
  • In my discussions with the Telcos they do not believe that the local services are coordinated enough to see the value proposition, we need to widen our industry engagement to include these local service companies. [#17]
  • Does this signal the death of the traditional Telco and the emergence of the local communications provider attached to the local municipality? [#33]
  • Not sure the Telco can cooperate enough with the local government. to provide an integrated 311. e.g. provide location service to find nearest service. [#39]


Feedback: Marketing Telco 2.0 to the enterprise

The engagement model between operators and enterprises remains opaque. Is it about partnering or new channels & marketing techniques? Telco 2.0 believes that many operators need to be realistic – they cannot “own” the enterprise value chain simply via provision of a few APIs, when incumbent integrators and software vendors are already tightly bound to business processes.

  • Can a Telco actually logistically work with hundreds of SIs to make this feasible [#30]
  • As a Telco how do you stop partners taking the majority of the value chain with enterprises and governments? [#31]
  • How does a Telco manage to sell the idea of these services to millions of small businesses? the cost of sale is too high to service a dentist who might spend $100 a year on phone/SMS reminders for appointments. [#48]
  • Re 48, in the same way Google and Amazon can do it: by driving down the cost of bringing companies on to the platform. it doesn’t work if it needs an SI involved – the whole point is that this works if it is plug and play. [#50]
  • If the likely evolution of many Telcos is that network assets are spun off into a few shared netco’s and the remaining service operations are left competing for customers (with Google, Nokia etc), who exploits the 2 sided business model – the netco with open API’s or the service leveraging the end customer relationship? [#60]

Feedback: Competing with Big Technology Solutions

Software vendors like SAP and Oracle could be the bridges between enterprise and Telco IT domains. These companies already have strong footholds in almost all vertical markets – and are also ramping up the reach of their applications for telecoms operators. That said, their incumbency also represents a challenge to the Telco 2.0 model, particularly where the more innovative web- and SaaS-based models conflict with large-scale “owned” in-house application architectures.

  • It was not clear in the SAP presentation how it really fits into the Telco2.0 initiative – it may have been better received if it addressed the commercial model the technology allows. [#20]
  • I don’t understand the Oracle or SAP examples. they have a vested interest in complex, heavy apps which are attractive to SIs with very high total cost of ownership. [#52]
  • Web services, cloud computing and virtualization are absolute disruptive advances which will allow operators to save money thus to be more apt to take risks on new biz models. [#21]
  • Is oracle/sap interested to provide apps to Telcos on a pure revenue sharing basis? [#59]
  • Do oracle and sap really interested in working with carriers? Why? For sharing revenues? [#61]
  • To Openet: have you ever met someone from a Telco with the job title of ‘policy manager’? who manages all this stuff, given you need to understand access, apps, legal issues, behaviour, core networks, issues around false positives/negatives etc? [#55]


Participants’ “Next steps” Vote

Participants were asked which of the following statements best described their view on communications-enabled business processes for the enterprise?

  1. Individual operators should focus their efforts very carefully on specific capabilities (e.g. billing and payments or customer care) and verticals (e.g. government, healthcare) and compete with point providers (such as Paypal) in these markets.
  2. Individual operators should focus their efforts on building a broad set of horizontal capabilities (covering identity, authentication, security, marketing and advertising, content distribution, off-line logistics support, billing and payments and customer care) to a broad range of vertical markets as this will enable a unique value proposition and develop scale.
  3. Telcos should avoid Telco enabled business processes – the market is a red herring.

Lessons learnt & next steps

In theory, the enterprise segment ought to be at the heart of operators’ Telco 2.0 strategies. Irrespective of single-sided corporate retail propositions, in a two-sided world “upstream” providers are generally businesses or governments. But many of the comments during the session identified just how difficult it is to extract the value in a Telco’s inherent assets and capabilities, and apply this to corporate IT and business problems.

The Telco 2.0 Initiative believes that one of the major issues around exploiting the enterprise opportunity is that Telcos need to learn how to develop, sell and support services which are customised, as well as mass-market “basic” applications and APIs. Ideally, the technical platform will be made of underlying components (e.g. the API interface “machinery” and the associated back-office support systems) designed to cope with both “off the shelf” and “bespoke” go-to-market models for new services.

Especially in the two-sided model, there are very few opportunities to gain millions – or even tens of thousands – of B2B customers buying the same basic “product”. Google has managed it for advertising, while Amazon has large numbers of hosting and “cloud computing” customers – but these are the exceptions. Even in the software industry, only a few players have really huge scale for basic APIs (Microsoft, Oracle, Sun, etc.) across millions of developers.

Werner Vogels, CTO, Amazon.com: ”Amazon cloud services took off with the creative people and start-ups, but the enterprises came aboard because they could get agility here they couldn’t get anywhere else.”

Operators may indeed have some easily-replicable “upstream” services that could be sold through an online platform in bulk (perhaps authentication or billing, or basic APIs like location), but these often also face competition in terms of alternative technological routes to their provision. They may also need to be “federated” across multiple operators to be truly useful. Perhaps the most easy and universal horizontals will be enhancements to voice and messaging capabilities – after all, these are the ubiquitous cross-sectoral services today, so it seems likely that any enhancements will follow.

To really exploit unique assets and “take friction out of business processes”, there will also be a need to understand specific companies’ (or at least sectors’) processes in detail – and offer customised or integrated solutions. Although this does not scale up quite as compellingly, the aggregated value involved may be even higher. Even Microsoft and Oracle have dedicated solutions for healthcare or manufacturing, as well as their baseline horizontal products.

J. P. Rangaswami, MD, BT Design: ”Our measure of success should be how easy it is for customers to use the network. Margins will be like a retail business –  a razor thin layer of value spread across a huge area of the economy.”

Another interesting example is that of the BlackBerry. Although today we think of mobile email as a generic capability used across the whole of the economy, the original roots of the company (pagers) were highly financial-oriented. The banking sector very much catalysed the subsequent growth in other knowledge industries (e.g. legal / consulting) and then the more general adoption among businesses of all types. This reflected not just the need for (and high value of) real-time messaging, but also other issues that a pure horizontal approach may have neglected. A specialist salesforce, an early focus on enterprise network security integration – and a large target audience of Microsoft Exchange users were all important. Even the “gadget envy” of a well-paid and dense concentration of users (Wall Street) may have helped the device’s early viral adoption.

As yet, this need for customisation and integration has not been fully recognised. The results of the vote at the end of the session were stark – perhaps surprisingly so. The vast majority of survey responses suggested that operators should attempt to build up exposed capabilities across a set of horizontals, rather than focus on the needs of specific markets.

This seems to reflect the hope for more Google/Amazon-style cross-sector offerings. But as discussed above, this may not be easy, nor will it be the whole story. It is also unlikely to work for every operator. Telco 2.0 thinks that the horizontal approach certainly makes sense in terms of the core abilities of the technical platform, but in terms of developing solutions and partnering with particular integrators or influencers, some measure of vertical specialism is often necessary.

That said, the telecom industry has not often been good at “picking winners” from an enterprise stance,

In the short term, Telco 2.0 would recommend the following:

  • Look for “low hanging fruit” around next-generation contact centres and voice mashups. These are prime targets for horizontal exploitation. Where appropriate, partner with one or more start-ups if existing internal skillsets are weak. ‘Eat your own dog food’ – sort out your own call centres first and develop skills and processes that can be applied to other industries
  • Continue with plans to monetise certain other assets for enterprise utility – especially security, payments, messaging and features that can add value to logistics processes. However, work in parallel on broad commercial platforms (e.g. web-based APIs) and more customised routes to market.
  • Conduct research to identify any particularly attractive near-term addressable target verticals. This can reflect existing skills/services (e.g. within an internal integration business unit), national-specific trends (e.g. major healthcare or environmental projects), local legislation (e.g. banking rules) or wider industry collaboration (e.g. GSMA projects in areas like mobile payments).
  • Build a database of possible acquisition targets (for example, corporate web/telco specialists), especially those with funding vulnerabilities that may make them available at low prices in the recession.
  • Start thinking about the implications of network outsourcing or managed service contracts on the ease of offering exposed service capabilities to upstream enterprise customers.

Longer term, other considerations come into play:

  • Develop separate strategies for high-volume/low-value enterprise services (e.g. servicing thousands of customers via web service platforms for generic “building blocks” like authentication), and low-volume/high-value corporate projects. [Note: volume here means # of customers, not # of transactions or events: imagine a one-off deal with a government, for national health ID & patient records]. Ultimately these may use the same underlying capabilities, but the engagement model is totally different – for example, participation in a Government-led scheme to extend smart metering for utilities, or a one-off deal with a broadcaster for a new advertising and content-delivery partnership.
  • Aim to work closely with one or more top-tier enterprise IT vendors to help add value to their hardware/software solutions. IBM, Microsoft, Oracle, SAP, Cisco, HP, Sun and others have large bases of extremely loyal customers.
  • Look to exploit new device and network capabilities, such as sensors, cameras, enhanced browsers and widgets on phones, or femtocells in B2C customers’ homes. In particular, there are various government/public-sector applications that could benefit from closer integration with citizens’ technology. Examples could include authentication for local services (or even voting), or assorted types of monitoring for environmental, healthcare or public safety reasons.Do a full analysis of applications that can be hosted in the cloud – but beware the integration and “touch points” with corporates’ in-house infrastructure.

Online Video Distribution Market Study

Options and Opportunities for Distributors in a time of massive disruption

As online video challenges traditional distribution models, both old and new suppliers are pushing into the value chain in the hope of grabbing a share of the emerging global market. But how will the market develop and which companies will be the ultimate winners?

STL Partners has analysed the potential of online video, identified possible market winners and losers, and set out three interlocking scenarios depicting the evolution of the market. In each scenario, the role of distributors is examined, possible threats and opportunities revealed, and strategic options are discussed. (March 2009)

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This report is now availalable to members of our Telco 2.0 Research Executive Briefing Service. Below is an introductory extract and list of contents from this strategy Report that can be downloaded in full in PDF format by members of the executive Briefing Service here. 

For more on any of these services, please email contact@telco2.net/ call +44 (0) 207 247 5003 

Key Points

  • Market background, size and dynamics
  • Differences in, and lessons from, different geographies
  • Analysis of prospects by content type: movies, sport, music, adult and user-generated
  • Hulu Vs YouTube: Comparative business model analysis
  • Market forecasts for revenues related to online and mobile video
  • Evolving market scenarios
  • Positioning to maintain / develop advantages in scenarios
  • Recommends specific short, medium and long term actions for moving forward

Who is this report for?

The study is an invaluable guide to managers across the TV and video value chain who are seeking insight into how the online market will develop and the opportunities and threats it presents.

CxOs, Strategists, Product Managers, Investors, Operational Managers in Telecom’s Operators, Broadband Service Providers and ISPs, Media Companies, Content Aggregators and Creators.

Key Questions Answered

  • How will the online video market develop and what are the implications for value chain players?
  • Are there historical lessons (from cinema and TV) from which to learn?
  • Which content categories will be most affected by the shift online?
  • What is the best strategy for distributors and aggregators to maximise chances of success?

Background – Online Video: the Growing Bulge in the Fat Pipe

All recent data point towards video being the fastest growing segment of all internet traffic and the trend looks set to continue for the foreseeable future. This is true whichever metric is used: absolute number of viewers, total time spent viewing, data traffic volumes.

Growth is not limited to a content category: adult, sports, movies and music are all rapidly moving online. The internet has also led to a completely new category: User Generated Content – home movies have moved out of the privacy of the living room and are becoming more and more professional.

Growth is also not limited to a specific geography: the movement online is a worldwide phenomenon. The internet has no respect for traditional geographies and boundaries.

Overall, the evidence points towards a future where the internet will be a critical distribution channel for all forms of video.

The New Distribution is disruptive and no longer centrally controlled

Innovation in Video Distribution is nothing new and over the last century we have seen cinema, broadcast networks and physical media creating temporary shocks to older methods of distributing content – but the older methods survive.

However, there is only a certain amount of time in the day available for entertainment in general and watching video specifically. Legacy distribution channels are understandably worried about whether video online will be additive to or cannibalise their audiences, and our survey respondents largely share this view.

More Growth + Less Control = More Unpredictability

Positively, individuals have generated their own content and made it available to the world. Negatively, some individuals have used interactivity to distribute content without regard of the rights of the copyright holders. Copyright holders have struggled to enforce their rights. Illegal distribution of content not only threatens the absolute value of content, but has lead to unpopular and complicated mechanisms to protect content.

The absolute volume growth has also placed the internet access providers under severe strain: attempting to increase prices to compensate for the growth in traffic and gain extra revenue through developing additional services is proving very difficult.

These forces have generated a considerable amount of experimentation in the market especially in the area of pricing models: subscription, pay-as-you-go, advertising funded, bundles with other distribution channels and offset/subsidy – all exist in a variety of forms.

How & why is the current model broken?

The net result is the video market is in a state of flux and increasing tension as key players explore their positions. Will order emerge from the chaos? In what form will this new order take? What will be impact on the existing players in the video value chain? And, will powerful new players emerge?

How can it be fixed?

We believe that Video Distribution on the internet will reshape the value chain and the current forces point towards great uncertainty in the short term. In these circumstances, the key step is to explore possible future scenarios to assess their viability and robustness in the face of change.

Case Studies, Companies and Services, and Technologies & Applications Covered

Case Studies: Apple, Hulu, Phreadz, YouTube.

Companies and Organisations Covered: 3 UK, AllOfMP3.com, Amazon, AOL Music, Apple, Babelgum, Barnes & Noble, BBC, BBC iPlayer, Bebo, Bit Torrent, Black Arrow, BlipTV, Blockbuster, BT, BT Openreach, BT Vision, Comscore, Del.icio.us, Deutsche Telecom, Deutsches Forschungsnetz (DFN), Diggnation, Digital Entertainment Content Ecosystem (DECE), eMarketer, EMI, European Union, Eurosat, Facebook, Flickr, Flickr, Forbes, Frost & Sullivan, Gartner, Google, Hanaro, Hitwise, Hulu, iBall, IBM, Imagenio, International Movie Database (IMDB), Joost, KDDI, Korea Times, KT+A94, Lenovo, London Business School, MGM, Mobilkom Austria, Mobuzz, MP3Sparks, MSN Music, MTV, MySpace, Napster, National Information Society Agency (NISA), NBC, Net Asia Research, Netflix, NewTeeVee, NicoNicoDouga, Nielsen SoundScan, Nintendo, Now, NTT DoCoMo, Ofcom, Orange, Phorm, Phreadz, Powercomm, Qik, Recording Industry Association of America (RIAA), Revision 3, Screen Digest, Seesmic, Seskimo, Silicon Valley Insider, Sky, Softbank, Sony, The Guardian, T-Mobile, Tremor Media, UK Football Premier League, Verizon, Video Egg, Virgin Media, Vivid, Walmart, Web Marketing Guide, Wikipedia, World Intellectual Property Organisation (WIPO), Yahoo, YouPorn, YouTube.

Technologies & Applications Covered: 3G, 3GP, AAC, Adobe Flash, AMR, Android, Apple Quicktime, Apple TV, AVI, Batrest, BBC iPlayer, Beacon, Betamax, Broadband, CD, Cinema, DivX, DOCSIS 2.0, DOCSIS 3.0, DRM, DSL, DVD, Ethernet to the home, Fibre to the home, Final Cut HD/Pro/Studio, FLV, FON WLAN, Fring, GIF, H.264, H.264/AVC, HSDPA, iDVD, iMovie, Iobi, IP, iPhone, iPod, IPTV, iTunes, JPEG, Linux, MOV, MP3, MP4, MPEG, MPEG-2 SD, MPEG4, MPEG-4, NVOD, OGG, P2P, PAL, PNG, PopTab, P2P, RM, RMVB, Scopitones, Sky +, Slingbox, Soundies, TiVo, TV, VCR, VHS, Video over IP, VOB, VOD, WiFi, W-LAN, WMV, XviD.

Markets Covered and Forecasts Included

Markets Covered: Global, US, Canada, UK, France, Germany, Italy, Hungary, Spain, Sweden, Finland, Japan, South Korea.

Forecasts Included: Online Video Vs Cinema & TV 2012, Global TV, Video and Cinema to 2018, Online Video Subscription and Advertising Revenues, Pro-Tail content advertising forecasts, Mobile TV and Video 2013.

Summary of Contents

  • Introduction
  • Executive summary
  • Part 1: Online video – the situation today
  • Part 2: Future scenarios
  • Part 3: Evolution of specific media genres
  • Part 4: Mobile evolution
  • Part 5: Geographical differences

The Research Process

The research evaluates the likelihood of three scenarios: Old Order Restored, Pirate World and New Players Emerge. Each of which paints a picture of the future entertainment industry in terms of: technology developments; consumer behaviour; service uptake and usage.

The research is based on comprehensive literature reviews, industry research and interviews with key staff from relevant organizations that shed insight on the needs and dynamics of the key players. Key Case Studies bring the story to life and provide a context for both successes and failures. An economic model of the resultant value chain is produced for each of the scenarios with analytical commentary.

Research Format
  • 130+ page manuscript document

This report is now availalable to members of our Telco 2.0 Research Executive Briefing Service. Below is an introductory extract and list of contents from this strategy Report that can be downloaded in full in PDF format by members of the executive Briefing Service here.  To order or find out more please email contact@telco2.net, call +44 (0) 207 247 5003.